Contractors know all too well how quickly a dispute can get out of hand and end up in litigation. Performance and payment bonds, change of work order, delay and acceleration, critical path method for scheduling and defects may be familiar terms to those in the construction industry, but a judge or jury would be hard-pressed to fully understand them, especially when experts testify on the stand with differing interpretations of the disputed items.
In comes arbitration, which has been touted as a private forum to save money and time in the pursuit of a final disposition of claims. However, there are unique arbitral benefits to the construction industry that are time- and court-tested.
Arbitration is a private process by design that can be customized to meet the needs of the parties and project, unlike court where the entire proceedings are a matter of public record.
Parties must follow the rules of the particular court, which are designed for all case types. Thus, the clear advantage in arbitration is that the parties have immense power over the proceedings.
Some would argue that the real success of a project depends on the mechanisms in place to deal with disputes likely to rise during the construction phase.
Whether it is a public, private or P3 project, conflicts are inevitable, so contractors should be prepared to bring dispute avoidance tools to the table.
Above all, the contractor should be knowledgeable of any applicable rules or procedures and participate in drafting the contract.
In 2017, an American Arbitration Association survey asked construction lawyers how often their clients are involved in the development of a contract’s dispute resolution provisions. The answer: Clients were only “significantly or always involved in the process” 30 percent of the time.
So where can a contractor provide advice and consultation?
Consider subcontractor default insurance contracts, many of which contain a standardized arbitration clause for coverage disputes. Several points in these types of arbitration clauses leave the door open for negotiation and improvement.
1. Locale
When an arbitration clause does not specify where the arbitration will take place, the parties are given an opportunity to agree on the locale. However, to the extent the parties are unable to agree, the ADR forum or arbitrator will likely make that determination.
Therefore, it is important that the parties specify, pre-dispute, where the arbitration will take place. Further, the choice of the place to arbitrate may be construed to imply a choice of the applicable procedural law, which in turn may affect questions of procedure, court intervention and enforcement.
2. Qualification of Arbitrators
Unlike court, where parties have no say in the appointment of their judge, arbitration clauses can specify that the arbitrators have a certain type of construction background or expertise.
It’s worth mentioning here that not all arbitrators are attorneys or retired judges. Non-attorney construction industry professionals serving as arbitrators may seem like a new phenomenon to those who entered the construction practice in the last 10 years. However, AAA construction panels have included architects, engineers, general contractors and subcontractors for more than 90 years. In fact, today there are approximately 300 industry professionals on the AAA’s national construction roster.
3. Duration of Arbitration Proceedings
A frequent complaint of clients in an arbitration hearing is that when they look around the room, everyone is making money except them. It may not be enough to simply rely on the arbitration process to provide a speedier method of resolving disputes.
An emerging trend in arbitration clause drafting is to include timelines for the completion of an arbitration.
However, it is important to suggest deadlines that are realistic because failure to meet specified deadlines could jeopardize the enforceability of the arbitration award. The uncertainty pre-dispute is that the parties do not know what the scope of a potential claim may be.
Here, a “time is of the essence” provision, where the arbitration hearings shall take place within 90 days of filing and award rendered within 120 days, may be acceptable for a small project, but completely unrealistic for a multi-million- dollar project.
4. Discovery
Discovery is one of the most expensive and time-consuming portions of the arbitration process and, unbeknownst to many, the amount and scope of discovery can be controlled through a clause in the contract. In addition, the process can be limited by agreement of the parties at any time up to and including the preliminary hearing.
Under most ADR forum rules, arbitrators are authorized to direct a pre-hearing exchange of documents and witness lists, but the limitations can be unpredictable. In this instance, the parties may want to provide for a more tailored discovery program in their arbitration clause.
5. Confidentiality
While ADR forums and arbitrators adhere to certain standards concerning the privacy or confidentiality of the hearings, parties might want to impose limits on themselves as to how much information regarding the dispute may be disclosed outside the hearing. Except when required by law, parties to a contract can contractually limit parties or arbitrators from disclosing the existence, content or results of an arbitration unless they have the prior written consent of all parties.
The true power of arbitration lies in the ability of the participants to take advantage of all available strategies and techniques to ensure the right arbitral process for their dispute. Whether the parties are in arbitration or court, the benefits are only achieved if all the players know and understand the rules, policies and procedures.
Contractors also should be mindful that not every dispute requires legal action or a legal decision. Interestingly, this might explain why there is a noticeable increase in the enrollment of industry professionals in alternative dispute resolution training classes. Such a proactive part on contractors to better understand dispute resolution systems will certainly ensure that they are better prepared to handle potential disputes.
