Arbitration Clauses in Construction Contracts
It’s going to happen eventually. No matter how careful you are on your construction projects, something eventually will go wrong. How are you going to deal with it when you end up in a fight with the owner or a subcontractor? The best time to think about dispute resolution is before the dispute ever arises–when you’re drafting the contract. Are you going to include an arbitration clause?
Construction contracts frequently include arbitration clauses. Arbitration has been viewed for years as a fast and inexpensive process. Contractors also like that arbitration is confidential, which means their names won’t show up in public court records.
But arbitration for construction contracts also has a downside. Many who have been through the process find that arbitration wasn’t what they expected. Parties are often surprised to learn that the cost of arbitration has increased significantly, and that the process often takes longer than it would in court. And parties don’t always expect that they will have no appeal rights for an arbitrator’s final decision, even when the arbitrator doesn’t follow the law.
What’s a contractor to do?
If you’ve decided that you still prefer the arbitration route over court, then review your contracts. Make sure that you draft your construction contracts in a way that gets you what you want out of arbitration:
Pick Your Arbitration Forum
First, pick your arbitration forum. The American Arbitration Association (AAA) and JAMS are two of the biggest arbitration services, but there are plenty of other options. Be sure to consider local arbitration forums, which often can offer the right balance of value and cost. The things you’ll want to look at when choosing your arbitration forum are (a) cost, (b) panel members, and (c) rules.
- The cost of an arbitration service includes both administrative costs (e.g., filing fees) and professional costs (e.g., the rate of the particular arbitrator selected). Contact the providers you are considering to learn what their cost structure is.
- Look at the panel members. Are there panel members with construction experience? Are there panel members who are retired judges? Make sure that your pool of potential arbitrators includes the type of professionals you’d like deciding your dispute.
- Look at the rules the arbitration service uses. How fast are the filing and response deadlines? Is a discovery phase expected? Are there expedited processes available for lower-dollar disputes? These default rules will be incorporated into your contract unless you modify them, so be sure that you understand them.
Adopt the Default Rules or Draft Your Own
Second, draft your contractual arbitration clause with an eye toward the rules of the process. Think about the default rules of your chosen arbitration forum. Keep what you like and draft around the rest. For example, you like having the option of a discovery phase, but don’t want costs to spiral out of control. Then draft the arbitration clause to allow for a greater scope of discovery in higher-dollar cases and a more restricted scope of discovery in lower-dollar cases. If you want to require mediation before either party can file for arbitration, then include language to that effect in your contract, if it’s not already in the default rules.
Require a Reasoned Decision
Third, if you want the arbitrator to give you a decision with more than “Party A wins $_______,” then include language in your contract requiring a “reasoned decision.” This means that the arbitrator has to give you some explanation of the factual basis and legal reasoning for his or her decision.
Require the Arbitrator to Follow the Substantive Law
Fourth, remember that arbitration awards are basically appeal-proof. Arbitrators don’t have to follow the substantive law when making their decisions. If you want your arbitrator to follow the substantive law, you need to write this into your contract. And be sure to include language giving the parties the right to have a court review the decision for compliance with the substantive law.
With careful consideration on the front end, you can save yourself great time and expense. Make arbitration work for you by drafting your construction contracts to meet your goals.
We’ve helped many clients with their construction arbitrations. Contact Murdock Law if we can help you too.
Want to learn more about construction contracts? Check out our blog post about enforcing oral construction contracts.