Does the Arbitration Clause In Your Contract Protect You?

Does the Arbitration Clause In Your Contract Protect You?

What You Should Know About Construction Arbitration Clauses

Unfortunately, litigation has become a common method for resolving construction industry disputes. While you may prefer not to consider how a dispute should be resolved prior to its commencement, the time to do so is when you enter into your construction contract.

For years arbitration has been considered by many to be a fast and relatively inexpensive forum for resolving construction disputes. The speed of arbitration resulted from limited pre-arbitration discovery and a binding decision that were rarely overturned by the courts. Over the last few years the courts have issued a number of decisions that impact the arbitration process. In fact there are currently two arbitration related cases pending before the California Supreme Court.

The affect of recent court decisions on the arbitration process has led many parties who have gone through the arbitration process to conclude that the arbitration provisions in their contracts may not lead to a resolution of their dispute in a manner that they had expected. In the meantime, the cost of arbitration has soared while the time expended for the resolution of a case in the state courts has significantly diminished. This article shall examine a typical arbitration clause and discuss possible changes to it that you may wish to discuss with your legal counsel.

A typical arbitration clause is found in the American Institute of Architects specifications (formA201) which provide:

All claims or disputes between the contractor and the Owner arising out of or relating to the Contract Documents, or the breach thereof, shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect unless the parties mutually agree otherwise.

The award rendered by the arbitrator or arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof.

The primary concern has arisen as a result of two California Supreme Court cases that held that the courts cannot overturn a binding arbitration award even if the arbitrator fails to follow California substantive law. In essence, an arbitrator can render an award that is contrary to the accepted law on a particular subject, yet the award cannot be overturned. As a result, it becomes not only difficult to predict the outcome of an arbitration but literally impossible to have erroneous decision reviewed by the courts.

However, there is a method for avoiding such an unfair award. By incorporating certain requirements in the arbitration clause the parties to an arbitration can have greater control over their arbitration destiny.

In the light of the foregoing, an arbitration provision should address the following issues:

1. Option to Arbitrate:

Many arbitration clauses allow one party to determine if the matter should be arbitrated rather than litigated in state court. These type of clauses are currently being reviewed by the courts.

2. When the arbitration occurs:

Most arbitration clauses postpone the arbitration of a dispute until after the project is completed. Ideally, an arbitration should be completed as near as possible to the date that the dispute arose. Speedy arbitrations prevent the dispute from expanding. An alternative provision that should be considered is a requirement for mediation. Mediation is a dispute resolution process that involves the use of a facilitator who seeks a voluntary settlement of the parties to the dispute.

3. Arbitration forum:

The standard dispute resolution forum in the construction industry is the American Arbitration Association (AAA). The AAA has developed Construction Industry Arbitration Rules for the arbitration of disputes and has a panel of arbitrators. Over the last several years, a number of other dispute resolution service providers (e.g. Judicial Arbitration and Mediation Service "JAMS") have developed their own rules for arbitrating disputes. Many attorneys now prefer the other dispute resolution service providers over the AAA. The choice of an arbitration forum should be reviewed in context of the cost, arbitration panel members and forum arbitration rules. Particular attention should be paid to the forum's arbitration rules since they are incorporated into the arbitration clause. As will be discussed, the arbitration clause may include provisions that delete all or portions of the forum's rules.

4. Discovery:

Generally, the litigation discovery process (e.g, document productions, depositions and interrogatories) is time consuming and expensive. However, discovery can play an invaluable role in analyzing the other party's case and presenting your own cases. Most arbitration clauses limit the scope of pre-arbitration discovery. A well drafted arbitration clause will restrict or expand discovery to correlate to the dollar value of the dispute.

5. The award:

An arbitration clause can be drafted to require the arbitrators decision to comply with the substantive law. If the arbitrator violates such a provision, the parties to the arbitration may seek to overturn the award since the arbitrator exceeded the authority granted to him under the arbitration contract clause. Thus, such a provision should be included in the arbitration clause if you want the arbitrator to follow the applicable substantive law.

To ensure that the court has enough information to properly review the arbitrators award the arbitration clause should require the arbitrator to render a well- reasoned opinion. The opinion should include a statement of the factual determination made by the arbitrator and the conclusions of law rendered by the arbitrator.

6. Standard for Court review of the award:

Finally, if you want the decision to be reviewed by the courts for compliance with substantive law, a provision should be included in the clause that clearly states that desire.

Conclusion

The best method for ensuring that a construction dispute is correctly and fairly resolved is through properly drafted construction contracts. The arbitration clause is one of many clauses that is included in the typical construction contract. It is a wise contractor who reviews its contracts with legal counsel on a regular basis to ensure that it is taking advantage of recent changes in the law.

This article, ©1999, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for 20 years. Mr. Last also holds a California A & B contractors license. He can be contacted at 650-425-7679. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.