You may not even know it, but you could be forced to settle your next construction payment dispute through arbitration. Arbitration clauses are included in most construction contracts these days, so read your contract! If a dispute arises, the clause will require you to submit to arbitration instead of being able to file a lawsuit in court. It’s important to know what this is, and how it works, so you can effectively defend yourself. Let’s take a closer look at the construction arbitration process.
So what exactly is arbitration?
Alternative Dispute Resolution (ADR) is a cost-effective, efficient form of resolving disputes without having to resort to a full blown lawsuit. The two main forms of alternative dispute resolution are mediation and arbitration. Think of arbitration as a mini court proceeding. In arbitration, two disputing parties present their respective sides of the story to a neutral third party (the arbitrator). Each party will have the opportunity to make statements and present evidence, and the arbitrator will make a final decision that is binding on both parties.
Standard construction arbitration clauses
Most standardized construction contract forms, such as AIA, ConsensusDOCS, or AGC, will have an ADR clause calling for the use of the American Arbitration Association (AAA). For example, this is the ADR clause on the standard AIA 201 General Conditions form:
If the parties have selected arbitration as the method for binding dispute resolution in the Agreement, and Claim, subject to, but not resolved by mediation, shall be subject to arbitration which, unless the parties mutually agree otherwise, shall be administered by the AAA in accordance with its Construction Industry Arbitration Rules in effect on the date of the Agreement.
The (AAA) is a non-profit organization that provides alternative dispute resolution services around the world, to a wide array of industries. The construction industry is particularly susceptible to contract and payment disputes. So much so, that they have specific Construction Industry Arbitration Rules.
The 4 Procedures of Construction Arbitration
The AAA Construction Industry Arbitration Rules outlines 4 separate construction arbitration proceedings that depend on the dollar amount in controversy, as well as the dispute at hand. These include:
- Regular Track Procedure
- Resolution of Disputes through Document Submission
- Fast Track Procedure
- Large, Complex Construction Disputes.
Which procedure applies to your dispute depends on the amount in controversy and if the parties need to physically meet to resolve the issue. However, the proceedings are all initiated through a written demand for arbitration. This is the aggrieved party’s responsibility. If the contract has an arbitration clause, and the contractor goes straight to the courthouse, the case will be thrown out for failing to go through arbitration.
The basic procedure is, as mentioned above, kind of like an informal mini-trial. Depending on the procedure, the actual process will vary. Once the demand has been sent, there are generally 4 basic phases:
Phase 1: Selection of the arbitrator(s)
Most procedures allow for some sort of involvement in the selection process. If using the AAA, the Association will send a list of potential arbitrators. The arbitrators will typically be construction attorneys, contractors, or other types of industry professionals. Both parties can strike certain names, and rank them in order of preference. The Association will then take those into consideration and assign an arbitrator (or arbitrators) as the ultimate decision maker.
Phase 2. Pre-hearing
A pre-hearing will be scheduled as soon as possible to discuss the how the arbitration will proceed. This can either be done in person or over the phone. These are just preliminary discussions to agree on the rules and procedures that will be enforced. At this time the parties can exchange or request more documents or evidence from the other party to prepare their arguments.
Phase 3. Hearing
This is the real meat and bones of this process. Both parties will meet with the arbitrator and present their case. Although the parties can represent themselves, many elect to bring in their own legal counsel. Other parties that may be present at the hearing can be witnesses, interpreters, and some even choose to bring in a stenographer to record the hearing. The arbitrator will listen to both sides of the story, ask any follow up questions, and conclude the hearing.
Phase 4. Decision
Once the hearings have officially closed, the clock starts ticking on how long the arbitrator(s) have to make a decision and final award. The award rendered through construction arbitration is final and binding on both parties. If a party refuses to pay the award, the arbitration award can be enforced through filing a lawsuit in court.
Benefits to arbitration
The main advantages of construction arbitration, are the fact that they are quick and simple. The decision will be rendered quickly, there’s less paperwork involved, and it’s relatively informal.
Also, as noted above, the arbitrator will typically be either a construction lawyer or some other construction industry professional. Which is a huge bonus. Judges are experts in law, and there’s an exorbitant amount of time wasted explaining the situation in a way that someone outside the construction industry will understand. The arbitrator will be able to understand the details of the dispute, and use their experience to determine the best solution.
Another benefit is that they are less constricted by strict interpretations of the law. When dealing with the court system, parties can easily lose a lawsuit due to some technicality or minor error. On the other hand, arbitrators aren’t required to follow the law or procedures to a tee. They can make the determination based on what they think is fair and reasonable.
Drawbacks of arbitration
One drawback is that, although presumably cheaper than litigation, most people elect to bring a lawyer to their arbitration hearing. Not only that, but there are administrative filing fees. The arbitrator needs to be compensated as well. These amounts can add up quickly, and end up being just as expensive, if not more costly than litigation.
Another issue most have with the construction arbitration system is the inability to appeal the award. Appeals from arbitration are only allowed under specific circumstances such as corruption or fraud. So once a decision is rendered, that’s it! The prevailing party can file the award with the court and it will become a fully enforceable judgement.
Also, when you mix construction disputes with arbitration, things can get complicated. There are multiple parties, mechanics lien deadlines, and a number of other potential problems. Check out this article by our CEO Scott Wolf, Jr. to read about how arbitration clauses can create a mechanics lien mess.