Construction Contract Arbitration
By Andrew B. Cohn

The decision to include an arbitration clause in a construction contract depends on multiple factors and begins with an understanding of what arbitration is, and its potential benefits, and downsides.

Arbitration of construction disputes, an alternative to traditional court litigation, has been used for many years. Arbitration is typically binding with virtually no appellate rights (except for proof of arbitrator bias or prejudice, or significant due process violations). It is often administered by an independent organization (e.g. the American Arbitration Association), and offers the parties the opportunity to select the arbitrator(s), and to structure the proceeding and its schedule. Rules of evidence are typically relaxed, and some evidence can be received in a form which would not be allowed in court.

A party should take several factors into account before selecting arbitration.

First, an arbitrator's decision will be final and binding and for all intents and purposes not appealable. As a result, it places significant power in the hands of the arbitrator.

Second, arbitration allows the parties to select the arbitrator. This is perhaps its biggest advantage as it increases the likelihood that the fact finder will be experienced in construction disputes, have the technical background to understand the issues, and is an alternative to having the case heard by a judge who may not have the background (or the patience) to hear a complicated, paper oriented construction dispute.

Third, the arbitration process is usually faster because pre-hearing discovery is limited (typically to document exchange), and as a result is less expensive, especially for smaller cases.

Each of these factors has counter-balancing considerations. For instance, a party may want to preserve at least limited appellate rights to address a clearly erroneous decision. It is possible to draft for this in the arbitration agreement, although a very recent U.S. Supreme Court case (Hall Sreet Associates v Mattel) appears to limit this option.

While arbitration is generally less expensive than court litigation, the filing fee and arbitrator fee costs (especially in larger, more complex cases) can add significant cost to the process. Thought could be given to selecting arbitration in cases below a specific dollar amount. And scheduling larger cases, where more than one arbitrator is involved, can delay cases for time periods similar to court litigation.

At the end of the day, I believe the main advantage of arbitration is to give the parties the opportunity to control the qualifications of the arbitrator. Whether an architect, engineer, contractor, or construction lawyer is chosen, arbitration gives the parties the chance to increase the likelihood that a decision will be made by someone who understands the technical points likely to be presented, and gets the decision "right".

If a decision is made to arbitrate disputes, advance thought should be given to consult with counsel to draft the arbitration clause to include language to ensure selection of a competent arbitrator and implement an arbitration process which meets the needs of the parties.

Kaplan Stewart
Andrew B. Cohn, Esquire
Construction & Surety Law Department
http://www.kaplaw.com