Executives in the design and construction industry are often confronted with contracts that force them to decide in advance whether litigation or arbitration will be used for dispute resolution. Unfortunately, these executives rarely have the appropriate information to make that decision. Moreover, if a company is inclined to agree to a mandatory arbitration clause, there is typically little or no conversation about what the language in the actual clause should be.
Instead, if a party makes the decision to agree to mandatory arbitration, that is usually the end of the analysis. Additionally, a stock arbitration clause, like the one found in the American Institute of Architects (“AIA”) form contract documents, is adopted with little or no consideration for the impact of that clause or of options for modification that ought to be considered. The purpose of this article is to provide information so design and construction executives are better able to understand the decisions regarding whether to choose arbitration over litigation, and if so, what to consider when agreeing to an arbitration clause.
ARBITRATION VS. LITIGATION CONSIDERATIONS
There are a number of important considerations when deciding between arbitration and litigation.Generally speaking, arbitration is perceived to be less expensive and quicker than litigation, with less formality. To that end, the American Arbitration Association (“AAA”) has recently re-emphasized the importance of speed and efficiency to its roster of arbitrators. Note also that issues concerning speed and efficiency can be controlled by a company executive through careful drafting of an arbitration clause, as discussed below.
Another critical distinction for consideration is the difference in the level of education and expertise to be found in a judge and jury, versus with an arbitrator or an arbitration panel. Design and construction industry issues are often complex and highly technical. Bright judges struggle with many of the concepts because they are, by nature, generalists and usually have limited exposure to the legal and factual issues that arise in construction and design disputes. Conversely, groups like the AAA maintain a roster of arbitration neutrals specific to the industry with a high level of experience and expertise with the legal and factual issues found in design or construction disputes.
The flip-side to speed and efficiency to be found in arbitration is the potential lack of procedural safeguards. One of the reasons arbitration can be more efficient is because those safeguards, like rules of evidence and procedure as well as appeal rights, are limited or (for all practical purposes) eliminated, compared with litigation. For example, the procedural safeguards regarding the admissibility of evidence are more of a guide in arbitration, whereas in litigation they are strictly enforced. Perhaps the biggest procedural safeguard lacking in arbitration is appeal rights. Generally speaking, once an arbitration award is issued, it is very hard to appeal (although a right to appeal can be included in an arbitration clause), but again this general principle is one of the reasons arbitrations can be more cost effective. Another “litigation vs. arbitration” consideration is privacy. An arbitration is a private event and, more likely than not, will remain private. Conversely, litigation is rarely (if ever) private, so a party must be prepared to have its “dirty laundry” aired if it chooses this path.
The considerations discussed above are not exclusive, but are provided as examples of the points to consider when weighing the decision to litigate or arbitrate. Of course, if the choice is arbitration, then a company executive’s job is not complete. The next step is careful consideration of the language of the actual arbitration clause.
ARBITRATION CLAUSE CONSIDERATIONS
If arbitration is chosen as the method of dispute resolution, there are still many considerations before signing a contract containing a mandatory arbitration clause. For example, the AIA contract formscontain a standard arbitration clause but company executives should not assume that the “one size fits all” approach represented by this clause works for their company. This is not meant as a criticism of the standard AIA language, but an acknowledgment that the AIA clause may not address every issue a company executive may believe is important. Instead, carefully consider all aspects of the potential arbitration. One tool available to the public to help with this process is the AAA “Clause Builder” on its website (found at www.adr.org).
When a company executive considers an arbitration clause, the first step is to determine what the scope of the clause will be. What sort of disputes do you want an arbitrator to have authority to decide? A part of this consideration is, what remedies should an arbitrator be able to impose. Another consideration is whether the arbitration process will be administered by a commercial service, like the AAA, and if so, will its standard Commercial Rules of Procedure be adopted or something more specific like the Construction Industry Rules?
Arbitrator selection is also an important component of any arbitration process the AAA provides. Parties can pre-select an arbitrator or, if using a commercial service like AAA, utilize one of the methods of selection. The AAA maintains a roster of arbitration neutrals qualified to hear design and construction disputes, and as part of the arbitration administration process, will walk the parties through arbitrator selection. In addition, an important part of this process is the management of arbitrator conflicts and disclosures to ensure the arbitrator is in fact impartial and neutral. AAA manages this process as part of its administration responsibility.
Next, you should consider the location of the arbitration and which state law will apply. At this point, you should also consider the practical and procedural aspects of an arbitration process. Will the parties be allowed to conduct discovery and, if so, to what extent? Will witnesses be called live in an arbitration hearing, or will the hearing be decided only on documents and briefs submitted by the parties?
Another important consideration is the sort of award that is requested. Typically, arbitration awards come in two forms, which are a standard award and a reasoned award. A standard award generally does not address how an arbitrator made a decision and instead simply states what the decision is in terms of liability finding and any resulting remedy or damage award. A reasoned award generally addresses the arbitrator’s decision-making process, discusses the findings of fact and law that drove the decision, as well as details the liability, remedy and damage findings that result from the process. To the extent appeal is an option in arbitration, a reasoned award is recommended because a standard award provides very little for the party charged with conducting the appeal to review.
The stakes involved in design and construction disputes can be enormous and complex. Careful consideration should be given to the issues raised in this article and a company should not overlook these important decisions in exchange for a “one size fits all” approach.
ABOUT THE AUTHOR
Ben Wheatley has more than 23 years of experience litigating complex construction and environmental matters, negotiating and drafting construction and design contracts, serving as in-house counsel for an international A/E firm, and working on issues concerning the practice of architecture, engineering, and project construction in all 50 states, Mexico and South America. In addition to construction law matters, Ben handles administrative matters related to the construction and design industry, as well as environmental and commercial litigation.