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Construction Arbitration: Pros And Cons

Aug 31

Disputes are common in the construction industry and must be resolved via mediation or arbitration.

Rather of going to court, many construction disputes are settled via arbitration, a process in which the parties agree to have their case heard by a neutral third party who functions as both judge and jury.

Where Do Mediation And Arbitration Differ?

Many people confuse arbitration with mediation, and even less commonly with litigation. Conflict resolution strategies will vary depending on the context.

In a mediation, a neutral third party facilitates a face-to-face meeting between the disputing parties in an effort to reach a mutually agreeable resolution to the dispute. Mediators act as objective third parties in conflict resolution. The mediator has the power to oversee the mediation process but cannot force parties to reach an agreement. The disputing parties bring their issue to the mediator either because they are required to do so by a court or a contract condition, or because they hope the mediator will help them find a compromise they cannot achieve on their own. There is, however, the possibility that the parties may ultimately reject a settlement offer.

A lawsuit begins with a complaint filed by the plaintiff, who is the party seeking redress from the defendant. The right of the parties to have their dispute heard and decided by a court is guaranteed by the parties' respective state or national constitutions or by laws enacted by legislatures. Each party to the litigation has the right to go before the government body presiding over the case to get a ruling on the legality of the other party's claims or the court's ruling.

An arbitration proceeding is very much like a lawsuit, except it is held in a neutral location instead of a court. Instead of filing a lawsuit in court, the parties hereto agree to submit their dispute to arbitration (either in a contract before a dispute develops or by a subsequent agreement to avoid a lawsuit). By their agreement, the Parties provide the Arbitrator the power to render a final and binding decision on the Parties' rights and duties. Arbitration is distinct from mediation in that an unbiased third party issues a binding decision. There need not be a choice between arbitration and mediation. Dispute resolution clauses are common in contracts, and they often stipulate that parties must attempt mediation before resorting to arbitration.

Important Distinction Between Arbitration And Lawsuits

Because of its use as a courtroom replacement, arbitration has certain similarities with the traditional legal process but also has important differences. What follows is a summary of the key distinctions between arbitration and court proceedings:

Both the Decision-Maker And The Decision-Making Procedure

If a case goes to trial, a "finder of fact" will determine the result. The judge is a law enforcement professional whose job it is to preside over the court proceedings. Legal determinations are made by the judge. At trial, the questions of fact are often decided by a jury, however in exceptional cases the judge will make these determinations as well. The judge determines the applicable law and applies it to the facts before him or her in order to reach a ruling.

The rules of arbitration are determined by the agreement or contract that set up the arbitration. The arbitration procedure and governing law are very flexible, and may be determined by mutual agreement of the parties. This liberty, however, is not without its restrictions. For example, an arbitration provision that calls for a coin toss to decide the winner is very unlikely to be upheld in court.

In arbitration, a private arbitrator (or panel of private arbitrators) functions as both the judge and the jury, hearing evidence, making factual determinations, and applying the law. A hearing on the evidence, which is quite similar to a trial in court, is the last step in the arbitration process.

The parties to the dispute (or the court, in rare situations) will choose the arbitrator. Since this is the case, the arbitrator in a construction arbitration case will most likely be a construction lawyer or someone with extensive construction experience. That way, the lawyers don't have to spend time "educating" the arbitrator on building issues, and the arbitrator has a better foundation on which to base a decision.

The judge in a court case is a generalist, whereas the arbitrator is a specialist in the field of construction. Even if the judge has some knowledge in the field of construction, it's likely that the vast bulk of his or her caseload has had nothing to do with the industry. Normal jurors won't understand the complex issues discussed in construction arbitration either.

Rules

The purpose of arbitration is to resolve legal disputes in an informal setting. An arbitrator has considerable discretion in determining how an arbitration proceeding is to be handled, and there is less of an emphasis on strict adherence to the rules of evidence and civil process. Since arbitration is so unstructured, disagreements about procedure and protocol are common. However, with the aid of the arbitrator, the parties usually reach an order setting down the procedure, rules, and timetable for the arbitration. This order often specifies the duration of the discovery period, the place and time of the evidentiary hearing, the nature of the arbitrator's ultimate conclusion, and the number of requests for and types of information that will be permitted.

The behavior of the parties and the filing of claims in a lawsuit are governed by a set of rules (often called the Rules of Civil Procedure) adopted by the court hearing the case. While a judge is not required to follow the rules to the letter every time, the parties are nonetheless given less leeway in court than they would be in arbitration.

In theory, arbitrations should be faster and cheaper than court trials for settling legal issues. Due to the informal nature of arbitration, the parties and arbiter are free to create a method for conducting the arbitration that is most effective for their particular goals, without regard to formal standards of evidence or civil procedure. On a regular basis, however, many parties (and/or their counsel) turn arbitration into "arbigation," in which the same amount of discovery is conducted in arbitration as it would be in litigation. The cost of the arbitrators involved may make arbitration as costly as, or more expensive than, going to court.

Appeals

It is rare for a court to overturn an arbitrator's decision. This is primarily because arbitration is meant to reduce the time and money spent on appeals. A party that disagrees with an arbitrator's decision may find it difficult to dispute the decision in court, even if the party believes the arbitrator made a legal mistake or reached an inappropriate factual determination. There are only three legitimate reasons to ask a court to overturn a decision made by an arbitrator: fraud (the arbitrator accepted a bribe), bias (the arbitrator showed overt preference toward one of the parties), or the arbitrator resolved a subject that was not within the scope of the arbitration. These kinds of firmly established premises are quite unusual, especially when they can be shown.

Arbitration's lack of an appeals process has the advantage of allowing a final resolution to be achieved more swiftly and at lesser expense. It's unfortunate because an arbitrator's obviously wrong decision might lock in a bad result for one of the parties. It's especially sad since public court judgements on common construction industry themes have decreased significantly as arbitration has been the preferred method of dispute resolution over the last several decades. Therefore, even a careful and astute arbitrator would have little to no precedent on which to base their decisions on.

The parties in litigation, unlike in arbitration, have the option of appealing the trial court's ruling to a higher court. If a litigant is dissatisfied with the outcome of a case, they may have more than one opportunity to appeal the decision. Unlike arbitration judgements, many appellate court decisions are public and may be used as precedent.

Additional Participants Are Welcomed

Disputes in the construction industry may include a large number of parties and claims from seemingly everyone associated with the project. When compared to a lawsuit, adding participants to an arbitration is a more involved process. Only between parties who have both consented to the use of arbitration in the resolution of disputes (and this agreement typically will only be easy to obtain at the beginning of a project when the project contract is being negotiated).

As long as the court has jurisdiction, the parties to a case are not limited to the people directly involved in the dispute. To be subject to a court's jurisdiction, an additional party must either physically reside in, or have substantial contacts with, the state in which the court is situated. After a lawsuit has been filed, it is much simpler to join such groups. The benefit of this is that it lessens the likelihood that different arbitrations or lawsuits would reach different conclusions on the same issue.

If one or more parties to a dispute have agreed to arbitrate, but not all of them have, the court will often compel the parties who have agreed to arbitrate to do so, and the litigation will be stayed or stopped until the arbitrating parties have finished their arbitration. Since the parties have already agreed to have their dispute resolved via arbitration, the court will have the authority to "delegate out" this element of the case to the arbitrator.

Expenses For Legal Representation And Related Costs

Fees for legal representation may be claimed in arbitration if they were to be awarded in court in a comparable case. For lawyers' fees to be recovered in court, there must be a legislative provision allowing for such recovery in the specific kind of case or in the specific type of claims being asserted. A provision in the arbitration agreement providing for the award of attorneys' fees is required under the North Carolina Revised Uniform Arbitration Act ("NCRUAA"). Therefore, unlike in a court of law, collecting lawyers' (and other) expenses is not simplified by arbitration.

 

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Justice System Participation In The Arbitration Procedure

A court will very definitely get involved regardless of whether or not arbitration is employed. If one of the parties to an arbitration agreement refuses to participate in the arbitration, the other parties might petition the court to force them to do so. This would be in blatant violation of the parties' expressed desire as demonstrated by their agreement, but for the court's inherent governmental authority to compel arbitration, the obstinate party may refuse to fulfill its arbitration agreement and force the disagreement into a lawsuit to settle the problems.

Most construction disputes fall within the purview of the Federal Arbitration Act ("FAA"), which provides courts the authority to order arbitration of disputes involving interstate commerce, including construction. Agreements to arbitrate are binding and enforceable under the FAA. That way, if one party wants to force the other to arbitration, they can do so with the assistance of the federal court system. However, the FAA provides very little specifics on the arbitration process. Therefore, the arbitration method and rules will undoubtedly be drawn from the parties' arbitration agreement, directed by the court, or agreed to by the parties if a party relies only on the FAA to enforce an arbitration agreement.

North Carolina is one of many states that have adopted a version of the Revised Uniform Arbitration Act. As with the FAA, the NCRUAA serves a similar purpose. However, the NCRUAA provides a variety of mechanisms for setting up and conducting arbitration. Among them are procedures for compelled arbitration, arbitrator appointment, staying ongoing court actions during arbitration, discovery requests, and enforcement of an arbitration verdict. The Federal Arbitration Act (FAA) and the National Commercial Rules Enforcement Act (NCRUAA) guarantee that an arbitration agreement will be enforced whether or not the parties initially bring the dispute to state or federal court.

Refraining From Breaking Unfavorable Regional Law

Unintentionally, arbitration may help parties escape local substantive law in areas like evidence, jurisdiction, venue, and law of choice. Most federal courts have held that executing an arbitration requirement requires not just requiring arbitration but also enforcing the process set out in the arbitration agreement under which the parties agreed to conduct the arbitration. For instance, if the contract states that "any and all disputes arising from the contract shall be submitted to final and binding arbitration in Wake County, North Carolina," a court will almost certainly find that it must also enforce the requirement that the arbitration be held in Wake County, even if there is a state law stating that the particular dispute should not be heard in Wake County.

Consequently, parties that want to avoid adhering to their state's venue and choice of law regulations will introduce an arbitration provision as a means to pick a venue, choice of law, or other method or rule that would be otherwise barred by the relevant local state law. This is very important because otherwise the laws of the state in which the contract is formed would control its terms. The terms of the agreement will take priority over the state law since the FAA preempts or trumps it.

A good example of why a party might wish to rely on the provisions of an arbitration clause in a construction contract is the prevalence of out-of-state general contractors on major building projects in North Carolina. If there is a dispute between a general contractor and a subcontractor, the out-of-state contractor would rather resolve it in their own state than in North Carolina. Notwithstanding, North Carolina law requires that any construction-related issue be heard and resolved only in North Carolina courts and according to North Carolina law. An out-of-state party may sidestep North Carolina's statute mandating the case be handled in North Carolina by including a non-North Carolina venue arbitration language in the construction contract.

Third-Party Arbitration Administration

There are numerous organizations tasked with settling arbitration disputes. The two most common ones are the American Arbitration Association ("AAA") and JAMS. These organizations serve as arbitral mediators, reducing the courts' already little role in the process. Hiring one of these businesses may help move the arbitration process along when one of the parties is stonewalling, but it will add expense and time to the process. One of these services may only be used if both parties have already agreed to arbitrate using it.

The American Arbitration Association (AAA) is often designated as the arbitration administrator in standard form construction contracts' arbitration clauses. To avoid having to deal with AAA administration, disputing parties may look into arbitrating their dispute under the AAA Rules. The parties should exercise prudence since AAA administration is required under the AAA rules. One court has ruled that parties' agreement to have arbitration handled in accordance with AAA standards constitutes an agreement that the AAA would administer the arbitration.