Give Your Contract’s Dispute Resolution Clause The Attention it Deserves

When is the last time you read the dispute resolution clause in your standard form of contract? While indemnification, paid if paid, and insurance clauses often contain the most finely crafted language in a construction contract, an equally or perhaps even more important clause, the dispute resolution clause, is often overlooked.As you perform your last bit of “spring cleaning” and ready your company for the upcoming summer construction season, take a minute and pull out your standard form contract to determine whether its dispute provisions need to be cleaned up and fine-tuned. 

The Standard Arbitration Clause

The American Arbitration Association (AAA) provides this standard arbitration clause in its construction industry arbitration materials:

“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Construction Industry Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.”

While the AAA’s language is both effective and enforceable because arbitration is a dispute resolution device that you control, it is in your best interest to specifically tailor the arbitration clause in your contract to address important issues that will streamline the dispute resolution process into a predictable, comprehensive, cost-effective and timely dispute resolution device. 

Basic Points

The basic points which you should consider for your arbitration clause are the following:

1. Who has the right to demand arbitration?
2. Will mediation be a condition precedent to arbitration?
3. Where will the arbitration be conducted?
4. How will the arbitrator be selected, and what qualifications must he have?

While you may not want to commit to arbitration for every dispute that arises, arbitration may be just what the doctor ordered with respect to certain claims. Accordingly, your arbitration clause should provide that you, as the contractor, may in your “sole discretion” elect that disputes be resolved through arbitration. That way, you can “cherry pick” the disputes which you believe are appropriate for arbitration, leaving others to the state or federal courts for resolution.

Moreover, whether the venue be arbitration or a court of law, your dispute resolution clause should require mediation as a condition precedent to any legal proceeding. Mediation is a non-binding event where a mutually agreeable neutral mediator attempts to persuade the parties to resolve their dispute. 

Another issue which should be addressed is where the arbitration will be conducted. Again, it may be more beneficial to you to have the arbitration conducted in your city or town rather than where the project is located, especially if the project is located far away or in another state.

Finally, it is critical that the arbitrator who will sit on your case has knowledge of your particular area of construction and construction law claims. You can specify that the arbitrator be an attorney with a specific background, or for that matter, that the arbitrator be another contractor or a design professional with a specific expertise in your area of construction. Again, this is your opportunity to make sure that the dispute resolution process that you get is one that you want.  Take advantage of this opportunity and craft your arbitration clause accordingly.

Fine Points

Some of the finer points which should be included in your arbitration clause are the following:

1. What discovery will be permitted (if any)?
2. How will the proceeding be run, and how much time will each party have to present its case?
3. What type of award will the arbitrator render and will the arbitrator be able to award attorney’s fees and costs to the “prevailing party”?
4. Where will the arbitrator’s award be enforceable? Is the award appealable, and if so, what security must be posted by the appealing party in order to pursue an appeal?

Equally as important as the logistical mechanics of the proceeding is how the proceeding will be conducted by the arbitrator. In litigation, parties typically engage in “discovery.” Discovery can range from written questions being exchanged and answered by the parties, to production of documents, to depositions at which lawyers examine opposing parties’ witnesses under oath and their testimony is recorded by a stenographer.

Those who have been through a lawsuit understand that discovery can be a lengthy and costly process. One of the hallmark benefits of arbitration is that it is a streamlined, cost-effective alternative to litigation. Accordingly, your dispute resolution clause should address the issue of discovery. The AAA arbitration rules permit discovery in the arbitrator’s discretion. You need to determine and spell out whether or not the arbitrator should have any discretion on this issue.  For example, your dispute resolution clause could provide that there will be no discovery by the parties except for the exchange of documents which shall be completed within forty-five days of a demand for arbitration being filed. You may also provide that under no circumstances will depositions be permitted or that a limited number are permissible.

You can also specify how the proceeding itself will be run. You can dictate in your arbitration clause how much time each party will have for the presentation of their case in chief and how much time they will have to rebut the other party’s claims/defenses. Some clauses even specify whether the parties will present their cases themselves without using attorneys. In these situations, attorneys typically work behind the scenes with their client to prepare their respective cases, but when the matter goes before the arbitrator, the contractors themselves put on both the case and the defense. You can also specify a rigid time limit for resolution from the date of filing the demand to the draft of the issuance of an award.

Another issue is what type of award the arbitrator will render and how much time after the close of evidence the arbitrator has to issue it. Typically, in arbitration, there are two forms of award, a reasoned award and a line item award. A reasoned award is like a legal opinion. The arbitrator makes findings of fact and then draws conclusions of law and explains them in writing to the parties in rendering his decision. The line item award is more common in construction disputes.  In such an award, the arbitrator makes a determination on each item being claimed and issues a cash award without a reasoned decision. Your clause should also provide whether the arbitrator can award attorney’s fees and costs to the prevailing party and should specifically define what the term “prevailing party” means.

Additionally, most states have a form of the Uniform Arbitration Act in effect. This Act generally provides that in the absence of fraud on the part of the arbitrator, an arbitration award is unappealable. This means that even if the arbitrator made an error in connection with his legal reasoning/application or relating to the facts, in the absence of fraud, courts would permit the arbitration award to stand. If, however, you are concerned about the potential non-appealability of an adverse award, you can provide for specific appellate rights in your arbitration clause. The opportunity exists for you to specify the grounds upon which an award may be appealed and to where such an appeal can be taken. Additionally, you could also specify that any party appealing the award must post security for the same to cover the non-appealing party’s costs and attorney’s fees in the event that the award is not overturned.

Finally, your arbitration clause should provide where it can be enforced. Typically, arbitration clauses specify a court in the jurisdiction where the arbitration will take place and where the award can be enforced together with the general catch-all that it may be enforced in “any court of competent jurisdiction.”

By including a detailed and comprehensive dispute resolution clause in your standard form contract, you can ensure that your “bargained for” arbitration process is conducted before a qualified fact-finder in a controlled, cost-effective and straight-forward proceeding. Put this on your list of “spring cleaning” items before this summer’s hot construction season is underway.

Construction Business Owner, July 2006