An Overview of Construction Arbitration
Arbitration is an alternative dispute resolution process that allows parties in a construction project to seek a third party’s judgment of said dispute, instead of turning to the court system. It is similar to mediation, however, arbitration is a binding decision and most often eliminates or cuts down the time that would have been lost had the dispute gone to a court of law. Also, when choosing to arbitrate, instead of mediate, the parties agree that the arbitrator’s decision will be final, thus leaving little room for further disagreement and exhausting all possible avenues for appeal. In most construction contracts, if the parties cannot resolve an issue at hand, it stipulates that the dispute will not be tried in a court, but rather settled through an arbitrator.
There are many benefits to choosing arbitration over litigation. First of all, there are less costly litigation fees. Since a typical trial can take years sometimes, and arbitration can often be resolved in a few months, this is a very valuable asset to agreeing to settle a dispute through arbitration. Additionally, with construction disputes, oftentimes, you are required to use a jury of your peers, and the lawsuit could be brought in front of a jury. Arbitration can help minimize the chance that the jury’s opinion will bring to light some feelings that one of the parties may have about a contractor in the past. Thus, a jury may be swayed by what they feel as a personal vendetta towards a contractor with whom they have had dealings, whether it be good or bad . Another benefit of arbitration is that it is a much more private process than litigation. Many times, the details of a construction dispute can be confidential. Thus, if the parties choose to go through the arbitration process, there is a good chance that the information the parties suppress while seeking an arbitration, does not have to be made public records.
While there are many benefits to opting for arbitration over litigation, there is also a downside. First of all, if the parties agree to arbitrate in the construction contract, they are giving up their right to be tried in court, should a dispute arise. This is a huge disadvantage, as it eliminates an avenue of appeal that may help one side prove their claim is valid. Additionally, since the arbitrator is paid by the two parties, they may be biased in their decisions towards the party who pays them more money. Lastly, many times during arbitration, a witness can not be heard on both sides. For example, if party A wishes to present a witness, then party B will be unable to use this same witness. This can lead to issues if both parties have an individual that can help support their respective claims.
In conclusion, an arbitrator is an alternate way of settling a dispute in an expeditious manner. Sometimes it is best to settle a construction claim through arbitration, as there is less time wasted and it can save the parties money. However, there are some drawbacks that must be considered when choosing whether to arbitrate a claim.
Key Rules of Construction Arbitration
The rules governing construction arbitration typically include the American Arbitration Association (AAA) rules, the International Chamber of Commerce (ICC) arbitration rules, and the Construction Industry Rules promulgated by the ICC. The AAA rules are widely used in standard form contracts, including AIA (American Institute of Architects) contracts. For example, the AIA Standard Contract Terms includes a provision for arbitration, and should the AIA standard contract default to the AAA rules. However, parties can exclude them and use their own specific rules. The ICC rules have been used recently on transnational construction projects and are often used for international construction contracts. Amongst various other types of arbitration rules, there are the Construction Industry Rules, which are also widely used and specifically tailored for construction contracts. Some other rules that are sometimes used, which are not typically meant for construction contracts, include the LCIA (London Court of International Arbitration), SIAC (Singapore International Arbitration Centre), and the JCAA (Japan Commercial Arbitration Association).
The Construction Arbitration Agreement
Construction disputes are a foreseeable part of the construction process. Therefore, the need to resolve those conflicts is inevitable and indeed necessary to ensure the smooth operation of the industry. The parties’ potentially uneven bargaining power is alleviated, in part, by selecting an effective dispute resolution mechanism. Arbitration is a popular choice for the construction industry because it is generally more efficient, and cost-effective than litigation. By deciding in advance to submit any future disagreements to binding arbitration, the parties can plan on a three-step system as opposed to a potential five-step system in state or federal court.
If based on the parties’ agreement, rather than the demands of a statute, arbitration may be voluntary or mandatory. Many industry contracts, including the American Institute of Architects and the Joint Contract Documents Committee standard forms, provide for mandatory arbitration in the event of a dispute. A voluntary arbitration agreement requires the parties to agree to submit a specific dispute to arbitration frequently after the dispute has already arisen. Before going forward with arbitration, the parties must ensure that they have a comprehensive and enforceable arbitration agreement that, at a minimum, specifies the number of arbitrators, their selection process, the applicable rules, the seat of the arbitration, and the governing substantive law.
Some of the most common elements that should be included in an arbitration agreement are as follows: Number of Arbitrators:
The seat of arbitration is the arbitral tribunal’s legal seat and serves as its legal base, independent from its actual place of business. The seat of the arbitration is significant as it is the proper supervisory jurisdiction that will set the procedure and safeguards for the arbitral process. In addition, the procedural safeguards provided by the supervisory jurisdiction can prevent abuses and protect the award from being easily vacated. Finally, the parties’ submissions, the preliminary hearing and the evidentiary hearing typically occur at the seat of arbitration.
The contractual choice of law is important in arbitration, although not commonly anticipated. It is normal for the contract to incorporate both local and international laws. The proper seat of the arbitration may be important based on national or federal arbitrations statutes. The federal arbitration act, 9 U.S.C. §§1-16, broadly provides for the enforcement of arbitration agreements. Its definition of "commerce" is broad as well. In contrast, the Texas general arbitration act is limited in the scope of contracts covered. For example, the term "commerce" does not include a contract if the parties do not have places of business in two different states.
Court involvement: The arbitration agreement should specify the court involvement. While most construction arbitration agreements in the United States do not address the court’s role, those that do should provide the framework of the Agreement. Whether the parties will request interim measures or discovery from the court are two examples of how the arbitration agreement and the rules work in conjunction to supplement the arbitration process. A further consideration is the location of the arbitral seat. Many construction contracts contemplate international projects and will involve several parties from various jurisdictions. Different statutory schemes, custom and practice may apply. In addition, proceedings in many foreign countries are ex parte and favor the government authority that appoints the arbitrators, which may be unsuitable to the parties.
The importance of having a properly drafted arbitration agreement cannot be understated. Arbitration agreement disputes are usually difficult to resolve as courts generally uphold the terms as written absent an issue of public policy that cannot be circumvented. In many jurisdictions, the court involvement is limited to a narrow scope and pre-arbitration and post-arbitration relief. In addition, the local court will have authority over the arbitration. While the arbitration agreement does not supplant the rules of the tribunal, it should supplement its own rules and the proper jurisdiction.
Arbitrators in Construction Disputes
The qualifications and responsibilities of arbitrators in construction arbitration are not meticulously detailed in most construction arbitration rules. But these qualifications and responsibilities are similar to those set forth in the American Arbitration Association Construction Industry Arbitration Rules (the "AAA Rules"): the arbitrators must be neutral, impartial and independent, and arbitrators with special expertise in the substantive area of the dispute (often construction) will likely be designated by the parties or selected by the court.
The AAA Rules allow the parties to select an arbitrator or arbitrators with "construction industry experience." Guidance as to the meaning of this term can be found in the requirements set forth in the AAA Rules for arbitrator candidates. These rules require the selection of arbitrators who possess specific professional qualifications. Specifically, arbitrators must either be persons with "professional qualifications – engineering, architectural or other technical disciplines relevant to the issues in dispute" or persons with "demonstrated significant experience in the field of construction." The rules further require that arbitrator candidates be persons who demonstrate "integrity, fairness, support of ADR (Alternative Dispute Resolution) processes, governing knowledge, and be capable of maintaining impartiality and independence."
When a court selects the arbitrator, the court will generally try to select a person with special expertise in the industry involved. Thus, a construction case will involve an engineer or architecture professional experienced in the construction industry, while a medical malpractice case might involve a physician or medical professional with particular experience in the relevant field, or a business case will involve an experienced corporate lawyer. Unlike the AAA Rules, however, most of the rules do not specify whether the arbitrator will be a lawyer or a non-lawyer. For example, in some cases, the parties may agree to use a "lay-arbitrator," meaning that they will select a person with no legal background to serve as "judge" over the case. However, the lay-arbitrator system is used much less frequently in construction arbitration than in other types of arbitration.
If the parties cannot agree on an arbitrator and a court appoints an arbitrator, then parties usually have a right (in some jurisdictions, this right is exactly that, an actionable "right" to object to a proposed arbitrator) to object to a proposed arbitrator based on evidentiary bias or prejudice of the proposed arbitrator. This objection is usually based on a connection between a proposed arbitrator and one of the parties or what might be perceived as evidentiary bias or prejudice.
These are the critically important roles and requirements of the arbitrators whose decisions help resolve construction disputes.
Construction Arbitration Procedures
The stages of a typical construction arbitration include:
Stage 1: Drafting the Terms of Reference
For all ICC arbitration, the parties are required to draft the Terms of Reference. The Terms of Reference are the document in which the parties set out the issues/claims to be decided by the Tribunal.
Stage 2: The Preliminary Hearing
Typically, based on the Terms of Reference the Tribunal will be required to hold a Preliminary Hearing. The Tribunal will seek to set out the timetable for the arbitration and agree on any estoppel agreement to prevent the parties raising new claims that were not already included in the Terms of Reference.
Stage 3: Document Disclosure
The parties will each disclose documents which they require the other side to disclose. The Tribunal will decide any document disputes .
Stage 4: Expert Evidence
Expert evidence may be required if the Tribunal require an independent expert opinion on a specific issue or issue that has been raised.
Stage 5: Witness Statements
Witness statements are required when witnesses will need to give oral evidence in relation to a claim or defence. Generally, before the hearing the Tribunal will seek disclosure of the witness statements of the parties and then the oral hearing will take place.
Stage 6: Hearing
The parties will make submissions to the Tribunal, which are usually recorded in writing. Typically, the Tribunal will allow approximately a month for each party to make their submissions. After hearing the parties’ submissions the Tribunal will decide on the award (or decision). In ICC arbitrations the parties must keep in mind that the Tribunal will want to try and issue the award within 3 months of the last hearing.
Enforcement of Construction Arbitration Awards
Recognition and enforcement of arbitration awards is governed by rules, statutes and conventions. Arbitration awards in the United States are enforced under the Federal Arbitration Act. The Federal Arbitration Act provides the basis for enforcement of all U.S. arbitration awards, regardless of whether the award was made under state or federal arbitration acts.
The arbitration award is also "a compact between the parties" and so the agreement itself may contain language about enforcement of the arbitration award. The significance of the language in the arbitration award’s enforcement section is usually with regard to the type of relief and terms of any court order enforcing the arbitration award.
Internationally, agreements to arbitrate and arbitration awards are enforceable under the New York Convention. The Convention requires courts in its signatory countries to enforce both foreign arbitration agreements and foreign arbitration awards.
Common Issues and Pitfalls
Jurisdiction is a typically contentious issue in construction arbitration. In the United States, the great majority of construction contracts appoint the American Arbitration Association (AAA) as the arbitration administrator, and choose the AAA Construction Rules. However, the Federal Arbitration Act (9 U.S.C. § 1 et seq.) is silent regarding the enforceability of arbitration agreements in construction contracts, and whether or not an arbitration provision is enforceable will normally depend on state contract law. States can be uneven in their enforcement of construction arbitration provisions, and some are less sympathetic to construction contractors than others. In addition, the question of what constitutes a valid arbitration agreement can be complicated by the use of multiple related entities, complex transaction structures, and layers of subcontracting. When negotiating jurisdictional clauses, attention to these issues can help reduce the chances for post-award challenges.
The scope of the arbitration agreement is another source of challenge in construction arbitration. More construction contracts are being structured under common agreement frameworks such as JCT Contracts Review Panel or the NEC 3 Engineering and Construction Contract, or other kinds of institutional rules. Consensus standards facilitate the use of standard contracts, but because these standards tend to be relatively brief, they do not take some local law nuances into account. Another example is the use of an AIA form, complete with its own claims process, and then a separate arbitration protocol, without very specific cross-references to define the relationship between the two. If the arbitration rules that apply to the construction contract are weak, the chances of a successful challenge increase.
Arbitrator impartiality, sometimes called "arbitral independence", is one of the most commonly litigated areas of arbitration law. Despite the arbitrator’s supposed neutrality, challenges to awards by parties who believe that their arbitrator has a conflict of interest is sometimes successful. Since arbitrators are chosen by agreement of the parties, any perceived or actual bias that might reduce the arbitrator’s neutrality could have a negative impact on the validity of an award. In construction cases, this can be particularly difficult because arbitrators are often chosen based on their technical expertise, and would not have the opportunity to disclose their own backgrounds without extensive investigation.
The Future of Construction Arbitration
Construction arbitration is evolving. To some, it remains an underutilized system of dispute resolution, but the data suggests that construction arbitration is the way forward. In recent years, arbitration has gained near universal popularity in the construction industry. As the industry looks to address problems arising from standard contracting or dispute resolution practices, the construction industry will increasingly adopt arbitration as the spirit of choice. The future of construction arbitration sits at the intersection of technology, a new generation of participants, and increased information about industry-wide trends.
The future of arbitration in the construction industry is like that of the industry itself. As a dynamic and innovative field, construction constantly looks to the next best thing. The trend should be that arbitration is at the forefront of these efforts as the industry learns from practices abroad and improves upon traditionally risk-averse, and thus historically conflict-oriented, approach.
The new generation of construction professionals are a lock step in line with these changes, and are not beholden to the traditional macho-industry model. Rather, they are educated and health-conscious, and while they constitute a minority of the current construction workforce, they represent the near future . As the future workforce matures, the idea of arbitration will grow to seem like a well-tuned athletic machine, a natural evolution of a flawed, conflict-ridden process. This coming generation embraces mental and emotional well-being, their positive outlook is a by-product of the mentally-stressed industry they are entering. It is also the consistent message from their elders which they are willingly accepting: arbitration produces better results.
As the industry continues to arm itself with the knowledge of studies that show arbitration to be preferred by industry participants, technological advancements will only accelerate this momentum. Virtual arbitration is a more efficient, cost-effective, and less stressful way to arbitrate. Sitting in a conference room cloistered from the world can be a jarring experience for younger professionals, and virtual arbitration can ease those burdens.
It is not all clear sailing for construction arbitration. Arbitration typically requires the staccato of multiple players negotiating and looking for an advantage, rather than pursuing the common good. As the competition increases, the risk is that participants will take the arbitrary nature of the arbitration process to heart. Long after the case is over, the scars from scar tissue will remain. That risk is at play even as arbitration continues to be the preferred method of construction dispute resolution.
