Arbitration of Construction Disputes

Like it or not, you may be forced to arbitrate your next construction dispute instead of having it decided in court.

Printed Aia Construction Forms May (And Many Do) Require Arbitration

This is because most of the printed forms of construction contracts in use today are American Institute of Architects (AIA) documents. The forms provide that all claims and disputes between the contracting parties are to be arbitrated under the rules and auspices of the American Arbitration Association.

Arbitration is a means of having disputes decided outside of the established judicial system. Arbitrated cases are heard and determined by private citizen-arbitrators rather than the judges or juries of state or federal courts.

Arbitration hearings may take place anywhere: in someone's office, home, in a rented conference room or even at a construction site.

Arbitration Results May Be Turned Into Court Judgments

Although arbitrations are not formal legal proceedings, they nevertheless have the sanction of law. In most states (Colorado included) an arbitration award (decision) may be converted into a judgment in court and court processes then become available to recover amounts due. In recent years courts have favored arbitration because its use assists in relieving court congestion.

Before arbitration becomes available, the disputing parties must agree to arbitrate rather than go to court. This agreement may be made by contract before any dispute arises, for example by use of the AIA construction related forms containing arbitration clauses. Otherwise, the parties may agree to arbitration after a controversy arises.

The rules governing arbitration may be fixed by the parties themselves or GOVERNING RULES they may (and frequently do) adopt already-established arbitration rules. FOR ARBITRATION The AIA construction agreements provide that arbitrations will be conducted according to the Construction Industry Rules of the American BY THE PARTIES Arbitration Association (AAA).

That Association has published rules for the conduct of arbitration hearings. It also makes all the necessary arrangements for the proceedings-from the appointment of arbitrators to the scheduling and location of hearings and management of the paperwork involved.

The steps involved in an arbitration administered by the American Arbitration Association include: (1) making a written demand for AAA ARBITRATION, (2) selection and appointment of arbitrators, (3) fixing the times and place of the arbitration hearing, (4) conduct of the arbitration hearings, and (5) rendition of the arbitrator's award.

The "demand" is a simple written statement stating the nature of the claim and the amount demanded. A copy is sent to the other party to the dispute DEMAND who may not only answer his opponent's demand, but may also make a claim against him.

After the claim papers are filed, the Association sends lists of possible arbitrators to the parties who are asked to strike those names unacceptable to them and to number the remaining names in the order of their ARBITRATOR preferences. These lists generally include names of individuals familiar SELECTION with construction: contractors, subcontractors, architects, engineers, attorneys and other persons who are on the AAA National Panel of Arbitrators.

The arbitrators selected for each arbitration are from among those whose names are on the returned lists and to whom neither party has any objection. The Association strives to assure that the arbitrators selected are impartial and competent. Depending upon the amount of money in controversy, the Association either appoints one or three arbitrators for each arbitration proceeding.

Time And Place

Once the arbitrators are appointed, the Association fixes a place and schedules dates for the hearings at times convenient to all those involved.

The hearings are generally informal. The parties may be represented by attorneys, but are free to represent themselves. Arbitrators are charged with the responsibility of hearing all testimony and examining all exhibits which the parties wish to offer. After the hearings have ended, the INFORMAL arbitrators have 30 days within which to make their award. The award is HEARINGS usually brief, granting a dollar amount of relief to either party, or denying any relief whatever. As noted earlier, the arbitration award may be made a court judgment upon application. Judgments entered can then be enforced by garnishment, a sheriff's sale of property or in the same manner as any other court judgment.

Under American Arbitration Association rules the arbitrators are not paid for the first two days of service, but are paid for the time spend after the ARBITRATOR'S PAY initial two days at rates usually agreed to between the parties. The range of compensation for arbitrators is generally between $250 and $650 per day.

For its role in administering arbitrations, the American Arbitration Association is paid a fee scaled to the dollar amount of the claims involved. The fees range from a minimum of $200 to over a thousand dollars for claims in excess of $100,000. Unless the parties otherwise AAA FEE SCHEDULE agree, the arbitrators may decide who pays these fees and their compensation - depending upon the arbitration result. Frequently the losing party is required to pay all costs and expenses of arbitration.

Advantages Of Arbitration

There has been much debate over the merit of arbitration. The advantages of arbitration over court actions include:

  1. Usually a speedier determination,
  2. The likelihood that arbitrators are more knowledgeable about the technical aspects of construction than a judge or jury might be,
  3. Less paperwork than court proceedings usually involve,
  4. Some participation in the selection of the arbitrators,
  5. Less formal hearing procedures than in court.
  6. Ability of parties to represent themselves rather than hiring lawyers (although parties can represent themselves in court, the formality of court proceedings usually dictates against self-representation),
  7. Very little likelihood of the case receiving any publicity, and
  8. The opportunity to arbitrate a single dispute even during the progress and without interruption of ongoing construction.

Disadvantages Of Arbitration

Some of the disadvantages attributed to arbitration include:

  1. A larger expense involved in terms of fees for administration and arbitrators (for an $80.00 docket fee you can try a multi-million dollar case in a Colorado trial court),
  2. Ordinarily arbitrators' awards cannot be appealed to a "higher court" while a trial court judgment may be appealed,
  3. Discovery, the means by which parties in court actions prepare for trial by pretrial examination of witnesses (depositions) and examinations of books, records and other documents of opposing parties is generally not available in arbitration proceedings,
  4. Arbitrators are not necessarily bound to follow applicable law and may therefore rule on the basis of their notions of fairness rather than upon established legal principals, and
  5. It may not be possible to join all parties who might be involved in a particular dispute in a single arbitration.

Choice Of Arbitration Over Court Proceedings

If given the choice of whether to arbitrate or go to court parties should consider these advantages and disadvantages as well as other circumstances. Probably the most important consideration is who you are and who your opponent would be in the event of a dispute.

Analyzing who the parties are is important because, for example, a metropolitan general contractor might be uncomfortable having his dispute with a small mountain community school district tried before an all-taxpayer jury in that locality. By contrast, a local general contractor might be quite comfortable in front of a local court if his adversary is a large eastern corporate goliath.

If the controversy involves highly technical matters arbitration might be preferable. For example, it may be very difficult for a randomly-selected judge or jury to understand both the construction language and the engineering concepts involved in a major structural failure case in which it would not be unusual to find fingers pointing at the architects, engineers, the general contractor, several subcontractors and perhaps others as well.

Check Your Contract: Before You Sign It

Don't let arbitration sneak up on you. Before signing a construction contract find out whether it contains an arbitration clause. If it does, consider carefully whether you would prefer this method of claim or dispute resolution rather than going to court. Study the arbitration language to determine its scope, effect and limits.

If your contract does not provide for arbitration, do not ignore its use in the event of a dispute. You and your opponent may, upon careful reflection, determine that the advantages of arbitration merit its use.

Both Expensive

Before arbitrating or litigating, however, remember that both are expensive and involve risks. Therefore, make every attempt to settle your dispute amicably-out of court and out of arbitration.