Construction arbitration: the pros and cons
Appeared as part of the sponsored section, 2018 Law Journal, in the September issue.
Jason T. Strickland
Ward and Smith, P.A.
Many construction projects end in disputes and many of these disputes are resolved through arbitration, a process by which the parties agree to submit their case to a third-party neutral, an “arbitrator,” who acts as a judge and jury.
What is Arbitration?
Arbitration is often confused with mediation and with a lawsuit. Each involves different forms of dispute resolution.
Mediation is a settlement conference in which the parties meet and use a third-party neutral, a “mediator,” as a settlement facilitator. The mediator has no power to force settlement. The parties mediate because of a court or contract requirement, or because they feel the mediator will be able to facilitate an otherwise unobtainable settlement.
A lawsuit is conducted in a court and usually is initiated by a plaintiff filing a complaint, in which the plaintiff will ask for some form of relief from the defendant. The court is a government institution from which the parties are entitled to seek a decision as to their dispute.
Arbitration is a lawsuit without court involvement. The parties agree (typically in a contract before the dispute arises) to submit their dispute to arbitration. The agreement empowers the arbitrator to decide the dispute. Unlike mediation, the arbitrator’s decision is binding. Frequently parties will mediate and, if unsuccessful, then arbitrate.
Arbitration Versus Lawsuits
The following are the major distinctions between arbitration and court litigation:
In a lawsuit, the dispute is decided after a trial before a “finder of fact,” usually a jury. The judge administers the trial and decides questions of law. Although the judge may hear some construction cases, they are a small subset of the total cases he or she hears. Similarly, a typical juror will not be a construction expert.
In arbitration, the arbitration agreement controls the process. There is a private arbitrator (or a panel) who acts as both the judge and the jury. The arbitrator is chosen based on the subject matter of the dispute; e.g., construction arbitration will have a construction lawyer as the arbitrator. This reduces the effort necessary to “educate” the arbitrator and better suits the arbitrator to render a decision.
Arbitration is less formal than a lawsuit. The rules of evidence and civil procedure are not strictly enforced and an arbitrator has wide latitude to frame the process. Typically, the parties and the arbitrator will agree to a scheduling order setting forth the deadlines, rules for conducting the arbitration, process for discovery, where and when the evidentiary hearing will occur, and the content of the arbitrator’s award.
In a lawsuit, there are a set of rules dictating how the parties will conduct themselves and present their claims. These rules allow the parties less flexibility than in arbitration.
Arbitrations are intended to be a more efficient and economic means of dispute resolution. However, many parties frequently turn arbitration into what attorneys call “arbigation,” in which just as much discovery is conducted in arbitration as would be the case in litigation. This can make arbitration more expensive than litigation.
There is no appeal from an arbitrator’s decision–appeals create costs and delays; the things arbitration is designed to avoid. If a party believes that an arbitrator has made a mistake of law or determined facts incorrectly it will be difficult to pursue an appeal. The bases for asking a court to overturn an arbitrator’s decision are fraud (arbitrator took a bribe), bias (arbitrator evidenced overt favoritism), or the arbitrator decided an issue outside the arbitration scope.
No appeals is good insofar as a final result can be achieved more quickly and less expensively. It’s bad in the sense that a party may be stuck with a result that is both undesirable and erroneous. Another downside: as more construction cases are resolved with arbitration there have been fewer published court decisions on common construction issues, creating little precedent.
In litigation, the parties can appeal the final decision of the trial court to an appeals court. Frequently there are multiple levels of appeals courts creating precedential guidance.
Adding Additional Parties
Construction disputes involve claims between multiple parties. Arbitration is limited to those parties who have agreed to resolve their disputes through arbitration.
In a lawsuit, the parties can add other parties if the court has jurisdiction. Jurisdiction exists if the added party has substantial connections to the state in which the court sits. The ability to add parties is beneficial as it avoids inconsistent results that can occur if there are separate lawsuits concerning the same subject.
In situations where some of the parties to a lawsuit have an arbitration agreement, the judge will order the parties with the agreement to arbitrate and stay the lawsuit until the arbitration is finished.
The Federal Arbitration Act (“FAA”) allows a party seeking to enforce an arbitration clause to have courts compel the other party to arbitrate. The FAA doesn’t contain many, if any, specifics on the process for conducting arbitration.
Many states, including North Carolina, have adopted some form of the Revised Uniform Arbitration Act, similar to the FAA. North Carolina’s version (“NCRUAA”) contains mechanisms for conducting arbitration, including provisions on compelling parties to arbitrate, appointing the arbitrator(s), staying pending court cases while the arbitration is conducted, seeking the court’s assistance in conducting discovery, and enforcing an arbitration award in court.
Avoiding Local Law
Arbitration can also allow parties to avoid application of local substantive law on issues like venue and choice of law. Most federal courts have held that enforcing a requirement to arbitrate includes enforcing the process set forth in the arbitration agreement. If the parties agreed to “arbitrate any and all disputes arising from the contract in Wake County” then a court will likely hold that enforcing the arbitration agreement includes enforcing the requirement that the arbitration occur in Wake County—even if there is a state law requiring a different venue.
Parties seeking to avoid state laws regarding venue or choice of law will include an arbitration clause, allowing them to choose a venue, choice of law, or other procedure that would otherwise be barred by state law. Outside of arbitration, the state statute would control the terms of a contract. The state law can be avoided in arbitration because the FAA pre-empts the contrary state law.
Third Party Administration
Several organizations administer arbitrations. The two most common are the American Arbitration Association (“AAA”) and JAMS. These organizations facilitate and oversee the arbitration process. Use of these services will increase the cost and time of arbitration, but may help to move the arbitration process along. In order for these services to be involved the arbitration agreement must include the requirement.
Many standard form construction contracts contain arbitration clauses that require the AAA to oversee the arbitration. Parties frequently attempt to opt out and arbitrate under the AAA Rules while avoiding AAA administration. The parties should be careful when doing this because the AAA Rules require AAA administration.
Most parties on a construction project have a contract that defines their responsibilities. Many construction contracts contain arbitration clauses. Participants in the construction process must be aware of the pros and cons of arbitration.
Jason Strickland leads Ward and Smith’s construction law practice. He can be reached at email@example.com.
Ed. Note: For further examination of arbitration in construction, see www.wardandsmith.com/articles/construction-arbitration-vs-lawsuits