Construction Arbitration in Contracts Explained

Key Takeaways

• Construction arbitration is a private dispute resolution process often required by contract, where an arbitrator or panel decides issues without court involvement.
• Arbitration clauses should clarify scope, governing rules, timing, and enforcement of awards to avoid procedural disputes.
• Compared to litigation, arbitration is typically faster and confidential, but may offer limited appeal rights and higher upfront costs.
• Selecting experienced construction arbitrators and tailoring clauses to project complexity can improve fairness and efficiency.
• The American Arbitration Association (AAA) Construction Industry Rules are widely used and provide tiered case procedures based on dispute size.
• Understanding how arbitration interacts with warranties, defects, and contract breaches helps prevent costly disputes later.

Arbitration in construction contracts is unfortunately common, and arises when litigation occurs. While you may prefer not to consider this event at any point in time, the proper time to consider arbitration in your construction contract is when you enter into it.

What Is Arbitration?

Arbitration is a process that uses an arbitrator to solve a dispute, and the arbitrator's decision is final. The arbitrator can use any law and any court, which has led to decisions being permanent even if the arbitrator does not follow substantive law. In other words, the arbitrator can make a binding decision without following the standard applicable laws and it is impossible to challenge the decision. An arbitration clause establishes rules for the arbitrator.

A standard arbitration clause in the American Institute of Architects Form A201 is "All claims or disputes between the contractor and the Owner arising out of or relating to the Contract Documents, or the breach thereof, shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect unless the parties mutually agree otherwise."

Advantages and Disadvantages of Construction Arbitration

Construction arbitration offers several benefits over litigation, but it also comes with tradeoffs that contractors, owners, and developers should weigh carefully.

Advantages include:

• Speed and efficiency: Arbitration proceedings are usually resolved much faster than court cases, which can take years.
• Expert decision-makers: Arbitrators often have technical knowledge of construction practices and contract structures, allowing for informed decisions.
• Confidentiality: Unlike public court cases, arbitration hearings and outcomes remain private.
• Flexibility: Parties can customize procedures, select arbitrators, and schedule hearings to suit project timelines.
• Enforceability: Arbitration awards are legally binding and easier to enforce internationally under treaties like the New York Convention.

Disadvantages include:

• Limited appeal options: Once an award is issued, it can rarely be overturned except for fraud or procedural misconduct.
• Potential cost concerns: Although faster, arbitration can sometimes cost more due to arbitrator fees and limited cost-shifting.
• Perceived bias: Repeat arbitrators or industry panels may seem less neutral than judges.
• Discovery restrictions: Limited evidence-gathering can hinder complex claims where extensive documentation is critical.

Issues That Should Be Addressed

The following issues should be addressed:

• Option to arbitrate instead of litigation in a state court.
• When arbitration occurs - most arbitration clauses state arbitration occurs at the end of the project, however, it should ideally be as close as possible to the date the dispute arose.
• Who the arbitrator is - most construction companies use the American Arbitration Association.
• Litigation discovery - most arbitration clauses limit this process, which can be time-consuming and expensive. As a general rule, discovery must correspond with the dollar value of the dispute.
• Is the arbitrator bound by standard applicable laws? This can give a path to overturning an arbitrator's judgment if this provision is not followed.
• Court review standards - If you want a court to review the decision to ensure compliance, state that in the arbitration clause of the contract.

Drafting Effective Construction Arbitration Clauses

A well-drafted arbitration clause ensures disputes are handled efficiently and fairly. To strengthen construction arbitration provisions, contracts should specify:

• Scope of disputes: Clearly define which issues (e.g., payment delays, design defects, warranties) fall under arbitration.
• Rules and forum: Identify the governing rules, such as AAA Construction Industry Arbitration Rules or JAMS Construction Rules.
• Number of arbitrators: Use one arbitrator for smaller claims; three for larger, complex cases.
• Location and governing law: Designate a neutral venue and applicable state law.
• Consolidation and joinder: Allow related subcontractor or supplier disputes to be consolidated for consistency.
• Mediation step: Include a mediation requirement before arbitration to encourage early resolution.
• Award enforcement: Clarify that the award will be final, binding, and enforceable in any court with jurisdiction.

Well-crafted clauses help avoid procedural delays, inconsistent rulings, and unnecessary costs during dispute resolution.

Arbitration and Warranty Clauses

Contrary to what you or your lawyer may think, a warranty clause does not limit the timeframe in which claims must be made. Instead, it requires the owner to notify the contractor about substandard or nonconforming work within one year of completion to trigger the contractor's requirement to make repairs at no charge to the owner. In most cases, this occurs when the owner claims negligent, nonconforming, or defective construction, or cost overruns. This can be done at any point during the applicable statute of limitations, which varies by state.

Arbitration is the go-to method of dispute resolution in the construction industry, so most construction contracts feature an arbitration clause. It may not always appear in the body of the contract - a reference such as "Paragraph 4.5 of A201" is considered an arbitration clause. It is binding once signed.

Construction Defect and Performance Disputes in Arbitration

Arbitration is frequently used to resolve claims involving construction defects, delays, and performance disputes. These may include:

• Defective workmanship or materials resulting in water intrusion, structural issues, or code violations.
• Project delays or acceleration costs arising from scheduling conflicts or change orders.
• Payment disputes such as nonpayment, retainage withholding, or extra work claims.
• Design errors or omissions when architects or engineers are alleged to have contributed to project failures.

In such cases, arbitrators assess technical evidence, expert testimony, and contract specifications to determine liability. Some panels specialize in construction defect disputes, applying industry standards rather than rigid legal rules. Awards can include repair costs, liquidated damages, or equitable adjustments, depending on contract terms.

The Arbitration Process

The rules for arbitration by the American Arbitration Association can be found at their offices in any major city. The rules are easy to understand.

Your dispute will be placed in one of three categories. If no claims or counter-claims exceed $50,000, you'll be put on the Fast Track process. It claims and counter-claims are between $50,000 and $1 million, Regular Track rules apply. If the total amount exceeds $1 million, then you'll be put on the Large, Complex Track.

Both parties are given a list of names of possible arbitrators, and are allowed to eliminate three names in a single-arbitrator case and five names in a multiple-arbitrator case. Arbitrators are chosen from the remaining prospects. Fast and Regular Track cases are decided by a single arbitrator unless the agreement states otherwise. Large, Complex Track cases are decided by a single arbitrator unless one party objects, in which case three arbitrators will be used. The parties are responsible for the fees, which usually range from $500 to $1,500 per day.

A hearing may be held, and the arbitrator is not bound by the rule of law, including rules of evidence. The decision is final and the award must be honored within seven days in a Fast or Regular Track case and 30 days in a Large, Complex Track case. The award may not be appealed unless there is evidence of fraud or other egregious conduct. Costs and attorneys fees typically are not included in the award.

Construction Arbitration vs. Court Litigation

While both arbitration and litigation resolve disputes, they differ in key ways:

Many construction professionals prefer arbitration for its speed and flexibility, especially on complex projects. However, for issues of public record or where appeal rights are crucial, litigation may be preferable.

Frequently Asked Questions

1. Why do most construction contracts include an arbitration clause?
   Because arbitration provides a faster, private, and expert-based forum for resolving disputes without lengthy court proceedings.
2. Can I appeal an arbitration decision in a construction case?
   Only in rare circumstances, such as fraud, corruption, or gross procedural errors. Arbitration awards are generally final and binding.
3. How are arbitrators selected in construction arbitration?
   Parties typically receive a list of potential arbitrators from an organization like the American Arbitration Association and rank their preferences before selection.
4. Is construction arbitration cheaper than going to court?
   It can be, especially for smaller disputes, but costs may rise with multiple arbitrators, technical experts, and administrative fees.
5. What laws govern construction arbitration in the U.S.?
   Most cases are governed by the Federal Arbitration Act (FAA) and state laws that support enforcement of arbitration clauses in construction contracts.

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