1. What Is Arbitration?
2. Issues That Should Be Addressed
3. Arbitration and Warranty Clauses
4. The Arbitration Process

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."

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.

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.

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.

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