Returning Arbitration to an Effective Process in CONSTRUCTION CONTRACTS

In recent years, the arbitration process has been under increased scrutiny in both the local and national press. Lawyers and business commentators alike have expressed divergent views about whether arbitration, in practical terms, is any less expensive or time-consuming than litigation. That debate, however, has often focused on abuses of the arbitration process that make it more like traditional litigation, rather than on any inherent problems in arbitration and, as a result, has overlooked the fact that arbitration can be an efficient way to resolve disputes outside the court system.

Within the construction industry, that debate is particularly relevant. Deciding between arbitration and litigation as the favored dispute resolution process for disputes arising out of construction projects has never been more important because of recent changes in the standard construction contracts published by the American Institute of Architects (AIA). Every 10 years the AIA revises and updates these standard contracts, which are the primary contract documents used across the country on every type of construction project.

In early November 2007, the AIA released the latest revision to its most widely used standard contract document, AIA A201, "General Conditions of the Contract for Construction." Under the 1997 version of A201, boilerplate provisions mandated that when disputes arise, the parties to the contract must participate in the arbitration process. But that is no longer true. Under the new version of A201, the parties must elect to use arbitration by checking the arbitration box. If they don't, they will be opting, by default, for litigation.

For everyone in the construction industry, that's an important change. Many construction participants already know the benefits of arbitration and will elect to arbitrate disputes that cannot be settled in mediation. Others, however, will have to consider their options in order to decide how to deal with the dispute resolution provisions under the new AIA contract documents. In other words, they will have to decide which is the better option-arbitration or litigation. The purpose of this article is to help them make that decision by explaining the advantages of arbitration and how the process can be made to work effectively and efficiently.

Advantages of Arbitration

Greater Efficiency. Construction arbitration proceedings are almost always less time-consuming than litigation. This is because the process allows only limited discovery-usually just an exchange of relevant documents and few if any depositions-while litigation permits extremely wide discovery and lengthy depositions. Without question, the discovery part of the litigation process-which can include lengthy requests for documents and long lists of written questions called interrogatories (which can have multiple subparts)-can cause the time spent litigating (and hourly legal fees) to add up. Other causes of high litigation costs include the time spent questioning witnesses under oath in pretrial depositions.

Another reason why litigation takes much longer than arbitration is that a respondent is allowed 20 days to answer a complaint, and then each side has 30 days to answer each discovery request served. When these time periods are close to running out, the parties' counsel often send out requests to extend these time periods.

Then there is the motion practice associated with litigation. It is normal litigation practice for the attorneys to file every possible motion they can. When a motion is filed, the attorney for the moving party needs to prepare a memorandum of law (also called a legal brief) for the court and this takes a lot of lawyer time. Then the respondent will have time to prepare a reply brief, to which the moving party may prepare a rebuttal. This can add significant additional time to the litigation schedule. Usually the litigation schedule allots months for these processes using the time periods established under litigation rules of procedure.

In my experience, attorneys involved in state court litigation can rarely agree on a litigation schedule that would bring the case to trial in less than a year.

According to federal court statistics, the median length of a federal jury or bench trial in construction cases is almost two years.

Arbitration can take much less time, depending on the size and complexity of the dispute. According to 2006 data from the American Arbitration Association (AAA), the median length of a construction arbitration is less than a year for disputes involving $75,000-$500,000 in claims and counterclaims, and less than six months for matters involving claims and counterclaims valued at less than $75,000.

Because discovery in arbitration is much more limited and motion practice more controlled, arbitration hearings can usually be scheduled in a matter of months. In arbitration, it is usually the calendars of the parties' attorneys and the arbitrator (or members of the arbitral panel) that are the only obstacle to setting a date for a prompt hearing.

Less Cost. The time saved in arbitration translates into lower legal fees. In litigation the parties are paying for the lawyers to draft and respond to document discovery requests and interrogatories, prepare for and take (or defendant against) depositions of witnesses, draft motions and briefs and then argue them in court. All of these activities require much more time than it would take counsel to review the parties' documents and prepare for an arbitration hearing.

Some parties are wary of the administrative fee charged by the neutral ADR organization, like the AAA, to file a case. But when you consider the legal fees spent on pretrial litigation activities, the administrative fee will ultimately seem to be a modest financial consideration.

Limited Appeals. In most cases, arbitration does not involve any appeal-related costs. This is due to the fact that the grounds to appeal an arbitration award are strictly limited to cases involving fraud or corruption by the arbitrator or the arbitrator exceeding his or her authority. There are only a handful of appeals that are won each year. In all but the most unusual arbitrations, when the hearing is over, the loser pays the award and the parties' dispute is forever resolved.

Selection of an Expert Decision Maker to Decide the Dispute. In arbitration, the parties can select the arbitrator. This means that parties to construction disputes can select a person who has expertise in construction. For example, they can select an experienced construction lawyer, engineer, architect, or construction professional who knows the industry and construction terminology, and can quickly focus on the disputed issues. In litigation, this option is not available. Litigants cannot pick the judge, since forum shopping is frowned upon. Also, judges are not known for their expertise in the construction field. Juries are even less expert in construction. Concepts that are familiar to expert construction arbitrators, such as critical path schedules and implied warranties of plans and specifications, are unknown to the average juror or judge. Only rarely does a juror or judge have any significant knowledge of technical construction matters that might be involved in a case. To expect judges and jurors to learn all the facts and understand complex concepts over the short duration of a trial is often unrealistic.

Why Did the AIA Make Litigation the Default Process?

Given the advantages of arbitration, why did the AIA make that small but important change in its newly issued standard contract documents? Did it have a reason for making the change? Possibly the change was in response to complaints about abuses that can make arbitration more expensive and lengthy. What is important to know is that whatever motivated the AIA to make arbitration an elective process, there is nothing inherently or fundamentally wrong with arbitration.

We should not read the AIA's decision to change its form contract as a rejection of arbitration. The AIA is still making it possible for the contracting parties to choose to arbitrate by providing for an arbitration election. However, it has rejected what lawyers can do to arbitration to turn it into a type of litigation.

Arbitration can be efficient and less costly. But not when the parties' lawyers insist on having wide-ranging discovery, and file lots of motions and frivolous appeals. In a recent construction dispute involving a $1 million claim, opposing counsel demanded more than 10 depositions (I requested only two). When I asked him to list 10 witnesses he wanted to depose, he couldn't even name them. He just wanted the leeway to take lots of depositions before the hearing. In another case I was involved in, opposing counsel filed an appeal of an arbitration award, claiming that a distinguished arbitrator from a venerable law firm, with more than 30 years' experience, had manifestly disregarded the law. The award was subsequently upheld.

Parties to construction disputes have it in their power to return arbitration to the process it was intended to be-a process that provides a more informal and less draining means of resolving disputes with greater efficiency and less cost. The way to do this is to tailor the process to the needs of the parties and the dispute.

Tailoring the Arbitration Process to Business Needs

The AIA's new contract documents offer contracting parties a unique opportunity to negotiate procedural terms that ensure an economical and efficient alternative to litigation. In the latest version of the A201, arbitration is a process created under the terms of the construction contract, thus affording both parties an opportunity to tailor the basic boilerplate language to fit the needs of each project.

One area in which the process can be tailored concerns the selection of the arbitrator. This is perhaps the most important decision to be made in arbitration. The parties have the ability to put the name of the arbitrator they wish to hear their disputes in the contract. If they do this, however, they could face a practical hurdle if the person named is unavailable, or for some other reason cannot or will not serve as arbitrator.

Alternatively, the parties can state in the contract the qualifications they wish the arbitrator to have. Should the arbitrator be a lawyer or a design professional or both? Should there be more than one arbitrator, of whom one should be a lawyer and one an engineer?

To control the potential costs of arbitration, the parties could agree that unless the dispute involves a certain amount of money, or involves certain technical issues, there will be no use of experts and discovery will be limited to document exchanges. If the dispute is complex and involves a huge amount of money, they can agree to a limited number of pre-hearing depositions.

The parties should not agree to have judicial rules of procedure or evidence apply, since that will increase the length of the process and unnecessarily raise costs.

To facilitate the prompt resolution of frivolous claims, they can agree to permit summary judgment motions to be filed in arbitration. arbitration.

The parties can also agree on other details, like the venue for the hearing, and how much time each side will have at the hearing to present its case. If the parties don't do this beforehand, these matters will be decided after a dispute arises at the case management conference with the arbitrator. At that point, however, the parties' relationship may have deteriorated and they may not be able to agree on many things.

The parties can also set a time limit for the arbitration in the construction contract. They can agree that the hearing will take place within a certain number of months after the demand is filed. For other rules, they can agree to follow the AAA Construction Industry Arbitration Rules.

The key point to understand is that in negotiating a construction contract, the parties can not only choose arbitration, they can also decide how the arbitration process will work. An experienced construction lawyer is in the best position to facilitate this negotiation, help the client anticipate potential disputes that could arise out of the transaction, and decide on the arbitration procedures that would be most appropriate. The goal should be to set reasonable and practical boundaries for the arbitration in the construction contract while ensuring that the parties will be able to have fair, efficient and economical arbitration proceedings.