Arbitration of Construction Disputes

Lou Chang, ALC 2004

What is arbitration?

• Private adjudication

• Impartial third party/panel

• By written agreement, usually

• Parties can select arbitrators, specify desired expertise and background

• Parties can design and customize process

• Parties can select rules

Basic Steps in Arbitration

• Making an agreement to arbitrate

• Initiate process/demand for arbitration

• Appoint arbitrator(s)

• Pre-arbitration scheduling meeting

• Arbitration hearing

• Post arbitration memorandum (optional)

• Decision and award

“Standard” Contract Forms

Hawaii League of Savings Associations Form A-1 1979

DISPUTES: all disputes arising hereunder shall be submitted to… architect … and if none, then to the material company … surety on the bond; … the architect's … material company [decision] shall be subject to arbitration …. If … no architect or material house, then all decisions shall be submitted to arbitration. …[O]ne arbitrator selected by the parties hereto shall determine the disputes and failing agreement …, three disinterested arbitrators (who shall be licensed general contractors, architects, or structural engineers) shall determine the dispute, one to be appointed by each party hereto. If either party fails to name his arbitrator within ten (10) days after notice in writing of the appointment of the first arbitrator, the first arbitrator may name the second arbitrator. The two …shall name the third arbitrator. If they cannot agree within ten (10) days, either may request any judge of the circuit court of Hawaii …to name the third arbitrator. The majority decision of the arbitrators shall be final and binding …. Each party shall pay one-half of the costs of the arbitrators’ fees and each party shall pay all other costs incurred by such party.

18. 19. 20. 21. DISPUTES: All disputes arising hereunder shall be submitted to the

licensed architect, if any superintending said construction, and if none, then to the material company which may be surety on the bond; provided, however, that the architect's decision or the decision of the material company, as the case may be, shall be subject to arbitration if notice thereof is given by either party in writing within ten (10) days of the date of the decision. If there shall be no architect or material house, and all decisions shall be submitted to arbitration. In the event of arbitration, one arbitrator selected by the parties hereto shall determine the disputes and failing agreement as to the selection of an arbitrator, three disinterested arbitrators (who shall be licensed general contractors, architects, or structural engineers) shall determine the dispute, one to be appointed by each party hereto. If either party fails to name his arbitrator within ten (10) days after notice in writing of the appointment of the first arbitrator, the first arbitrator may name the second arbitrator. The two thus chosen, in either manner, shall name the third arbitrator. If they cannot agree within ten (10) days, either may request any judge of the Circuit Court of Hawaii within which the premises are situated to name the third arbitrator. The majority decision of the arbitrators shall be final and binding upon the parties hereto. Each party shall pay one-half of the costs of the arbitrators’ fees and each party shall pay all other costs incurred by such party.

Hawaii League of Savings Associations Construction Contract form No. A-1, 1979

AIA General Conditions (A201-1997) 4.6 ARBITRATION 4.6.1 Any Claim arising out of or related to the Contract, except claims relating to aesthetic effect and except those waived as provided for in subparagraphs 4.3.10,9.10.4 and 9.10.5, shall, after decision by the architect or 30 days after submission of the Claim to the Architect, be subject to arbitration. Prior to arbitration, the parties shall endeavor to resolve disputes by mediation in accordance with the provisions of paragraph 4.5. 4.6.2 Claims not resolved by mediation shall be decided by arbitration which, unless the parties mutually agree otherwise, shall be in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect. The demand for arbitration shall be filed in writing with the other party to the Contract and with the American Arbitration Association, and a copy shall be filed with the Architect.

Core Arbitration language:AIA A201-1997

AIA General Conditions (A201-1997)

4.6 ARBITRATION 4.6.1 Any Claim arising out of or related to the Contract, except claims relating to aesthetic effect and except those waived as provided for in subparagraphs 4.3.10,9.10.4 and 9.10.5, shall, after decision by the architect or 30 days after submission of the Claim to the Architect, be subject to arbitration. Prior to arbitration, the parties shall endeavor to resolve disputes by mediation in accordance with the provisions of paragraph 4.5. 4.6.2 Claims not resolved by mediation shall be decided by arbitration which, unless the parties mutually agree otherwise, shall be in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect. The demand for arbitration shall be filed in writing with the other party to the Contract and with the American Arbitration Association, and a copy shall be filed with the Architect.

 

4.6.4 Limitation on Consolidation or Joinder. No arbitration arising out of or relating to the Contract shall include, by consolidation or joinder or in any other manner, the Architect, the Architect's employees or consultants, except by written consent containing specific reference to the Agreement and signed by the Architect, Owner, Contractor and any other person or entity sought to be joined. No arbitration shall include, by consolidation or joinder or in any other manner, parties other than the Owner, Contractor, a separate contractor as described in Article 6 and other persons substantially involved in a common question of fact or law whose presence is required if complete relief is to be accorded in arbitration. No person or entity other than the Owner, Contractor or a separate contractor as described in Article 6 shall be included as an original third party or additional third party to an arbitration whose interest or responsibility is insubstantial. Consent to arbitration involving an additional person or entity shall not constitute consent to arbitration or Claim not described therein or with a person or entity not named or described therein. The foregoing agreement to arbitrate and other agreements to arbitrate with an additional person or entity duly consented to by parties to the Agreement shall be specifically enforceable under applicable law in any court having jurisdiction thereof.

Construction Parties

S u re ty

S u b co n tra c to r S u b co n tra c to r S u p p lie r

G e n era l C o n tra c to r

O w n er

A rch ite ct

Pre-arbitration scheduling meeting

• Identify & clarify claims, counterclaims and defenses

• Arrange information exchange

• Establish realistic working schedule

• Identify witnesses

• Opportunity to discuss streamlining process

• Schedule hearing

Advantages of Arbitration

• Choice of decision maker with expertise• Speed• Lower-cost• Flexible• Private• Less formal than court• Fewer grounds for appeal• Enforceability of award

Disadvantages of Arbitration

• Cost: parties pay for arbitrator and agency

• Limited rights of appeal, fewer means to delay and challenge award

• Lack of formal discovery

• Waiver of right to jury

When might arbitration not be desired?

• Jury desired

• Legal precedent needs to be set

• Constitutional principle needs to be declared

• Mechanic’s lien and foreclosure of third party rights

• Want broader appeal rights

• Faster resolution available (mediation, application on payment bond)

• Special judicial relief available

• Want full formal discovery

• Want slower, costlier court procedure

Finding the Right Arbitrator

• Determine qualifications and experience desired for your case

• Review resume and written qualifications• Get recommendations and referrals, comments on

judgment, fairness, fair hearing and enforceable award

• Obtain and carefully review written disclosure of all potential conflicts

• Up to date training and ethics code

Types of Arbitration

• Traditional: arbitrator hears witnesses, considers evidence and renders decision

• Fast track: accelerated and simplified procedures for prompt decision

• Baseball: each site submits final offer, arbitrator picks most reasonable

• High-low: arbitrator’s decision to be adjusted within range set by parties

Must you hire an attorney?

• Not mandatory: informal, business like setting of arbitration theoretically can be handled without engaging an attorney

• Hawaii’s new Revised Uniform Arbitration Act (RUAA) has made arbitration more like litigation

• Increasingly, it is wise to have an attorney’s guidance through the arbitration process

Arbitration tips: During Contract Review-1

• RUAA applies to all agreements to arbitrate made on or after July 1, 2002

• RUAA applies to all agreements to arbitrate whenever made starting July 1, 2004

• Many, not all provisions can be waived• Arbitration agreements may/should be

customized to fit specific needs and circumstances

Arbitration tips: During Contract Review-2

• Keep discovery simplified and inexpensive• Limit arbitrator to award of reasonable actual and

compensatory damages, no punitives• Provide for fast track procedures• Allow arbitrator to retain jurisdiction for specified

timeframe to address specific performance, implementation and interpretation

Include necessary parties for effective and efficient arbitration

• Common standard clauses do not address this adequately

• Must decide what specifically fits your circumstances

• Subcontracts, bond, design professional agreements and major purchase orders may need to be adapted to include critical parties in potential mediation and arbitration

Construction Parties

S u re ty

S u b co n tra c to r S u b co n tra c to r S u p p lie r

G e n era l C o n tra c to r

O w n er

A rch ite ct

Hawaii League of Savings Associations Form A-1 1979

DISPUTES: all disputes arising hereunder shall be submitted to… architect … and if none, then to the material company … surety on the bond; … the architect's … material company [decision] shall be subject to arbitration …. If … no architect or material house, then all decisions shall be submitted to arbitration. …[O]ne arbitrator selected by the parties hereto shall determine the disputes and failing agreement …, three disinterested arbitrators (who shall be licensed general contractors, architects, or structural engineers) shall determine the dispute, one to be appointed by each party hereto. If either party fails to name his arbitrator within ten (10) days after notice in writing of the appointment of the first arbitrator, the first arbitrator may name the second arbitrator. The two …shall name the third arbitrator. If they cannot agree within ten (10) days, either may request any judge of the circuit court of Hawaii …to name the third arbitrator. The majority decision of the arbitrators shall be final and binding …. Each party shall pay one-half of the costs of the arbitrators’ fees and each party shall pay all other costs incurred by such party.

Core Arbitration language:AIA A201-1997

AIA General Conditions (A201-1997)

4.6 ARBITRATION 4.6.1 Any Claim arising out of or related to the Contract, except claims relating to aesthetic effect and except those waived as provided for in subparagraphs 4.3.10,9.10.4 and 9.10.5, shall, after decision by the architect or 30 days after submission of the Claim to the Architect, be subject to arbitration. Prior to arbitration, the parties shall endeavor to resolve disputes by mediation in accordance with the provisions of paragraph 4.5. 4.6.2 Claims not resolved by mediation shall be decided by arbitration which, unless the parties mutually agree otherwise, shall be in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect. The demand for arbitration shall be filed in writing with the other party to the Contract and with the American Arbitration Association, and a copy shall be filed with the Architect.

 

4.6.4 Limitation on Consolidation or Joinder. No arbitration arising out of or relating to the Contract shall include, by consolidation or joinder or in any other manner, the Architect, the Architect's employees or consultants, except by written consent containing specific reference to the Agreement and signed by the Architect, Owner, Contractor and any other person or entity sought to be joined. No arbitration shall include, by consolidation or joinder or in any other manner, parties other than the Owner, Contractor, a separate contractor as described in Article 6 and other persons substantially involved in a common question of fact or law whose presence is required if complete relief is to be accorded in arbitration. No person or entity other than the Owner, Contractor or a separate contractor as described in Article 6 shall be included as an original third party or additional third party to an arbitration whose interest or responsibility is insubstantial. Consent to arbitration involving an additional person or entity shall not constitute consent to arbitration or Claim not described therein or with a person or entity not named or described therein. The foregoing agreement to arbitrate and other agreements to arbitrate with an additional person or entity duly consented to by parties to the Agreement shall be specifically enforceable under applicable law in any court having jurisdiction thereof.

Obtain Insurance Review

• Have liability insurance policies reviewed to confirm defense and coverage in mediation, arbitration and/or litigation

• Confirm whether available insurance satisfies requirements of construction contracts, especially non-”standard”, with regard to indemnity, primary insurance and defense obligations

Tips: Before the Arbitration Hearing-1

• Develop clear focus on key issues• Clarity of focus will narrow preparation,

discovery and shorten hearings• Be proactive. Get arbitrator’s help early• Get early articulation of all claims,

counterclaims and defenses• Accelerate and simplify discovery and

information exchange

Tips: Before the Arbitration Hearing-2

• Identify areas of consensus/stipulate to uncontested facts and issues

• Determine if bifurcation and early resolution of threshold issues can simplify and streamline process

• Consider use of single neutual fact finder to avoid costly battle of the experts

Streamlined Information Exchange

• Set reasonable, scheduled informal document and information exchange

• Consider first phase focus on information needed to assess case and settlement options

• Use joint exhibit list to avoid duplication• Tabbed, organized and numbered• Stipulate all documents into record except

for impeachment and rebuttal

Expert Witnesses

• Advance exchange of resumes,qualify expert before hearing, stipulate or allow arbitrator to determine qualification of expert

• Clarify whether report required, all opinions expressed, no later tests or surprise testimony

At the Hearing-1

• Key witness or advocate can provide overview, context and chronology

• Use chronology and reference charts

• Identify all claims and issues that arbitrator must decide

• Determine if certain issues are resolved/ask arbitrator to make interim decisions to narrow focus of case

• Focus evidence and witnesses on remaining issues of disagreement

At the Hearing-2

• Although informal, you, your client and key witnesses are always on stage

• Remind client and witnesses to maintain courtesy, respect and dignity at all times including during breaks

• Arbitrators have more opportunity and do observe telling actions and hear statements that affect their view of the case

• Credibility is always at issue, protect it carefully

Flexible Arbitration Options for Acceleration of the Hearing

• Use a neutral fact finder

• Consider tandem expert testimony or round table format

• Written direct testimony with cross examination and supplementation at hearing

• Witness by telephone/computer camera

• Affidavits or deposition excerpts

• Bifurcation of liability and damages, causation and fix or claims and counterclaims

• Clarify fix, then liability

Quick Summary

• Be proactive

• Involve the arbitrator early

• Develop focus as early as possible

• Take advantage of the flexibility to shape and customize arbitration

• Watch out for “standard” clauses

• Best to review upfront