Arbitration For You?

Arbitration -- Is It Right For You?

Michael D. Freeborn

(Reprinted with permission from Petroleum Equipment & Technology, January/February, 1996)

The construction project had been going along smoothly. Sure, there were the usual minor disagreements regarding who was responsible for a delay here and there, or regarding interpretation of some specification or drawing. But all in all, the fueling facility looked like it would be completed on time, within budget.

Then, things got a little scary. This is the part of the movie when the ominous music begins and all the eyebrows look more serious.

There’s a problem with the tanks. Somebody is responsible but it’s not yet entirely clear who. Litigation is now being discussed. How much will it cost? How much will the project be delayed? How can we find out who’s at fault?

If your construction contract is silent on the subject of dispute resolution, the number of possible answers to these questions is limited only by the ingenuity of two or more lawyers whose sole job is to vigorously advocate their client’s interest. Visualize injunctions, temporary restraining orders, work stoppages, and large legal fees.

On the other hand, if your contract includes a typical arbitration clause, you can at least hope that:

1. Construction will continue while the dispute is resolved.

2. Legal fees will be minimized, if only because pretrial discovery is reduced or eliminated.

3. An arbitrator's decision may come more quickly than a decision in court.

These are the principal advantages of arbitration. Many lawyers would agree, however, that there can be downsides to arbitration, as well:

1. Some believe that arbitrators have a tendency to compromise, to "cut the baby in half". Arbitrators who earn a living only by being hired to decide disputes sometimes lack the independence of a judge in rendering an all-or-nothing decision.

2. There is little or no pretrial discovery allowed. So if you don’t already have enough evidence to prove the other side is at fault, you may become the victim of trial by ambush.

3. The appeal rights are limited.

Despite these drawbacks, typical construction contracts include arbitration clauses, so it is wise to know something about them. Although the actual language can vary, and you should always consult competent counsel regarding a dispute, the following is a summary of language suggested by the American Institute of Architects, which appears in many arbitration provisions.

First, a claim is made by one of the parties seeking adjustment or interpretation of contract terms, payment of money, extension of time, or what have you. The contract usually requires such claims to be in writing, and places the responsibility to substantiate the claim on the party making the claim.

Typically, the claim is referred initially through the architect for action, and a decision by the architect is a condition precedent to arbitration or litigation as to all matters arising prior to the date final payment is due.

Claims must be made within 21 days after (1) occurrence of the event giving rise to the claim, or (2) the claimant first recognizes the condition giving rise to the claim, whichever is later.

Most importantly, work continues. In the usual contract, there is a clause which says that pending final resolution, unless otherwise agreed in writing, the contractor must proceed diligently with performance of the contract and the owner must continue to make payments in accordance with the contract documents.

Within 10 days of receipt of a claim, the architect is required to do one of five things: (1) reject the claim in whole or part, (2) recommend approval by the other party, (3) suggest a compromise, (4) request additional information, or (5) suggest a schedule to the parties indicating when the architect expects to take action.

You cannot demand arbitration until the earlier of (1) the date when the architect has rendered a final written decision, (2) the 10th day after the parties have presented evidence or had a reasonable opportunity to do so, if the architect hasn’t rendered a decision by then, or (3) any of the five events listed above. Arbitration may be commenced when 45 days have passed after a claim has been referred to the architect and no decision has been rendered.

When a decision of the architect says it is final but subject to arbitration, and that a demand for arbitration must be made within 30 days, then failure to demand arbitration results in the architect’s decision becoming final. If the architect renders a decision after commencement of arbitration, the decision may be entered as evidence, but does not supersede the arbitration unless all parties agree to it.

After arbitration, a court judgment may be entered to enforce the award of the arbitration.

There are time limits on a demand for arbitration. For example, in the absence of one of the time limits already described, a demand for arbitration must be made within a "reasonable time" after the claim has arisen, and in no event after the date when legal or equitable proceedings based on such a claim would be barred by the applicable statute of limitations.

This stuff can become fairly technical and the consequences of a mistake enormous. So be sure you have a chat with your lawyer before making assumptions about how to proceed.