Arbitration in construction matters and beyond
A 2019 ARCADIS Global Construction report determined that 30% of construction projects end in dispute. Any construction claims professional or construction attorney would argue that number is low. With the prevalence of construction claims on projects of all sizes, the parties frequently find themselves in the middle of uncharted territory—arbitration.
Arbitration has been intertwined with construction disputes for more than a century. The first American Institute of Architects (AIA) form contract, released in 1888, required arbitration as the dispute resolution procedure. Arbitration remains a feature of most construction contracts, including the AIA 2017 version and non-form agreements used by contractors and subcontractors.
For a time, construction arbitration had fallen out of favor, and it was thought to be of limited usefulness. However, with the ever-growing backlog caused by court shutdowns, reticent jurors, and a constant stream of new matters despite the pandemic, parties and courts are turning to both binding and non-binding arbitration to help resolve the always-complicated disagreements that arise over construction projects.
We will discuss the good and bad of arbitration, explore the pitfalls, debunk the myths, discuss the benefits of arbitration in construction disputes, and explore how claims professionals and lawyers can use arbitration as an effective tool to efficiently, effectively, and economically resolve construction related claims.
Arbitration is, simply, a private process where parties agree to have a neutral third party resolve a dispute outside of the court system. Arbitration may be binding (the arbitrator’s decision is final) or non-binding (the parties may reject the arbitrator’s decision and ultimately resolve their dispute in another forum).
In arbitration, there is a private arbitrator (or a panel of private arbitrators) who acts as both the judge and the jury: administering the case, deciding the facts, and applying the law. Arbitration ends after an evidentiary hearing that is similar to, but less formal than, a trial in a court of law.
The Pros
Parties may prefer arbitration over litigation for several reasons. First, the ability to agree in advance on procedural and substantive matters—including scope of discovery, timing, and selection of the finder of fact and law—provides a distinct element of predictability to the proceedings.
Second, generally, arbitration is faster than litigation. While, as discussed below, this element can often be destroyed by over-litigious parties, arbitration allows for the elimination of certain steps and the establishment of timely procedural deadlines that can allow for a much quicker resolution.
Third, for certain disputes, arbitration offers significant cost savings. In addition to limiting discovery, parties can decide when and where arbitration will occur, which can reduce costs.
Finally, many parties prefer the privacy benefits of arbitration. The dispute will be resolved outside of the public record. This feature of arbitration is one that should be enticing to insurance carriers, especially when resolving coverage disputes between carriers. Each carrier has a unique risk portfolio and, therefore, different carriers can look at coverage for certain risks very differently.
A carrier that writes all subcontractors is going to look at additional-insured and indemnity issues differently than the carrier who writes all, or mostly, developers and general contractors. One of them has to lose in either an arbitration or a suit. The difference is that, in an arbitration, neither takes the chance of creating bad law.
The Cons
In binding arbitration, the arbitrator’s decision is final. The ability to appeal is extremely restrictive and essentially may only be reviewed for fraud or bias. In short, your decision is only as good as your arbitrator. This could be said for a judge as well, but at least with a judge you have the option of proving the decision was incorrect.
Arbitration is generally voluntary, which sometimes means not all necessary parties are required to participate, and any arbitration decision will not be binding on them if they decide not to submit to the arbitration.
Arbitrators can accept any evidence, whether admissible in a court or not. Arbitrators are allowed to utilize any information brought to them as they deem appropriate.
There is also a lack of consistency inherent in arbitration because each arbitrator, and each matter, may have different rules and procedures. As should be clear, arbitration is a fluid process that can be used to great benefit in the right dispute and with the right participants.
Cost of Arbitration and Litigation
Arbitrations are intended to be a more efficient and economic means of resolving claims. A major part of that efficiency and economy is the less-formal nature of arbitration and the ability of the parties and the arbitrator to craft a procedure for conducting an arbitration that is the most efficient for each claim, without regard to the formal rules of evidence or civil procedure.
Regrettably, many parties (and/or their attorneys) frequently manage arbitration proceedings in a manner conspicuously like litigation. Many attorneys call it “arbigation.” As lawyers are sometimes wont to do, they need to ensure that every document is produced, every witness deposed, and every stone turned. Often, the parties conduct as much discovery in arbitration as a fully litigated matter. Combined with the cost of the arbitrators, this can make arbitration as, if not more, expensive than litigation.
Speed of Dispute Resolution
After cost, the next most disputed “pro” of arbitration is the speed with which the matter comes to final resolution. The timing for a full arbitration is dictated in large part by the parties and arbitrators’ decisions on discovery. The arbitrator has great power in determining the timing of the proceedings, and the initial arbitration conference goes a long way in determining how quickly the parties will get to a final hearing.
Several factors that account for the ultimate expediency of the proceedings are:
The parties and the arbitrators do hold the power in determining how quickly the matter reaches finality. Great care should be taken on the front end to ensure that the parties take the time to achieve the right balance of information and speed.
Quality of the Decision-Maker
One of the greatest benefits of the arbitration process in construction matters is the ability to select the decision-maker. Given the nuances and complexities that are necessarily part of even the smallest value construction claim, this decision can be the difference between a productive arbitration and the wasting of an opportunity to move the case to resolution.
Typically, the parties (or sometimes a court) choose an arbitrator based on the subject matter of the dispute. Thus, construction arbitration will nearly always have a construction lawyer or someone with extensive construction experience serving as the arbitrator. This reduces the time and effort necessary for the attorneys to “educate” the arbitrator on construction issues, and makes the arbitrator better suited to render a decision in the case.
Arbitration is intended to be less formal than a lawsuit. Arbitrators rarely strictly enforce the rules of evidence and of civil procedure. An arbitrator has almost full authority to determine the procedure and timing of arbitration. Because of this informality, disputes regarding process and rules commonly arise in arbitration.
The parties, collaborating with an arbitrator, ultimately will agree to a scheduling order that sets forth the deadlines, process, and rules for conducting the arbitration. These orders typically include how long the discovery period will last; the scope of discovery, expert discovery, and depositions; where and when the evidentiary hearing will occur; and the content of the arbitrator’s final award.
A quality construction arbitrator should have certain key qualities. First, an arbitrator must have familiarity with the industry, construction contracts (and their interpretation), the insurance ramifications of CGL or wrap policies on construction claims, and the industry culture.
Parties should consider the following key qualities when selecting the arbitrator:
As noted, the arbitration hearing is more informal than a trial. The Rules of Evidence do not apply, and the arbitrator may admit documents or testimony containing hearsay or incompetent testimony. The arbitration panel may also ask questions of the witnesses and the parties. Because the arbitrators may have construction experience, these questions can be highly technical in nature.
The selection of an arbitrator or arbitration panel can be the difference between a quick, successful arbitration and a matter the devolves back into litigation in another form.
Finality of the Result
Appeals from an arbitrator’s decision are rare. This is part of the process primarily because appeals create significant costs and delays, the very essence of what arbitration is designed to avoid. If a party believes that an arbitrator has made a mistake of law or determined facts incorrectly, it will be nearly impossible for the dissatisfied party to pursue an appeal. The only real bases for asking a court to overturn an arbitrator’s decision are fraud (the arbitrator took a bribe), bias (the arbitrator clearly evidenced an overt favoritism toward one of the parties), or that the arbitrator decided an issue that was not within the scope of the arbitration. These exceptions rarely exist and are almost never provable.
One benefit of a limited appeal process in arbitration circles back to the mantra of arbitration: “Resolution more quickly and less expensively.” The truth is that a party may be stuck with an undesirable result that is the product of an arbitrator’s clearly erroneous decision.
Florida and Non-Binding Arbitration
Florida Statutes § 44.103, et seq. and Fla. R. Civ. P. 1.800 and 1.820 contain rules and procedures for the use of court ordered non-binding arbitration. While these provisions had gone overlooked for many years, recently certain Florida courts have instituted a mandatory use of these procedures, specifically in construction matters.
Under these rules, a court may refer any contested civil action to nonbinding arbitration. The parties may select the arbitrator and the arbitration hearing is conducted informally. The parties present matters and issues to the arbitrator primarily through statements and argument of counsel. The arbitrator has 10 days to present the award in writing, which is sealed and filed with the clerk of courts.
The parties may accept the award, and the court would then enter orders and judgments as required. Should either party not accept the award, they have 20 days within which to file a request for a trial de novo. If a party requests a trial de novo, the statute calls for an attorney’s fees and costs provision to come into play.
Should the plaintiff file and then obtain a judgment at least 25% less than the award, the defendant’s costs and fees are set off against the award. If the defendant files and the plaintiff recovers at least 25% more than the arbitration award, the defendant is thereafter required to pay plaintiff’s fees and recoverable costs incurred after the arbitration hearing and continuing through the trial. This procedure of nonbinding arbitration can foster more productive settlement discussions, and often serves as the impetus for the parties to “get real” and find a resolution.
California and Texas—two other jurisdictions where construction-defect-related litigation is prevalent—do not have similar provisions to the arbitration rules that Florida utilizes to streamline the litigation process. However, due to the pandemic and resulting backlog in civil cases throughout both states, legislatures are considering the use of an alternative dispute process to free up the court calendars.
Ask a group of 10 lawyers and construction claims professionals to discuss arbitration and you just might receive 10 different answers. Arbitration in its purest form can be more economical, more efficient, and more expeditious than litigation. Even a hybrid arbitration with a look more like litigation can be an effective means to resolve construction disputes and should be in every claims professional and defense counsel’s quiver as another potential means to resolve construction claims.
However, care is needed to avoid turning the process into “arbigation.” Parties utilize the arbitration most effectively when they can work to find as many areas as possible where there are no disputes and limit the process to areas where they need the disinterested voice of a decision-maker.
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Lee Wright is casualty claim director at Tokio Marine. lwright@tmhcc.com
Scott Rembold is a partner at Rembold Hirschman. srembold@therhlawfirm.com
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