by Steven B. Kaplan, Esq.
In the prior article, I discussed the essential aspects of mediation which decisionmakers for construction participants—owners, contractors, subcontractors, and design professionals — should consider when confronted with resolving disputes. Here, I continue that discussion in regard to arbitrating construction disputes. As previously noted, this discussion is not intended to serve as a “legal primer”; rather, it lays out for decisionmakers and managers the most important, practical aspects of arbitration.
PART TWO: KEY CONSIDERATIONS FOR ARBITRATION
Arbitration is a binding method of dispute resolution. (There is no such thing as “non-binding arbitration.”) As with mediation, arbitration of construction disputes has been the preferred method of binding dispute resolution for decades. This is the result of the general consensus among construction professionals that the courts usually are not well-suited for resolving construction disputes. Many construction contracts require arbitration, rather than litigation, as the binding method of resolving disputes. Alternatively, some contracts (and statutes involving State contracts such as Conn. Gen. Stat. ⸹4-61) provide for arbitration as a discretionary choice by one of the parties. Moreover, since arbitration normally can proceed only by the agreement of the parties, sometimes the participants in a lawsuit will opt out for arbitration for a host of practical considerations— the ability to choose the arbitrator(s), cost effectiveness, scheduling, streamlining the process, or practical convenience.
For construction disputes, a single arbitrator usually will be an experienced construction lawyer, while a three-person panel customarily will consist of at least one lawyer, in combination with another lawyer(s), or a contractor, an owner’s rep, or a design professional. Sometimes the contract will determine whether a one or three-person panel is utilized, although the parties always can modify that choice by agreement. Organizations like the American Arbitration Association (“AAA”) are frequently designated as the administrator for the arbitration. The AAA prides itself on maintaining an extensive, experienced, and multi-faceted roster of construction arbitrators throughout the U.S., and makes the potential arbitrators’ resumes available to the parties.
As noted, the ability of the parties to choose the arbitrator(s) is a key component, and attraction, of arbitration. Selection of the arbitration panel (one or three) can be effectuated by the mutual agreement of the parties, or by selection from a list of proposed arbitrators. Whether the arbitration is being administered by the AAA, by another agency, or by collaboration between the parties’ legal counsel, it is critical to select arbitrator(s) who are well-suited for the particular case.
Important factors to consider in selecting the arbitrator(s) include: general reputation as a construction arbitrator; experience with the specific subject matter of the dispute — such as project design issues, geotechnical conditions, project management or scheduling disputes; availability; fees charged. Word of mouth usually tells a lot about a potential arbitrator’s qualities. Rarely, if ever, will a trial judge bring any comparable construction dispute experience into the courtroom, and in most cases, it is impossible to “choose” a judge for a specific case.
In some cases where the parties have failed to settle their disputes by mediation, they might consider utilizing the mediator to arbitrate the case. This could save time and money in the arbitration process since the mediator/arbitrator would be familiar with the case and could effectively work with the parties in narrowing issues and streamlining the arbitration process. Of course, the parties would have to waive any conflicts resulting from their prior confidential settlement discussions with the mediator, and they also would have to be confident that nothing they had discussed during the mediation would be construed by the mediator/arbitrator as a factual or legal admission on a disputed issue.
Before the arbitration gets underway, all necessary parties should be joined into the action — if possible. Frequently, contract clauses provide for joinder of key parties, such as subcontractors or design professionals, and the AAA Construction Rules also provide for joinder, as well as for consolidation with other cases that are dealing with the same disputes.
Several other widely noted advantages of arbitration over litigation include:
- Pre-hearing discovery is usually limited to document production; depositions normally are limited, if permitted at all;
- The evidentiary hearing process can be customized by the parties, in cooperation with, and at the direction of, the arbitrator(s). This includes specifying claims and counterclaims at the outset, and working efficiently on eliciting and producing the necessary production and exchange of documents;
- Pre-hearing motion practice is discouraged;
- Pre-hearing exhibits are jointly prepared and submitted by the parties, at least in part;
The parties also should maximize their input into achieving the “Goldilocks effect” for the hearings — not too many, not too few days of hearings; not too many, not too few witnesses; identifying and limiting the issues to be resolved; working cooperatively on scheduling of witnesses and hearings
The parties also may agree to bifurcate the hearing, initially putting on evidence only as to liability and procuring the arbitrator’s award before proceeding with evidence of damages. Regardless, the parties can stipulate as to uncontested facts, the scope and length of direct and cross-examination of witnesses can be defined beforehand, and certain testimony can be summarized or can be submitted by affidavit. When there is competing expert testimony, experts can appear concurrently, and the arbitration panel can question them side-by-side. By agreement, closing argument can supplant post-hearing briefs, which also can be limited in length or by issues to be addressed.
All of these factors should be considered by the parties to achieve an efficient, timely, and cost-effective process. And at any time up to the issuance of a final award, the parties can choose to suspend the arbitration and return to mediation, based on a better-informed view of how the case may turn out.
It is worth noting that the AAA has investigated the cost components for arbitration, finding that 85% of the cost of an arbitration proceeding is attributable to attorney’s fees; 11% for arbitrator compensation; and 4% for the AAA administrative fees. (This excludes, of course, the cost of your company’s personnel and management time in regard to the arbitration, which can be extensive.) Since the hearing process in an arbitration ordinarily takes considerably less time than a court proceeding, attorney’s fees should be substantially lower in arbitration. Much time and money is saved in arbitration by avoiding unlimited discovery and depositions, as well as motion practice that is customary in litigation. Moreover, the convenience of scheduling hearings by mutual consent, as well as the relative speed of issuance of an arbitration award (30 days after the close of the evidence versus at least 120 days in court), also commends arbitration versus litigation.
Finally, there are extremely limited grounds for appealing an arbitration award, versus the relatively open-ended grounds for appeal of a trial court judgment. In most cases, the parties favor the finality and closure provided by arbitration.
Company decisionmakers should take an active role in these considerations and should work with their legal counsel accordingly. There is no good reason why any arbitration proceeding should follow a cookie cutter approach. While experienced legal counsel will provide sage guidance, all aspects of arbitration will affect the ultimate result.
If you have questions about arbitrating construction disputes, please call Michelson, Kane, P.C. at 860-522-1243.
Michelson, Kane, P.C.
