For this week’s Guest Post Friday post we welcome back Melissa Dewey Brumback. Melissa (@melissabrumback) is a construction attorney and partner in the firm Ragsdale Liggett, PLLC in Raleigh. Although not as old as some crusty lawyers, she has already spent over a decade representing engineers and architects, advising them on contract proposals to limit risks, and defending them when litigation does arise. She blogs at Construction Law in North Carolina.
As a reader of Chris’ blog, you are undoubtedly familiar with some of the pros and cons of alternative dispute resolution procedures. Arbitration, in one form or another, is an option in each of the three main industry form documents (that is, those of the AIA, the EJCDC, and the ConsensusDOCS). In fact, until recently, the default tribunal for construction disputes was arbitration, and, in the case of AIA contracts, arbitration through the American Arbitration Association (AAA).
AAA arbitration is, by and large, successful. The tribunal understands that construction disputes are not like typical breach of contract cases, and that individuals with specialized training and knowledge will likely better understand industry norms and terminology. Leaving such concepts as Requests for Information, Construction Change Orders, Construction Change Directives, Construction Administration versus Construction Management, Acceleration, Critical Path and other industry terms to a lay jury is often deemed unwise. By utilizing AAA arbitration, the parties can instead get a panel of industry experts to hear their case and, presumably, the matter can be dispensed with much more quickly and cheaply than traditional courtroom litigation.
However, AAA arbitration is not without its negatives. If you have ever had a chance to participate in a full AAA arbitration, you know that its benefits come with costs: hefty filing fees, inflexible coordinators, uncertain evidence rules and more chance of a panel “splitting the baby.”
What is the best venue, then, for construction disputes? That depends on the size of your project, the nature of the dispute and the jurisdiction you are in. However, one option that is being used more and more is private arbitration. Private arbitration can either be negotiated up front, during contract drafting, or after a dispute has arisen. In fact, I have even gotten opposing counsel to agree to private arbitration after they have filed a lawsuit.
A sample up-front arbitration agreement can be very simple and straightforward, such as:
All the parties will cooperate with each other to resolve conflicts informally. Any disputes shall be governed only by the laws of the State of X, including, but not limited to, all applicable statutes of limitation and repose related to the bringing of an action, and such dispute shall only be brought through binding arbitration among the parties.
Such a proceeding shall commence by the delivery of a written Demand for Arbitration signed by a party to the other party. The Demand shall state the general nature of the Complaint. The other party shall respond, in writing, within 20 days. Thereafter, the parties shall endeavor to agree to appoint one person to serve as an Arbitrator to their dispute.
If the parties cannot so agree within 30 days after service of the response, either party may file a lawsuit in the Courts of General Jurisdiction for Y County, X State, and move to stay the matter so that the Court may thereafter enter an Order appointing a neutral third party to serve as arbitrator in this matter.
The arbitrator shall establish procedural rules for a hearing of the dispute on the merits, including limited discovery and other matters as necessary, and shall conduct an arbitration hearing with relaxed rules of evidence as justice may require. The arbitrator’s decision shall be binding on the parties, and is authorized to assign attorney fees to the prevailing party, in the arbitrator’s discretion. The arbitrator’s order shall be enforceable in the Courts as necessary.
Notice that in this provision, the specific discovery and evidentiary rules are left up to the arbitrator, and that there is also a provision for the Court appointing an arbitrator if the parties cannot agree on such a person.
What are the benefits of private arbitration?
Unlike AAA arbitration, in private arbitration, anything goes. The parties construct an arbitration agreement that determines who and how many people serve as arbitrators (a single panel arbitrator in a smaller dispute works just fine). The arbitration agreement also determines whether there is discovery, and if so, how much. In this way, expenses can be minimized so that only the absolutely essential discovery is conducted. This saves on time and expenses for both sides.
If you are considering adding private arbitration to your contracts, consider whether you want to address discovery limitations upfront. Here is just one example of a discovery-limiting arbitration provision:
Each party shall have the right to take the deposition of one individual and any expert witness designated by the other party. Each party also shall have the right to make requests for production of documents to any party. Additional discovery may be had where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of need.
Using this provision would further ensure that the benefits of private arbitration are fully realized.
One important caveat to using private arbitration is that, similar to AAA arbitration, the decision is binding and enforceable in Court. Absent an agreement within the arbitration provision itself, such decisions are generally binding without benefit of any judicial review. There are a few, limited cases which may be subject to review, such as when abuse of discretion is found. However, in general, the decision will be upheld by North Carolina courts, win, lose, or draw.
The key to making the most of private arbitration, then, is to fully vet the proposed arbitrator, to make sure you are not getting someone unfamiliar with legal standards, or someone who too often sides with one particular entity. A private three-person panel, while more cumbersome and expensive, can help to minimize the risk of a rogue arbitrator in the case where you have any doubts about the likely arbitrator for your case.
As always, you should check with your insurance broker to see if your particular insurance carrier has any additional guidelines or requirements should you elect to add private arbitration to your contracts.
While not a panacea for each and every construction dispute, private arbitration is another weapon to add to your risk-limiting arsenal the next time you begin negotiating a contract.
As always Melissa and I welcome your comments below. Please subscribe to keep up with this and other Guest Post Fridays at Construction Law Musings.
Excellent points, Melissa! I’ve been seeing a ton of interest in moving arbitrations outside the purview of the AAA, even where the applicable contract clause calls for AAA administration.
I do have one hesitation about agreeing to private arbitration. While the avoidance of AAA filing fees keeps up-front costs down, their absence can create an incentive to assert trumped-up claims that the AAA’s fee schedule might otherwise have dissuaded.
I had this very situation arise last year, when my client’s payment claim of $200,000 was met with a $1.5 million counterclaim for alleged defects and overpayments. My client prevailed with a net award of $175K (i.e., almost a complete repudiation of the counterclaim), but the attorneys’ fees incurred to discover and arbitate the counterclaim were significant.
Would the AAA’s filing fee schedule have made a difference? Hard to say. And I’m not necessarily suggesting that the risk of defending a trumped-up counterclaim outweighs the benefits of private arbitration. But it is something worth considering.
Good thoughts Matt. I am always hesitant about mandatory arbitration clauses unless they are carefully drafted to truly cut down on expenses. Otherwise you risk just paying a judge an hourly rate without any true streamlining.
Great post. I’m a big fan of Arbitrations and encourage them whenever I can.
Belated thanks, Matt and Ron, for your comments. And as always, Chris, for the platform.
Matt, your concern with the lack of a barrier to entry in private arbitration is well-founded. However, court has similar low barriers to entry (esp state court in NC). It is easier to have a judge kick a claim than an arbitrator, though, so point well taken.