Risk Mangement Library[site/headers/risk-management-top.htm]

Dispute Resolution and the Owner:
Is Mandatory Arbitration the Right Choice?

By Albert E. Phillips, Esquire

    Taken singularly, there is nothing unique about most construction tasks. Given application of the requisite skill by each person involved, almost every single work task can be performed over and over without difficulty or mistake. Why then do problems invariably arise?

    Construction of even the smallest project involves a process which is dynamic - not static - in nature. From the time the venture is conceptualized, until the last punchlist item is completed, something that never before existed, in exactly the same setting, is being created by numerous people, who work for numerous parties, each with diverse interests and differing motivations. Cooperation among all participants is a necessity, while coordination of each function is no less important. Delay on the part of one subcontractor puts others out of sequence, causing additional delay, disruption, inefficiency and higher costs.

    It is practically impossible to foresee all of the problems that will arise during the process. Some may be caused by the Owner, who decides to make drastic changes in the middle of the project, while others may stem from a mistake in the plans or specifications. Some may be
    caused by the Contractor's failure to properly schedule or clearly understand the multitude of activities required. Still other problems may arise which are the fault of no one, such as unexpected weather delays. However, one thing can be anticipated with certainty: problems will arise.

    In order for the process to function most effectively, and for problems to be handled fairly, efficiently and satisfactorily, it is imperative that the Owner begin by entering into contractual arrangements with the design professional and with the Contractor which anticipate the types of problems most frequently encountered and which provide a contractual framework for their prompt solution. No single step which the Owner takes during the entire construction process is more important.

    The construction industry has evolved numerous form agreements. These include standard form agreements published by The Associated General Contractors of America (AGC), The National Society of Professional Engineers (NSPE), the American Institute of Architects (AIA), and the Construction Owners Association of America (COAA). However, the most popular forms currently in use are those published by the American Institute of Architects. From the Owner's viewpoint, the AIA forms are, with the notable exception of the COAA documents, probably the best standard forms now available. Yet, as noted by one court, the printed AIA contract is replete with ambiguities, contradictions, and is an attempt to give all things to both parties.1 For the Owner to be adequately protected, some modification of whatever form is chosen is usually desirable.

    Disputes

    It is unlikely that any major construction project has been completed without any disputes. Most of these disputes are resolved between the affected parties. However, one or more disputes may become claims, and some claims lead to litigation or arbitration. The goals of the Owner should be to:

    • Become aware of potential disputes and claims as soon as possible, typically by contractually requiring early written notice from the Contractor of any potential claim;
    • Require from the Contractor the written basis for its claim, together with all supporting documentation and evidence at the earliest practical time;
    • Provide a preliminary, informal procedure for resolving the dispute or claim; and,
    • Contractually require the Contractor to continue with the work pending resolution of the dispute or claim, lest resolution of the dispute be permitted to hold the project hostage.


    With the exception of the COAA documents, most construction contracts contain mandatory arbitration clauses which require the Owner and Contractor to submit any unresolved claim to a panel of arbitrators. These standard form arbitration clauses usually do not serve the Owner well, as discussed below. Therefore, in most instances, the Owner should not bind itself, in advance, to any formal method of dispute resolution, except to the extent outlined above.

    Most states encourage arbitration as a matter of public policy and provide for the enforcement of such clauses2. One Florida court held that an arbitration clause was enforceable and would apply to an Owner's claim that the very contract of which the arbitration clause was a part was fraudulently induced.3

    Additionally, most construction Owners will find that the provision is enforceable under the Federal Arbitration Act4 in contracts involving interstate commerce and as a matter of federal policy.5 As almost all construction involves the movement of equipment and personnel across state lines, a state jurisdiction that does not recognize the enforceability of an arbitration clause will generally be pre-empted by the Federal Act.6

    The American Institute of Architects Document A2011997 provides for arbitration of all claims, disputes and other matters in question between the Contractor and the Owner7. These provisions8 are not difficult to understand and provide for arbitration proceedings in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. The provision excludes the Architect from such arbitration, thereby leaving out of the dispute one of the parties whose activities are frequently at the core of the dispute.9

    Yet, it must not be forgotten that arbitration is a creature of contract and no party can be compelled to submit a dispute to arbitration without having given prior contractual consent to do so.10 Where the choice is the Owner's, it is recommended that arbitration not be made mandatory.

    The main advantages of arbitration so often heard include its economy, its speed, its informality, and its ability to provide expert arbiters as the judge and jury. Yet, from the Owner's point of view, there are several reasons not to arbitrate:

    • Lack of Joinder: There is no provision for joinder of all affected parties. Many claims of Contractors against Owners are claims that may involve potential liability of another party to the Owner, e.g., the Architect. It is to the advantage of the Owner to be able to join all parties to the dispute who may have potential liability to the Owner. However, as presently drafted, the AIA arbitration clause11 does not allow for mandatory joinder of any party other than the two parties to the immediate dispute.
    • Unpredictable Outcome: Arbitrators are not bound by the terms of the contract documents, nor by the applicable law. From the Owner's standpoint, the best way of preventing construction disputes is to provide for particular provisions in the. contract documents. However, the arbitrators are not bound, as courts would be, to apply the terms of the contract.
    • No Discovery: There is no requirement for discovery in arbitration. In most cases, the Contractor will be very familiar with the documents supporting his claim. However, the Owner will have need to discover the Contractor's files and facts known to the Contractor's witnesses.
    • Compromise: It is generally believed that arbitrators are often inclined to cut the baby in half and arrive at a compromise decision. The Owner, who is frequently the defendant, has reached the arbitration stage because of its inability to reach a satisfactory compromise. In most cases, the Owner is looking for complete victory and will seldom be content with a compromise decision in arbitration.
    • Lack of reasoned opinion: The arbitrators are not required to give reasons for their decisions. Thus, if an Owner is dissatisfied with the decision, the lack of reasons given will mean, in effect, that the decision is final.
    • Limited appeal right: There are limited rights of appeal from an arbitrator's decision. Essentially, the award can be reversed in a court of law on very narrow grounds, e.g., fraud, duress, bribery, corruption or other misconduct on the part of an arbitrator. It is extremely rare that a court will reverse an arbitrator's decision.
    • Bias of experience: It is claimed that arbitrators are specifically selected for their knowledge and expertise in the disputed area; therefore, they arrive at more reasoned results. The other side of this argument is that arbitrators usually have their own points of view and may well have one which is negative to the Owner's position. This is particularly likely since most arbitrators are Architects, Engineers, Contractors or their representatives.
    • Expense: Arbitration is not inexpensive. The American Arbitration Association charges an initial filing fee, and, thereafter, charges a substantial fee according to the amount of the claim, or counterclaim, involved. Additionally, the arbitrators (usually three) must be paid their agreed-upon rates including other expenses, similar to court costs.


    Certain objections to arbitration listed above can be cured by appropriate changes to the arbitration clause. For example, provisions that may be useful under certain circumstances include: (1) a limitation upon arbitrability to disputes involving less than a stated amount; and, (2) an agreement to permit discovery of evidence pursuant to the Federal Rules of Civil Procedure.

    Absent clear reasons for submitting to arbitration, it is recommended that the Owner refrain from including the provision in its contract, or that any provision that is included be expressly limited to circumstances satisfactory to the Owner.

    Notes:

    1 Fletcher v. Laguna Vista Corp., 275 So.2d 579, 580 (Fla. 1st DCA 1973), cert. den. 281 So.2d 213.
    2 Palmer v. Duke Power Co., 499 S.E. 2d 801 (N.C. App.1998); Blanchard v. Petmecky, 709 So.2d 796 (La. App. 1997).
    3 Medident Construction, Inc. v. Chappell, 632 So.2d 194 (Fla. 3d DCA 1994).
    4 9 U.S.C. Sections 1-16.
    5 Southern Oklahoma Health Care Corp. v. JHBR-Jones-Hester-BatesRiek, Inc., 900 P2d 1017 (Okla. App. 1995); Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 E2d 402 (2d Cir. 1959).
    6 Southland Corp. v. Keating, 465 U.S. 1 (1984). 7. (Paragraph 4.6).
    7 (Paragraph 4.6).
    8 (Subparagraph 4.6.2).
    9 (Subparagraph 4.6.4).
    10 Scott v. Prudential Securities, Inc., 141 E.3d 1007 (11 Cir. 1998).
    11 (Subparagraph 4.6.4).


    Albert E. Phillips, Esq. a construction attorney and partner at the law firm of Phillips and Morgan in Atlanta, Georgia. Mr. Phillips has over 30 years of experience representing the interests of public and private Owners and is General Counsel of the Construction Owners Association of America. The above article is a brief excerpt from a detailed paper presented by Mr. Phillips at the Construction Owners Association of America Fifth Annual Meeting at Amelia Island Plantation, Amelia Island, Florida.


    Reprinted with permission on behalf of Albert E. Phillips, Esq.
   
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