Consider Arbitration Options in Dispute Clauses

By William Coats.

The author writes that parties to construction contracts should use the inception of new AIA contract documents as the perfect time to evaluate their dispute resolution options.

For many years, the American Institute of Architects standard form of construction contracts has included a provision providing for arbitration of disputes between the owner and the general contractor through the American Arbitration Association using the AAA Construction Industry Rules for administration of the arbitration.

In my practice, I have heard two common complaints over the years from clients about this format for arbitration. First, administration of arbitration by the AAA can involve excessive administrative fees. Second, the arbitrator selection process does not give the parties as much control over the arbitrators who are to decide cases as some other arbitration formats.

Under the AIA format, the parties are furnished lists of potential arbitrators from a panel of construction arbitrators maintained by AAA. Each party makes some strikes from that list, then the association makes the final selection. While the AAA panel is a high-quality, well-trained group, knowledgeable about the construction industry, the selection of arbitrators is made by the AAA, not by the parties. This format does not give the parties as much flexibility in arbitrator selection as the method in which each party selects one arbitrator and the two arbitrators then select a third arbitrator to join them. There are pluses and minuses to both a panel selection system and the party-picked arbitrator system.

Change is coming to the standard AIA documents. Under the newest version, contracting parties are given the freedom to designate the alternative dispute resolution provider of their choice. Specifically, while the new A141-2004 form requires mediation as a condition precedent to either arbitration or litigation, the new form permits selection of any mediation and arbitration provider on which the "parties mutually agree." The new AIA documents offer parties the option to choose the type of binding dispute resolution method that will govern the agreement. Where the old version required arbitration, the new version contains three options: 1) Arbitration, 2) Litigation, 3) Other (specify).

This seems to be a step in the right direction because it forces contracting parties to pay some attention to how they want to handle disputes if they arise. Contracting parties ought to consider a range of questions and then tailor a disputes clause to meet their particular needs and desires.

Important questions to consider before blithely signing a standard form of contract with an arbitration clause include:

• Do you want to arbitrate at all? You do not pay judges and jurors, you pay arbitrators.
• Do you think you would have a local advantage in a trial over the party you are about to enter a contract with?
• Do you want appeal rights - you have them in a trial, but not effectively in an arbitration.
• Do you want control over arbitrator selection? Do you want to pay for third party administration of the arbitration? Arbitrations can be administered by the parties themselves, with access to the courts in case of disagreement.
• Do you want elaborate, limited or no discovery in an arbitration? You can provide for discovery, limit or exclude it.
• Where do you want the arbitration hearing to be held? Do you want to control the cost of the arbitration hearing itself by providing for limits on the time each party will have to present its case, the fees to be paid arbitrators, use of court reporters, etc.?
• Do you want to arbitrate some types of claims but not others? Do you want to be able to decline arbitration if you cannot get all the parties necessary to the complete and final assignment of no fault to take part in the arbitration? For example, if an owner believes that its architect actually made the mistake that a contractor is seeking to arbitrate, would the owner want to arbitrate if the owner cannot get the architect to join the arbitration as a party?

These questions can be resolved with a properly drafted arbitration clause. Parties to construction contracts should use the inception of the new AIA contract documents as the perfect time to evaluate dispute resolution options. If they are not resolved in advance, you may be at the mercy of AAA administrators, a court acting as arbitration administrator or the arbitrators themselves.