Best Practices Construction Law : Construction Lawyer & Attorney : Matthew DeVries : Stites & Harbison Law Firm : Green Building & LEED Litigation

I recently read a BNA article on commercial arbitration entitled Achieving the Perceived Cost Savings and Expedience of Commercial Arbitration (pdf).  In the article, Chicago attorney William O'Neil identifies six essential terms you should include in your arbitration clauses.

While I agree with most of the essential terms, the recommendations really depend on the type and size of the dispute.  Here are O'Neil's recommendations to include in your arbitration provision, along with some of my thoughts for construction disputes in particular:

1. Insist on a Single Arbitrator.  Three member panels are, indeed, expensive.  While the average case cannot support the arbitration fees for a full arbitration panel, some construction disputes are of such a magnitude that a panel is necessary.  In other words, do you want one arbitrator deciding your $10 million claim?  There are ways to structure your dispute provision to have a single arbitrator for claims under $1 million and a three-member panel for claims over $1 million.
2. Limit the Time to the Hearing, the Length of the Hearing, and Time to Decision.   I wholeheartedly agree with this recommendation, as arbitration should achieve two of its primary intended purposes ... cheaper and quicker.  The problem is that parties rarely (if ever) spell out these deadlines in the contract and wait until the dispute arises to then argue about the time and length issues.
3. Adopt a Notice Pleading Standard for the Notice of Arbitration.  Most arbitration disputes begin with a Demand for Arbitration, which is usually no more than a one-page form that provides the name of the parties, the nature of the dispute and the amount in controversy.  As a construction attorney, I generally will include a multi-page complaint attached to the demand for arbitration. (Side bar: I include a similar complaint with contractor claims against the State of Tennessee even though the initial form does not require it.)  By requiring a "notice pleading" standard in your dispute provision, you are required to describe the basis of your claims or you have more information to review the claim, depending on whether you are the party seeking or defending arbitration.
4. Limit Discovery.  Again, depending on the nature and size of dispute, you may want full discovery just as you would have in the litigation process.  The point here is to decide the extent of discovery the parties want at the "contracting stage" as opposed to waiting for the dispute to arise and then be subject to either an arbitration rule of AAA or JAMS or no rule at all.
5. Authorize Arbitral Sanctions.  I agree that the decision-maker should have authority to resolve preliminary disputes, grant interim relief, and award sanctions.  Again, the key is to include this power in the dispute resolution provisions.
6. Ease the Confirmation Process.  Since arbitration is a creature of contract, the parties can contractually agree on its binding nature.  As O'Neil points out, arbitration is "wasted if there is a delay in confirming and enforcing a favorable judgment."  The problem is remedied by simply including a clause in your arbitration provision that vests jurisdiction in every district court in the United States to confirm and enforce the award.

Again, O'Neil makes some great points ... but some of these may require tweeking depending on the nature and extent of the dispute.  Make sure you check out the Model Arbitration Clause in the article for some sample language.

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Who knew that dispute resolution was a lot like ordering from a menu?  Would you like one arbitrator or a panel of three arbitrators?  Would you like your jurisdictional questions to be determined by the court or the arbitrator?  Which arbitration rules do you want to apply?  So many choices . . .

Recently, the American Arbitration Association revised and amended its set of Construction Industry Arbitration Rules and Mediation Procedures, effective October 1, 2009, which addresses some of these menu options.  A summary of the most significant changes is available through AAA's website.

One change that caught my attention involves L-6 Form of Award, which now reads: "In addition to the award requirements set forth in R-44 (a) and (b) unless the parties agree otherwise, the arbitrator shall issue a reasoned award."  A reasoned award?  What is that?  Why should you care?

Arbitration versus Litigation

First, let's go back to the basics.  If you find yourself in court on a construction dispute, the winner at the end of trial is usually granted a judgment.  That judgment can be in the form of an award of money ... a declaration of some finding (such as coverage under an insurance policy) ... an injunction prohibiting or requiring some act ... or any number of other remedies within the court's power.  The court may or may not issue a written opinion explaining the rationale for its decision.

On the other hand, an arbitration proceeding generally results in an "award," which is the determination on the merits by the arbitrator or panel of arbitrators.  Depending on the parties' contract or the applicable arbitration rules, the arbitrator can award the same or similar relief to that of a court.  Charles Resnick, former general counsel for Raytheon Company, has written a good article on whether to arbitrate or not to arbitrate.

Reasoned Award

While the law generally requires an arbitration award to be in writing, there is no consensus on what must be included in that award.  In fact, the traditional "default rule" has been that an arbitration award does not need to contain the reasons for the decision.  Thus, unless expressly required to do so by the parties' contract or applicable rules, the arbitrator could issue a summary award with a simple finding in favor of one of the parties for a specific award of money—no further explanation was required.  For complex construction cases under the AAA Rules, the "default rule" now requires the reasoned award.

A "reasoned award" requires that the arbitrator explain the reasons for the final decision. The reasoned award answers the question of "why" and should give you the "because" factors.  It can be a summary decision or a more detailed decision that contains Findings of Fact and Conclusions of Law. So, would you like "reason" with your arbitration award?  Here are some considerations:

• Since the reasoned award must be written by the arbitrator, it may take longer for the final decision to be issued. 
• For this same reason, a reasoned award may also require additional arbitrator fees.
• On one hand, the reasoned award may provide a solid basis for the award to stand on appeal in a confirmation hearing.
• On the other hand, the reasoned award may provide fruitful ammunition for vacating the award.
• Parties are more likely to accept the result if there is a reasoned award, which may lead to settlement even after the award is rendered. 

Overall, since the reasoned award will be written, it is likely that the arbitrator will more carefully review the facts and law, as opposed to simply finding a quick and equitable resolution (described by some as "splitting the baby" in arbitration).  

Requesting a "reasoned award" is only one of the many options on the arbitration menu.  It is important to know prior to the dispute arising what rules may apply and whether your contract changes any of the default procedures and processes.

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