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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You don’t always say what you mean. And you don’t always mean what you say. 

In construction contracts, parties attempt to use plain and ordinary words to describe their respective obligations. For example, when the parties use the word “shall” in their agreement, they generally understand that the obligation specified is mandatory. Or when parties use the word “may” in their contract, performance is permissive or optional given the plain meaning of the word. Consider the following construction contract provisions:

“If the Owner fails to make payment for a period of 30 days, the Contractor may, after seven days written notice, terminate the Contract and recover from the Owner payment for Work performed.”

“The Work may be suspended by the Owner as provided in Article 14 of the General Conditions.”

“Payments may be withheld on account of (1) defective Work not remedied, (2) claims filed by third parties, or (3) failure to carry out the Work in accordance with the Contract Documents.”

In all of theses examples, it seems clear that the parties agreed to allow—but not require—the specified performance. The word “may” was permissive in nature.

According to some courts, however, this traditional line of reasoning is no longer the trend in the context of arbitration provision in construction contracts. For example, in TM Delmarva Power v. NCP of Virginia, the Supreme Court of Virginia held that the parties’ use of the word “may” in the dispute resolution provisions of their construction contract required mandatory participation in arbitration at the election of one of the parties. The arbitration agreement provided:

“If any material dispute, disagreement or controversy concerning this Agreement is not settled in accordance with the procedures set for in [previous section] . . . then either Party may commence arbitration hereunder by delivering to the other Party a notice of arbitration.”

The court held that the above provision was mandatory at the election of one of the parties: “The word ‘may’ . . . means that either party may invoke the dispute resolution procedures, but neither party is compelled to invoke the procedures. . . . [But] once a party invokes the arbitration provision, the other party is bound to arbitrate.”  The Delmarva court reasoned that the disputes provision would be “rendered meaningless” if the word "may" was interpreted as permissive because parties to a commercial contract can always choose to submit their disputes to arbitration.  The Fourth Circuit reached the same dcision in United States v. Bankers Ins. Co.

Given the trend that the courts have interpreted the term “may” as “shall” in the context of arbitration agreements, parties to a construction contract must be careful in understanding both the plain, ordinary meaning and the legal meaning of the particular words used. In the above examples, if the parties wanted arbitration of disputes to be permissive and non-mandatory, they could have clarified their contract by including more explicit language (i.e., "any and all disputes, upon mutual agreement, may be arbitrated" or "with the consent of the other party, either party may commence arbitration").  It is important in contract drafting that you say what you mean and you mean what you say.

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