The Benefits And Drawbacks Of Construction Arbitration

Unfortunately, many construction projects end in disagreements, forcing the parties to engage in some type of conflict settlement.

Many of these construction issues are handled by arbitration, which is a procedure in which the parties in disagreement agree to submit their case to a third-party neutral, known as the arbitrator, who acts as a judge and jury, rather than going to court to determine the matter.

What Is the Difference Between Arbitration and Mediation?

Arbitration is frequently mixed up with mediation and, on rare occasions, with a lawsuit. Each one necessitates a different approach to conflict resolution.

Mediation is a type of settlement conference in which the parties meet (usually in person) and a neutral third party acts as a mediator. The mediator is the third-party impartial. The mediator has the authority to conduct and administer the mediation, but he or she does not have the ability to impose or compel a settlement. The parties submit their disagreement to the mediator either because a court or a contract clause compels it, or because they believe the mediator will be able to help them reach an agreement that they would not be able to reach otherwise. The parties might, however, refuse to settle in the end.

A lawsuit is a legal proceeding that begins with a plaintiff submitting a complaint, in which the plaintiff requests some sort of redress from the defendant. State or national constitutions, as well as legislation established by legislatures, allow for the parties' right to have their disagreement resolved in a court. The court where the lawsuit will be heard is a government entity where the parties have the right to seek a judgement on their rights and duties under the law.

Arbitration is similar to a lawsuit, however it takes place outside of a courtroom. The parties agree to submit their disagreement to arbitration rather than pursue a lawsuit in court (either in a contract before a dispute develops or by a subsequent agreement to avoid a lawsuit). The parties' agreement grants the arbitrator the authority to make a judgment about the parties' rights and obligations, which will be legally binding on all parties. As a result, arbitration differs from mediation in that a third-party impartial renders a legally enforceable ruling. However, arbitration and mediation are not mutually exclusive. In many circumstances, parties will include a dispute resolution clause in their contract that allows or requires them to mediate first and then submit their disagreement to arbitration if mediation fails.

The Key Distinctions Between Arbitration and Lawsuits

Because arbitration is largely used as a substitute for litigation, there are some parallels between the two systems, but there are also significant distinctions. The following are the main differences between arbitration and judicial litigation:

The Decision-Making Process and the Decision-Making Maker

The outcome of a lawsuit is decided after a trial before a "finder of fact." The judge is a government official who is in charge of overseeing and administering the case and trial. The judge makes legal decisions. A jury will usually decide the facts at trial, however in rare situations the judge will decide both the law and the facts. To arrive at a decision, the judge decides the law and applies it to the circumstances.

In arbitration, the procedure is governed by the contract or agreement that established the arbitration. The parties have a lot of leeway in deciding how the arbitration will be conducted and what rules will apply. There are, however, certain limitations to this freedom. An arbitration clause that requires the parties to flip a coin to determine the outcome, for example, is unlikely to be enforced.

A private arbitrator (or a panel of private arbitrators) operates as both a judge and a jury in arbitration, conducting the case, deciding the facts, and applying the law. Arbitration comes to a close following an evidence hearing, which is akin to a court of law trial.

The arbitrator is usually appointed by the parties (or, in certain cases, by a court) based on the dispute's subject matter. As a result, the arbitrator for construction arbitration will most likely be a construction lawyer or someone with substantial construction expertise. This saves the attorneys time and effort in "educating" the arbitrator on construction concerns, and the arbitrator is more qualified to make a judgement in the case.

In contrast to an arbitrator who is a building expert, the judge in a lawsuit is a generalist. Although the judge may have some construction-related expertise, it is probable that the majority of the cases the judge has heard are unrelated to construction. A normal jury, likewise, will be unfamiliar with the highly technical concerns raised during construction arbitration.

Rules

Arbitration is meant to be less formal than a courtroom battle. The norms of evidence and civil procedure are usually not rigidly followed, and an arbitrator has a lot of leeway in deciding how the arbitration should be conducted. Disputes over process and norms are prevalent in arbitration because of this informality. In most cases, however, the parties will agree to a scheduling order with the help of an arbitrator that specifies the timeframes, method, and rules for conducting the arbitration. The length of the discovery period, the location and time of the evidentiary hearing, the content of the arbitrator's final ruling, and the quantity and kind of discovery that will be allowed are all frequently included in this order.

A collection of regulations (usually referred to as the Rules of Civil Procedure) governs how the parties conduct themselves and submit their claims in a lawsuit, depending on the court in which the litigation is handled. Although these standards allow for some flexibility and a judge may occasionally deviate from strict obedience to them, the Rules of Civil Procedure provide less latitude to the parties than arbitration does.

Arbitrations are (or are meant to be) a more efficient and cost-effective method of resolving disputes. This is made possible by arbitration's less formal character and the parties' and arbitrator's flexibility to design a process for conducting an arbitration that is most efficient for their specific purposes, without respect for formal standards of evidence or civil procedure. However, many parties (and/or their attorneys) regularly transform arbitration into "arbigation," in which arbitration is used to undertake the same amount of discovery as litigation. When you add in the expense of the arbitrators, arbitration may be as expensive as, if not more expensive than, litigation.

Appeals

An arbitrator's ruling is usually not appealable. This is largely due to the fact that appeals incur considerable expenses and delays, which arbitration is supposed to minimize. It will be extremely difficult for a disgruntled party to challenge an arbitrator's ruling if they feel the arbitrator made a legal error or decided facts improperly. The only true grounds for requesting a court to reverse an arbitrator's judgment are fraud (the arbitrator received a bribe), bias (the arbitrator showed overt preference toward one of the parties), or the arbitrator resolved a subject that was not within the scope of the arbitration. These foundations are extremely rare, and much more so when they can be proven.

The absence of an appeals procedure in arbitration is beneficial in that a final conclusion may be reached more quickly and at a lower cost. It's terrible in the sense that a party may be trapped with an unfavorable outcome as a result of a manifestly erroneous ruling by an arbitrator. It's also unfortunate because, as more and more construction matters have been handled through arbitration in recent decades, there have been far fewer public court rulings on topics that are common in the sector. As a result, even a thorough and intelligent arbitrator would be guided by little or no precedent on these questions.

In contrast to arbitration, the parties in litigation can appeal the trial court's final decision to an appeals court. There are frequently many levels of appeals courts, and as a result, any party unsatisfied with the results of a litigation may have multiple levels of appeal. Many appellate court rulings, unlike arbitration decisions, are published and available for precedent.

Possibility of Adding More Parties

Construction disputes sometimes entail claims from practically every party involved in the project, and the number of parties involved is frequently fairly enormous. Adding parties to an arbitration is more complicated than adding parties to a lawsuit. Arbitration is only available to parties who have agreed to have their disagreements resolved through arbitration (and this agreement typically will only be easy to obtain at the beginning of a project when the project contract is being negotiated).

In a lawsuit, the parties can normally include other parties as long as the court has jurisdiction over them. Such jurisdiction will normally exist if the party to be added lives in or has strong ties to the state where the court is located—one or the other will almost certainly exist if that party has consented to participate in a building project. It is significantly easier to join such parties after filing a lawsuit. This is advantageous because it reduces the possibility of conflicting findings that might arise when various arbitrations or lawsuits are conducted on the same subject matter.

When some, but not all, of the parties to a case have agreed to arbitrate, the court will normally order the parties who have agreed to arbitrate to do so, and the litigation will be stayed or suspended until the arbitrating parties have completed their arbitration. This empowers the court to "delegate out" to arbitration the portion of the issue that is between the parties who have agreed to arbitrate.

Attorney's Fees and Other Fees

Attorney's fees are recoverable in arbitration if they would be obtained in litigation in a similar case. There must be a statutory provision providing for the recovery of attorneys' fees in that type of case or in the type of claims being claimed in that case for them to be recoverable in court. The North Carolina Revised Uniform Arbitration Act ("NCRUAA") further stipulates that the arbitration agreement must include a clause allowing for the award of lawyers' fees. As a result, arbitration does not make recovering attorneys' (and other) costs any simpler than if the case had been handled in a court of law.

Involvement of the Court in the Arbitration Process

Even if arbitration is used, a court will almost certainly be engaged in some way. A court can compel one of the parties to an arbitration agreement to participate in the arbitration if that party refuses. If a court does not use its inherent governmental power to compel arbitration, the recalcitrant party may refuse to honor its arbitration agreement, forcing the dispute into a lawsuit to resolve the issues—a development that is directly contrary to the parties' intent as evidenced in their agreement.

The Federal Arbitration Act ("FAA"), which applies to matters involving interstate commerce and includes most construction issues, gives the court the power to compel arbitration. The FAA basically states that commitments to arbitrate must be fulfilled and enforced. This permits a party wanting to enforce an arbitration clause to seek federal court help in forcing the other party to arbitrate. The FAA, on the other hand, has little, if any, details on the arbitration procedure. As a result, if a party relies only on the FAA to enforce an arbitration agreement, the arbitration procedure and rules will very certainly be taken from the parties' arbitration agreement, ordered by the court, or agreed to by the parties.

The Revised Uniform Arbitration Act has been adopted in various forms by several states, including North Carolina. The NCRUAA works similarly to the FAA. The NCRUAA, on the other hand, offers a number of procedural tools for establishing and conducting arbitration. These include, for example, rules requiring parties to perform arbitration, appointing the arbitrator(s), halting pending court proceedings while the arbitration is taking place, requesting the court's aid in conducting discovery, and enforcing an arbitration judgment in court. The FAA and NCRUAA assure that, regardless of whether a matter is first brought in state or federal court, a valid arbitration agreement will be enforced.

Keeping Away from Unfavorable Local Law

Arbitration can also have the unintended consequence of permitting the parties to avoid applying local substantive law to matters such as evidence, jurisdiction, venue, and law of choice. This is because most federal courts have ruled that implementing an arbitration requirement entails not just mandating arbitration, but also enforcing the procedure set forth in the arbitration agreement under which the parties agreed to conduct the arbitration. For example, if the parties agreed in the contract to "arbitrate any and all disputes arising from the contract in Wake County, North Carolina," a court will almost certainly hold that enforcing the arbitration agreement also entails enforcing the requirement that the arbitration take place in Wake County—even if there is a state law stating that the specific dispute should not be heard in Wake County.

As a result, parties desiring to evade specific state rules on venue and choice of law will insert an arbitration clause as a mechanism to allow them to select a venue, choice of law, or other method or rule that would otherwise be prohibited by the applicable local state law. This is crucial since the terms of a contract would otherwise be governed by the state legislation. The state legislation can be avoided because the FAA preempts or supersedes it, allowing the provisions of the agreement to take precedence.

Many significant construction projects in North Carolina include out-of-state general contractors, which is a practical illustration of why a party would want to depend on the terms of the arbitration clause in a construction contract. Out-of-state contractors prefer to settle subcontractor issues in the general contractor's home state rather than in North Carolina. However, a legislation in North Carolina mandates that any dispute involving a building project in the state be handled solely in North Carolina courts and under North Carolina law. By inserting a non-North Carolina venue arbitration clause in the construction contract, an out-of-state party can escape the state legislation requiring the case to be handled in North Carolina and instead have the matter heard in the party's home state.

Arbitration Administration by a Third Party

Arbitrations are handled by a number of different bodies. The American Arbitration Association ("AAA") and JAMS are the two most popular. These groups act as mediators in the arbitration procedure, allowing the arbitration to take place with even less involvement from the courts. Although hiring one of these firms may raise the cost and length of the arbitration, it can assist move the process ahead in circumstances when one of the parties is stonewalling. In most circumstances, there must be a prior agreement to arbitrate that includes the necessity to use one of these services in order for one of these services to be involved.

Many standard form construction contracts have arbitration terms, and many of these agreements stipulate that the arbitration be overseen by the AAA. When a disagreement develops, the parties may try to avoid this need by arbitrating under the AAA Rules while avoiding the AAA administration requirement. Because the AAA regulations require AAA administration to be included, the parties should proceed with caution. According to at least one court ruling, if the parties agree to have their arbitration administered according to the AAA regulations, they are also agreeing to have the arbitration administered by the AAA.