Mike Geraghty Emily Yoshiwara
Rinker & Baker LLP
A primer on contracts with arbitration of disputes
Many construction contracts have an arbitration clause that requires the parties to submit any disputes to arbitration. Any party to a construction contract, from owners to lower tier subcontractors, may be bound by an arbitration provision in their subcontract. So, what does it mean if your contract requires arbitration of disputes?
What is arbitration?
Arbitration is a form of alternative dispute resolution where disputes that arise between the parties are referred to an impartial third party — or arbitrator — who decides the case instead of a judge or jury. Arbitration is a creature of contract — whether or not a claim is arbitrated, where it is arbitrated and who it is arbitrated by can all be determined by an agreement between the parties. Typically, parties will agree via contract before any dispute actually arises that any potential dispute will be referred to an arbitrator. Alaska law states that agreements to arbitrate are valid and enforceable. The U.S. Supreme Court has also favored enforcement of arbitration clauses.
Because arbitration is an alternative to litigation in court, the arbitrator’s decisions are usually binding. This means that there are typically no appeals from an arbitrator’s decision. The exceptions to this rule are cases where the arbitrator has committed fraud, there is evidence of bias or the arbitrator has decided an issue that was outside the scope of arbitration. Some contracts can require non-binding arbitration, where the arbitrator’s decision is not binding on the parties and they can still litigate the dispute in court if arbitration does not lead to an acceptable settlement.
What does arbitration cost?
The costs of arbitration can vary depending on the dispute being arbitrated. Many construction contracts call for arbitration by the American Arbitration Association, or the AAA. The AAA has specific rules for construction disputes and can help provide parties with an experienced arbitrator (or multiple arbitrators) who are experienced and knowledgeable about construction. Arbitrators are typically paid per hour, in advance, and their fees can vary based on their experience. In addition, the parties will often have costs associated with renting a neutral venue where the arbitration will take place. The filing fees associated with arbitration can often be higher than those associated with traditional litigation. The AAA provides for specialized procedures that can be used if the amount of claim being arbitrated is low or, alternatively, if the claim involves multiple parties and is for a high dollar amount. However, the costs of arbitration can mount quickly and will depend on the length of the arbitration and the amount of the claim at issue.
How do you initiate arbitration?
If you believe you have a dispute that needs to be resolved in arbitration, it is best to first consult an attorney. It is important to examine the contract language to determine the specifics of your arbitration clause. The contractual language can designate the law to be used, the venue where the arbitration will take place, the rules to be used for arbitration and how the costs of arbitration will be allocated.
The first step in arbitrating a claim is filing a demand for arbitration. This demand contains basic information such as the names of the parties, each party’s address, and a basic statement of the dispute and the relief requested; it is similar to a complaint filed in court. Although money and time can be saved by attempting to negotiate a resolution with the other contracting party, a valid arbitration agreement is all that is required before an arbitration demand can be filed. If a lawsuit has already been filed in court, but the parties have a binding arbitration agreement, the court can order the parties to proceed with arbitration if one party balks. However, if a party disputes the existence of a valid agreement to arbitrate, a court must resolve the issue before the parties are required to arbitrate. Generally, courts will require parties to comply with a valid agreement to arbitrate.
As more and more construction contracts include arbitration provisions, it is important for construction professionals to understand the basics of this process and the potential implications of arbitration. Knowing if your contract contains an arbitration provision is obviously an important first step for knowing how to handle any disputes that may arise during a construction project.