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Arbitration: An Effective Alternative to Litigation

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Juanita Ferguson
BKK Construction & Land Use Newsletter
September 2010

Dispute resolution is an important, yet often overlooked term when parties enter into construction contracts. At the outset of a relationship between a contractor and a customer, there is often negotiation on the contract price, the start and end dates for construction, and the scope of work. The parties are less likely to give equal consideration to what happens when the parties' interests begin to diverge.

Consider the following scenario:

The contractor and the customer enter into an agreement for the construction of a mixed-use building. They reach agreement on the scope of work to be provided by the contractor, the cost to complete the project, and the acts by either party that allow the other party to terminate the contract. There is a small provision that references dispute resolution. It states that all disputes must be resolved through arbitration. It is assumed that the parties read the provision prior to executing the agreement.

The project is expected to last six months. For the first five months of the project, the customer is satisfied with the progress of the project and the contractor's monthly invoices are paid in a timely manner. During the sixth and final month of the project, the customer begins to question the quality of construction and refuses to make final payment. The contractor has little leverage as the work is essentially complete. Despite numerous attempts on the part of the contractor to satisfy the customer's concerns, the customer refuses to make final payment. Frustrated at the turn of events, the contractor decides to sue for the remaining balance, only to learn later that the right to sue the customer does not exist. The dispute resolution provision of the contract states that resolution of disputes is governed by the rules of the American Arbitration Association ("AAA").

While the concept of arbitration may appear less familiar than having a judge or a jury resolve the dispute, it is nonetheless an effective, and potentially, less time-consuming alternative than traditional litigation. Once notified by the parties, the AAA acts quickly to set fees for the arbitration and to assist the parties with the selection of an arbitrator. Unlike a lawsuit, where the court assigns a judge to hear the matter, in an arbitration the parties get to review the qualifications of potential arbitrators and actually rank the list of arbitrators presented. Only in the event that the parties cannot reach an agreement on the selection of an arbitrator will the AAA select an arbitrator from a panel of arbitrators. The arbitrator is usually a practicing attorney or a retired judge with considerable experience with the type of case that is being arbitrated.

Once selected, the arbitrator usually meets with the parties to discuss the exchange of relevant documents, the list of potential witnesses, and a timetable to conduct the arbitration. Usually, the parties are not allowed to communicate with the arbitrator directly and all communications with the AAA must be shared among the parties to prevent any unfair surprises to opposing parties. Depending upon the complexity of the matter, an arbitration can occur within a few weeks of the parties contacting the AAA. The length of the actual hearing can last one to several days, depending upon the number of issues to be resolved and the number of parties in the arbitration. After all of the evidence has been presented, the arbitrator makes an award. In most circumstances, the award cannot be challenged in court and the award is final.

All fees for the arbitration, including the arbitrator's compensation, are paid equally by the parties, unless the arbitrator awards otherwise. Compared to traditional litigation which could keep the parties in court for several months, arbitration is a fast-moving process that allows the parties to reach a resolution promptly.