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Legal - A case for careful review of construction contract dispute resolution clauses

image Ian Faria, Partner, Bradley Arant Boult Cummings LLP, Houston, TX

HOUSTON - Dispute resolution clauses are common in contracts between owners, general contractors and subcontractors. For quite some time, the general rule of the construction industry has been that an arbitration proceeding is the preferred method of resolving disputes as opposed to jury trials. There is also the general belief maintained by many in our industry that arbitration is less expensive, less time consuming, and quicker to achieve a resolution. For many, these “well known” beliefs have been put to the test, and have resulted in a reevaluation of not only those beliefs but of the dispute resolution procedures in the contract. A careful review of alternatives to the standard dispute resolution clause selecting arbitration is a good practice.


    Typically, the dispute resolution clauses in construction contracts require arbitration (and the waiver of a jury trial) that the parties agree to a location of the arbitration and the use of one of the many “alphabet” arbitration services. These services offer office space to hold the arbitration (for a fee), the selection of qualified arbitrators from a panel list (for a fee), regular conferences and administrative functions (for a fee), and filing fees and response fees for bringing and defending claims. 
    An alternative to consider to replace the typical arbitration system is for the parties to agree to a private arbitration.  Quite often, the arbitrator or panel of arbitrators will agree to govern the dispute themselves without the need for a third-party administrator. If the arbitration rules are previously agreed to in the dispute resolution clause, a private arbitration without the cost of a third party administrator is a good way to limit the cost and expense. Additionally, with a private arbitration, there traditionally are no filing fees or office space fees.  Such a scenario leaves the parties with only having to pay their share of the arbitrator’s fees.
    One of the drawbacks of many arbitration clauses is that there is no significant avenue of appeal available to either party if the arbitrator or the arbitration panel issues an award that does not comply with Texas law or blatantly ignores uncontested facts. Since arbitration clauses are creatures of contract, there is no prohibition on creating an appeals process. Therefore, an alternative to consider is to include an appeals process.  Such a process is often limited to errors of law, errors of fact and errors of legal reasoning.  Further, the appeal may be limited to a court of competent jurisdiction with a waiver of a jury. Such an addition gives the parties some peace of mind that the dispute, on appeal, will be decided by a judge. 
    Many arbitration clauses are also silent with respect to the discovery permitted in arbitration. Often the decision of the type and degree of discovery (such as depositions and written discovery) is simply left to the arbitrator, the arbitrator panel, or the arbitration rules agreed to by the parties (which often times simply defer to the arbitrator).  It is usually in the parties’ best interest to limit discovery. However, fearful of being challenged, it is common for arbitrators to be generous with discovery. As a result, it is a good idea to outline in the arbitration provision what discovery will be permitted and what will be limited so as to create certainty.
    Lastly, the issue of the rules of procedure and evidence can be significant.  One way to address this is to clearly spell out the agreement of the parties. For instance, some arbitration clauses specifically require compliance with the Federal Rules of Evidence. Additionally, some clauses allow the contractor to select either an arbitration under certain rules, or a bench trial before the court with the rules of evidence and procedure from that jurisdiction. Again, the parties can contract and agree on the process they think best suits their relationship. 
    Dispute resolution clauses in a construction contract are often drafted without much input, or are the standard clauses found in many “form” contracts.  There are several considerations outlined herein that can be used to both parties’ benefit. The goal being to have certainty, limit costs, and bring disputes to a swift resolution.
    Ian P. Faria is a member of the Construction and Government Contracts Practice Group and Managing Partner of the Houston office of Bradley Arant Boult Cummings LLP. He represents developers, general contractors, subcontractors, homebuilders, business owners and individuals in a variety of disputes, as well as in OSHA compliance and investigation matters. He can be reached at ifaria@bradley.com.

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