Owners, general contractors, subcontractors, and design professionals are well advised to control risk on a project in a number of well known ways, including careful preparation of contract documents, meticulous maintenance of project records, adoption of safety programs, and a utilizing a well designed insurance program. All of these factors and others are important in minimizing the number of claims, and the potential catastrophic economic impact of claims, on a project.
However, in the author's experience, one factor in controlling project risk is often simply overlooked: The careful planning and drafting of dispute resolution provisions. Many construction contracts and subcontracts contain a "standard" arbitration clause, which simply provides that all claims and disputes arising out of or relating to the contract will be resolved by arbitration, typically under the Construction Industry or Commercial Rules of the American Arbitration Association ("AAA"). A standard arbitration clause will typically insure that disputes are resolved through arbitration, rather than through the civil court system.
However, many companies apparently do not realize that they can customize the dispute resolution process in their contract, and simply use a standard provision (or utilize an AIA document containing a standard provision) as an afterthought. As a result, these companies simply do not think about the dispute resolution process at all, much less about how it can be designed to control or lessen both the risk of claims and the cost of disputes that may arise. Companies should think through dispute resolution clauses just as carefully as other commercial terms and conditions. The following is a non-exhaustive list of items that merit consideration in drafting and utilizing dispute resolution clauses to minimize risk on a project.
Multi-tiered dispute resolution approach. Some contracts adopt a multi-tiered approach to dispute resolution. The basic idea is to provide a series of steps to try to resolve a dispute before it goes to arbitration. Such provisions might provide that when a claim or dispute arises, it first must be discussed and negotiated among designated management personnel of the parties. If the negotiations do not result in a settlement, the next step might be mediation. Mediation is a structured, non-binding settlement process with a trained neutral third party. Although a mediator cannot impose a settlement, mediation often results in a settlement at a relatively low cost. Although mediation can be used at any point in a dispute, including after an arbitration is commenced, some parties prefer to build mediation into the dispute resolution process as an early step in the hope of avoiding mediation. If mediation is not successful, the final step is to go to binding arbitration.
Dispute resolution provider. The AAA is an excellent organization and does a good job administering arbitrations and mediations. Further, the AAA has rules specifically designed for the construction industry. However, the AAA is often chosen as the administering organization by default and not for a particular reason. There are alternatives, such as non-administered arbitrations under the Center for Public Resources Rules. There are also other administering organizations, such as JAMS and the International Chamber of Commerce ("ICC") International Court of Arbitration.
Number of Arbitrators. Arbitrations are typically conducted before a single arbitrator or a panel of three arbitrators. Under the AAA Construction Industry Rules, the AAA has some discretion to determine the number of arbitrators, unless the parties otherwise agree. Although some argue that three member panels generally reach better decisions than a single arbitrator, the parties must pay the fees of each arbitrator, which can be very expensive over a multi-week arbitration. Accordingly, the parties may want to specify in their contract that disputes below a certain amount will be heard by a single arbitrator, and disputes above that amount will be heard by a panel of three.
Discovery. Discovery involves the exchange of information prior to a trial or arbitration. In the federal court system and the court systems of most states, parties to a lawsuit are allowed broad rights of discovery, including a right to inspect and copy non-privileged documents, and requiring the other party to answer written questions under oath (interrogatories). In addition, the parties will be permitted to take depositions, a procedure where the lawyer for one party is allowed to question representatives of the other party or other witnesses under oath to learn what they know about a dispute. In some jurisdictions, there are no time limits on depositions, and depositions have been known to continue for days, and, in rare cases, for weeks. Although the court discovery process encourages the full disclosure of information, it is very expensive. In addition, discovery can be very time consuming and disruptive to a business.
Traditionally, little discovery was permitted in arbitration beyond an exchange of documents. However, in recent years, discovery in arbitration has in practice become more like that in a civil court proceeding, often including depositions. The AAA Construction Industry Arbitration Rules for Large Complex cases contemplate that the parties will discuss discovery at a preliminary hearing, and further provide that the arbitrators can determine the amount of discovery permitted if the parties do not agree.
This article does not advocate whether there should be more discovery or less discovery in arbitration, because there are arguments in favor of either approach. However, because of the substantial costs that are involved in discovery, parties should consider whether to include specific provisions governing discovery in their dispute resolution clause. Parties favoring discovery might want to provide that discovery will be allowed as provided in the federal courts under the Federal Rules of Civil Procedure. Parties concerned about the cost or disruption of discovery might want to limit discovery to an exchange of documents, and perhaps depositions of outside expert witnesses.
Other Issues. There are many other issues that parties should consider in drafting their dispute resolution provisions. These issues may include specifying the place of the arbitration, the language in which the arbitration will be conducted, minimal qualifications of the arbitrators, whether a written, reasoned decision will be required, and many others.
Dispute resolution provisions should not be an afterthought. Parties can draft dispute resolution provisions that provide early opportunities for resolution and lessen the need for arbitration proceedings. If a dispute arises, parties can specify the procedures that will govern the arbitration, and that may substantially lessen the cost, and make sure that a dispute is resolved in a fair and efficient manner. As is the case with almost all aspects of a construction project, spending a little time and thought on the front end will typically pay off substantially on the back end.