ABA Endorses Business-To-Business Arbitration: Impact on Construction Dispute

For decades construction contractors and owners have selected arbitration as an alternative to court litigation for the resolution of their disputes. For example, the industry has widely used standard form contracts such as AIA Form A-201, General Conditions of the Contract for Construction, which offers arbitration as an alternative method of dispute resolution. Construction businesses often cite speed and economy among the advantages of arbitration in choosing it over court litigation, which is often more time-consuming and expensive. In February, the American Bar Association’s (“ABA”) House of Delegates recognized these advantages by adopting Resolution 100 which states: “RESOLVED, that the American Bar Association supports the use of arbitration of business-to-business disputes, both domestically and internationally, as an efficient and economical method of dispute resolution.” The vote was overwhelmingly in favor of the Resolution (323-53). Since the House of Delegates (“HOD”) is the ABA’s policy-making body, the ABA now officially endorses commercial arbitration as a matter of policy. 

By endorsing business-to-business arbitration (a/k/a commercial arbitration) the Resolution clearly includes construction arbitration as it involves contractors, owners, and related businesses. By referring to both domestic and international disputes, the Resolution also recognizes the benefits of arbitration on international as well as domestic construction projects. In short, the ABA Resolution supports the use of arbitration in construction disputes as an alternative method of dispute resolution. The Resolution is supported by an ABA Report that stresses the benefits of commercial arbitration which are applicable to construction businesses. This Article will discuss these key benefits in the context of construction arbitration typically conducted under the rules of major providers such as the American Arbitration Association and JAMS.

Speed

One benefit of arbitration is the speed in which cases proceed to decision. For construction participants, delay in dispute resolution can seriously disrupt business.  Companies can ill-afford to devote construction personnel and resources to support a protracted lawsuit instead of assigning them to work on the next new project. For this reason, contractors and owners have long favored the arbitration process, as it generally moves to resolution more quickly than court litigation.

As noted in the ABA Report, the speed of an arbitration is a function of its streamlined procedures and the lack of formality. Discovery can be limited, sometimes strictly to document discovery, and the first round of document production is often ordered ex parte by the arbitrator. This is appropriate since the construction process is document intensive by its nature and project communications are largely via e-mail. Document discovery usually provides the parties with the information necessary to prosecute or defend the arbitration. Depositions may be limited as agreed by the parties and authorized by the arbitrators – most often in larger cases.  In contrast, court litigation often involves multiple rounds of discovery and many depositions. In addition, motion practice in arbitration is usually limited to dispositive motions that must be pre-authorized by the arbitrators. The ABA Report cites a recent study sponsored by the American Arbitration Association which showed that arbitration cases on average took one-half the time to resolve than civil cases in U.S. District Courts. And the difference in time savings was even greater if appeals were included. See http://go.adr.org/impactsofdelay.html.

Economy

As discussed in the ABA Report, the same factors that make arbitration a faster process also can result in substantial cost savings as compared to litigation.  It is no secret that discovery causes a large part of litigation expense, especially in complex, multi-party cases. This factor is particularly relevant in construction cases where large multi-year projects can generate hundreds of change order disputes and consequent schedule delays or disruptions. In such situations numerous personnel on the project staffs can be involved. Lawyers for the disputants will often take many depositions of the personnel, which drives up the cost. To quote an old maxim “time is money”. By limiting discovery and motion practice, arbitration can result in substantial savings of attorneys' fees and legal costs.

Knowlegeable  Decision Makers       

A key benefit of commercial arbitration, noted in the ABA Report, is the ability of parties to select knowledgeable decision-makers. Under prevalent provider rules such as the construction rules of the American Arbitration Association and JAMS, parties select the arbitrator(s) from lists of trained and experienced professionals screened by their peers. Typically, the candidates are construction lawyers, and occasionally industry professionals, with experience as arbitrators. In contrast, a dispute in court would be heard by a judge who may know nothing about change order practices or CPM schedules, and a jury which does not know the difference between rip-rap and rebar. In such cases, the risk of a judge or jury misunderstanding the facts is high. Thus, in construction arbitration, the parties are assured of having one or more neutral decision-makers who are knowledgeable about industry jargon, technology, customs and practices, and the relevant law of construction.        

Finality

The ABA Report also points out that “finality” is an important benefit of commercial arbitration. Litigation in court can be dragged out for years if a disappointed party files an appeal. However in construction arbitration there is no appeal from an adverse award as a matter of right. The ability to vacate an award is sharply limited to grounds such as evident partiality of the arbitrators, fraud, corruption, and/or arbitrators acting in excess of their powers. See 9 USC §12; Uniform Arbitration Act, §23. As such, the ability of a disappointed party to delay resolution of a dispute with a lengthy appeal is not available. Lawyers will recall the law school maxim “justice delayed is justice denied”. This is not the case in arbitration since an award is final and binding. It can be confirmed as a judgment in court by means of a motion to confirm the award if necessary to enforce it. See 9 USC §9; Uniform Arbitration Act §22. In a real sense, the award is the final word on the dispute both legally and practically speaking.

Neutral Forum For International Disputes

As noted in the ABA Report, parties to an international construction contract have a natural aversion to having a dispute resolved in a foreign forum.  The risk of being “home-towned” or worse is a reality of international business.  Some people fear that  foreign judges may be unqualified or biased. And the parties may have to contend with foreign law, foreign language, and foreign customs. For these reasons arbitration by screened neutral arbitrators is the preferred method for dispute resolution on international projects. Further, arbitration provides a significant advantage over court judgments because foreign arbitration awards can be enforced in most countries pursuant to multi-national treaties such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. 9 U.S.C. §§ 201-208.

Joinder Of Parties

Construction disputes often involve multiple parties such as the owner, contractor and its subcontractors. In the event of a dispute this scenario presents the risk of multiple dispute proceedings and potentially inconsistent results. For example, a general contractor may be caught in the middle between the owner’s claim of defective work for which the general is contractually responsible but which was performed by a subcontractor that denies liability for it. In such a case the subcontractor should be brought into the case and held responsible if the owner’s claim proves to be correct. If the parties have incorporated arbitration provisions into both the prime contract and the subcontracts, then the subcontractor can be joined in the arbitration between the owner and general contractor. The joinder process is authorized by the relevant construction rules of major providers such as the American Arbitration Association and JAMS.  This process provides the general contractor with the opportunity to defend against the owner’s claim and at the same time obtain recourse against the subcontractor if the owner’s claims are proven correct.

Party Control

The ABA Report also discusses a further benefit of commercial arbitration -- the ability of companies to tailor the process to their own needs. For example, construction firms can draft arbitration agreements that specify the number of arbitrators, their qualifications and industry experience. A panel of three is typically required in high-stakes disputes. Provisions can be drafted to exclude certain issues from arbitration such as punitive damage awards or modification of contract terms. If the contract in dispute already incorporates the rules of a major provider such as the American Arbitration Association the parties can modify the rules by mutual agreement, for example to provide for more or less discovery in a case.

The ABA Report summarizes these benefits and others, such as the privacy of commercial arbitration proceedings, in support of Resolution 100.  For construction industry members, arbitration provides significant benefits in contrast to litigation in court.  It is fair to say that, by adopting Resolution 100, the ABA recognized the advantages of commercial arbitration and recommends it to businesses including those in the construction industry. The Resolution and Report can be found at:  http://nysbar.com/blogs/ResolutionRoundtable/ABA%20Resolution%20Report%20-%202021.pdf