Arbitration of Construction Claims

Arbitration of Construction Claims

Associations and management companies routinely consider contracts for repairs or maintenance (e.g. painting, roofing, concrete restoration) which contain arbitration provisions in the event of dispute. However, many people do not have a clear idea of what “arbitration” is and whether it is better or merely different than litigation.

Arbitration in Florida is governed by the Arbitration Code, Chapter 682, Florida Statutes. According to Section 682.02, an agreement to submit a dispute to arbitration is valid, irrevocable and enforceable. Recently, courts have held that arbitration clauses are broadly construed to favor arbitration of any dispute arising from a contract. This article will discuss arbitration procedures and compare them with more traditional methods of dispute resolution to assist you in determining which forum is most beneficial to you.

Section 682.04, Florida Statutes provides ” if an agreement or provision for arbitration subject to this law provides a method for the appointment of arbitrators or an umpire, this method shall be followed.” Contracts for repairs or maintenance typically require the arbitration to be conducted under the auspices of the Construction Industry Arbitration Rules of the American Arbitration Association (the “AAA”). Form contracts prepared by the American Institute of Architects contain AAA arbitration clauses and are frequently used by contractors, engineers and architects. The AAA is an established organization with a set of written rules for conducting procedures which are similar to a simplified trial. Administrators for the AAA serve the combined function of the Clerk of court, scheduling the date of the hearing and arranging for the arbitration panel and a judge, deciding preliminary matters such as statements of potential witnesses and exchange of documents.

Arbitration has distinct advantages and disadvantages. Arbitration may represent a quicker more expeditious way to resolve the dispute; unlike a lawsuit, in which certain legal issues must be argued before the facts are presented at a trial. Following the filing of the Demand for Arbitration, the other party will be provided an opportunity to respond and an arbitration panel is then appointed. Depending upon the size of the claim, the panel will consist of one to three arbitrators. The arbitrators are selected from a list of names provided by the AAA and typically consist of architects, engineers and attorneys who have attended seminars designed to qualify them as arbitrators. Arbitrators generally have a contractor or engineering affiliation and are rarely identified with the owner of a construction project. This could be considered a disadvantage to an Association which may receive a more favorable result before a judge or jury. Upon receiving a list of proposed arbitrators, each party is entitled to strike persons from the list of proposed panelists. Once both parties have registered their objections to certain proposed panelists, the AAA Administrator appoints the panel based upon the remaining names.

Arbitration may also complicate dispute resolution because the Administrator’s decision-making ability is limited to the written Rules for dispute resolution and often applies only to the parties to the contract. By virtue of provisions that preclude joining other responsible parties to an arbitration proceeding such as an Architect to a dispute between the Association and Contractor, the Association may be required to bring two actions to recover all damages arising from the same project. For example, if an Association enters into a contract for reroofing which contains an arbitration provision and the provision prohibits bringing other parties into arbitration, the Association will be forced to pursue its claim against the roofer in arbitration and its claims against the engineer, supplier and manufacturer of the materials in court. The roofer cannot be joined in the lawsuit because the court must enforce the arbitration provision, and the other parties cannot be joined in the arbitration unless the court finds them to be “third party beneficiaries” of the roofing contract.

In a lawsuit, the Rules of Civil Procedure provide for exchange of documents, taking of witness statements through deposition, expert opinions and other discovery methods to provide the parties an idea of the other side’s view of the issues. On the other hand, in an AAA arbitration, if the parties cannot agree to exchange documents or witness statements, the Administrator will typically not order the information to be provided prior to the arbitration hearing, so that the information presented at the arbitration will be a complete surprise to the other party. This can be particularly difficult in the case of expert witnesses, whose opinions cannot always be deduced from the facts. This “from the hip” approach presents a risk to all participants.

The arbitration hearing is more informal than a trial. The Rules of evidence do not apply, and documents or testimony containing hearsay or incompetent testimony may be admitted. The arbitration panel may also ask questions of the witnesses and the parties. Because the arbitrators may have construction experience, these questions can be highly technical in nature. Unless a witness is properly prepared, an otherwise meritorious claim could be compromised.

Following conclusion of the hearing, the panel will enter an award within a short period of time. The issuance of an award in favor of a party does not automatically require that the money will be paid; just as a judgment is no a guarantee that sufficient assets will exist to satisfy the judgment. The fact that a party consents to arbitration does not mean he will pay the money without a fight. The award will not necessarily include all elements of damages, such as attorneys’ fees, even if they were required to be provided by contract. Section 682.15 allows the Circuit court to translate the award into a judgment in order that a writ of execution may be issued to obtain satisfaction using the court system; the AAA Rules make no provision for collection of the award.

In a lawsuit, a judgment may be appealed by the losing party on a number of grounds, from departure from established principles of law to violations of the Rules of Evidence. The appeal can result in a new trial or an order that the judgment be modified to correct a legal or procedural error. In contrast, there is virtually no appeal from an arbitration award. The Arbitration Code provides that the award may be changed or vacated only under very limited circumstances, such as fraud, partiality of a member of the arbitration panel or a decision which exceeds the authority or jurisdiction of a panel. Since the procedure of an AAA arbitration is informal and based in large part on the agreement of the parties, problems with procedure do not constitute grounds for changing the award. While the lack of an appeal may eliminate a delay in collection, it can also damage a party who, if the dispute was resolved in a lawsuit, might have had a better chance with a new trial and a more favorable result.

Depending on the circumstances and complexity of the issues, arbitration may not result in a cost savings to the parties. There will be attorneys’ fees incurred for the arbitration, just as in a lawsuit. Although legal counsel is not required in an arbitration, attending without counsel can produce disastrous results, particularly given the limited scope of appeal from an arbitrator award. Parties to arbitration also discover that costs associated with this process can be expensive. Initial filing fees, depending upon the size of the claim can be several thousands of dollars. Thereafter, processing fees may be incurred simply by the passage of time. These fees are separate and apart from arbitrator fees which vary from pro bono to thousands of dollars a day for each day of arbitration. If the opposing party has an attorney, the party without legal counsel will lose a vital strategic advantage. Just as in a trial, an arbitration requires skillful cross-examination, analysis of complex issues, the ability to make effective use of documents and assemble an organized, persuasive presentation of the claim of defense. The lawyer should also be familiar with arbitration and litigation. For example, an attorney counting on excluding damaging information in reliance on the Rules of Evidence will be in for an unpleasant surprise.

The mandatory enforcement of arbitration provisions merit close scrutiny when they appear in a contract presented to your Association. Depending on the size of the contract and the work involved, you may wish to include an arbitration provision. The most important thing is to make an informed decision — to discuss the advantages and disadvantages of arbitration with your legal counsel in light of the potential claims under the proposed contract. The decision as to whether to arbitrate must be decided at the time you negotiate your contract, long before any dispute arises.