Source: http://www.constructionlawyerblog.com/arbitration/
Timestamp: 2018-01-24 11:29:07
Document Index: 189574585

Matched Legal Cases: ['§4', '§ 4', '§ 8', '§10', '§10', '§10']

constructionattorneyblog: arbitration
Care is Required in Preparing a Seven-Day Notice
An unpublished Illinois Appellate Court opinion in Beckman v. Art Development Group (1 Dist. Sept. 20, 2013) shows how careful a seven-day notice of termination needs to be prepared and delivered. In that case, the owner hired a contractor to renovate his home. On April 11, 2007, the owner sent an email to the contractor, complaining of issues with the plumbing work and with the trusses. The email indicated that if the work was not corrected, the contract would be terminated. On May 14, 2007, the owner sent a letter to the contractor terminating the contract.
Per the contract, the parties mediated the dispute, but the mediation was not successful. The owner then made a demand for arbitration with the American Arbitration Association. An arbitrator was appointed and the contractor filed its answer and counterclaim. AAA then sent invoices to both parties, which was paid by the owner but not the contractor. AAA then suspended the arbitration due to the contractor’s failure to pay the invoice.
The owner then filed a breach of contract claim with the circuit court and the contractor failed to appear. An order of default was entered against the contractor, who then appeared and moved to vacate the default. The court granted this motion and the parties proceeded with the litigation. Later, the owner moved for summary judgment claiming that the contractor should be barred from asserting a counterclaim or maintaining a defense because the contractor had not participated in the arbitration. The court did not rule on this motion, but sent the parties to arbitration and stayed the case pending the arbitration.
A hearing was held by the arbitrator and an award was entered. In that award, the arbitrator found deficiencies in the contractor’s work, but he also found inadequacies in the owner’s notice of termination and found that the owner terminated the contract without cause. The arbitrator found that the owner’s email of April 11, 2007 did not satisfy the requirements of Article 11.2 of the contract as a seven-day notice for termination for cause, and therefore the termination was found to be pursuant to Article 11.3, By the Owner for Convenience:
11.2 By the owner for cause: 11.2 (a) If the contractor persistently fails to perform any of its obligations under this contract, the owner may, at the owner's sole option, after seven days prior written notice to the Contractor... the owner may undertake to perform such obligations through another contractor; (b) Upon seven days' prior written notice to the Contractor, the Owner may terminate this contract for any of the following reasons * * * If the contractor fails to cure within the seven days, the owner, without prejudice to any other rights or remedy, may take possession of the project site and complete the work utilizing any reasonable means. In this event, the contractor shall not have a right to further payment until the work is completed and all payments by owner for costs of completion of the work including but not limited to recording and reasonable attorneys fees, costs, and expenses have been deducted from the balance due contractor.
11.3 By the owner without cause: The owner may terminate this contract or any reason other than as set forth in article 11.2. Upon termination the owner shall pay the contractor for all work executed and for any proven loss, cost or expense in connection with the work, plus all proven demobilization costs ('termination payment'). In the event the owner terminates the agreement under this section the contractor shall provide a detailed accounting of any such costs, incurred by the contractor. In such event, to the extent of any amount due from contractor shall be credited to the owner's account at the time of termination and any remaining unpaid balance of the termination payment shall be paid to the contractor within 30 days after owner's termination.
The arbitrator specifically found deficiencies in the notice for the following reasons: (1) it was not identified as a seven days notice; (2) it did not indicate that the contractor has seven days to cure; (3) it did not identify what defects needed to be cured; and (4) it was not proper under article 16.1 of the contract, which governed notices and written communications between the parties. That section provides:
16.1 All notices or other written communication hereunder shall be deemed to have been properly given and shall be effective (i) upon delivery (or attempted delivery, if delivery is refused), if delivered in person or by facsimile transmission with receipt acknowledged by the recipient thereof and confirmed by telephone by sender, (ii) one day after having been deposited for overnight delivery with any reputable overnight courier service, or (iii) the earlier of actual delivery (or attempted delivery if delivery is refused) or three days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal service and sent by registered or certified mail, postage prepaid, return receipt requested, addressed to Borrower or Lender, as the case may be, at the addresses set forth below.
The arbitrator awarded damages to the contractor in excess of $100,000 after deducting amounts for defective work. The owner moved to vacate the award, but the trial court denied the motion and entered judgment for the contractor. The appellate court affirmed. Several issues were raised.
First, the owner argued that the contractor waived arbitration and its motion for summary judgment should have been granted. The appellate court said that the trial court had never actually ruled on that motion and the owner forfeited this claim of waiver by not including it in his initial brief.
As to the issue of the seven-day notice, the appellate court agreed with the arbitrator. The email notice did not follow the terms of the contract as to how notice was to be given. This meant that the email was not a valid seven-day notice and when the termination was finally made, it could only be for convenience and not cause.
This case should be viewed with some caution because it involved an arbitration award and whether that award should have been vacated. Arbitration awards are granted great deference and it is very difficult to vacate such an award. However, the lesson of this case is that a party seeking to terminate a contract must comply with the notice provisions to the extent possible. Any shortcuts can carry substantial risk, as this owner discovered.
February 19, 2014 in arbitration, contracts, litigation | Permalink
A Plea for Clarity in Construction Contracts
In our construction practice, we represent many design professionals, owners, contractors and others involved in construction projects. Frequently, the parties do not consult with a construction attorney when drafting contracts. This might be acceptable when the parties use standard forms, such as the American Institute of Architects documents, but the situation can rapidly disintegrate when the parties use home-brewed documents or heavily edit the standard documents.
Architects are among the worst offenders, often choosing to use “letter agreements” that they have cobbled together from various sources. They don’t like the length and legalese of the AIA documents and fear that an owner will not take kindly to the use of such documents. They prefer a more “friendly” document. Architects believe that they can use plain English in a simple agreement to form a bond with an owner. Unfortunately, this is usually a flawed view. In the event of a problem, such a document is often used against the architect and the result is exactly the opposite of what the architect intended. The “plain and simple” document drafted by the architect is not clear. Clarity is required and is often not present because the architect is not trained to draft contracts.
Attached to a letter agreement, an architect had a page entitled “terms and conditions.” A section of this page contained the following dispute resolution provision:
Any claim, dispute or other matter in question arising out of or related to this Agreement shall be subject to mediation as a condition precedent to binding dispute resolution unless the parties mutually agree otherwise. Any fees for mediation or dispute resolution shall be mutually shared by both parties.
This was the only language in the entire agreement that addressed how to resolve disputes. This language is similar to the first sentence of §4.2.1 of AIA Document B102-2007:
§ 4.2.1 Any claim, dispute or other matter in question arising out of or related to this Agreement shall be subject to mediation as a condition precedent to binding dispute resolution.
However, the AIA document contains several additional provisions that describe in detail the rules that will apply to mediation and an entire section devoted to arbitration. The home-brewed letter agreement contained none of those sections. This means that if there is a dispute between the owner and architect, this architect will be left with this one paragraph to follow. So how would that work?
The first question to answer when a claim or dispute arises under this particular agreement is whether mediation is required. The language states that mediation is a “condition precedent” to binding dispute resolution. What does that mean? Normally, a condition precedent is something that is required before the next step can be taken. Here, however, the contract is ambiguous as to whether “binding dispute resolution” is required or whether a party can simply file a lawsuit and bypass mediation. And what is meant by “binding dispute resolution?” The architect probably meant arbitration, but there are many different types of binding dispute resolution, which may or may not include litigation.
A second question is whether this provision requires arbitration. This all depends on the meaning of “binding dispute resolution.” Unlike the AIA language which actually provides a detailed roadmap, this letter agreement does nothing to shed light on how any of this is to work. In fact, it may make the whole process much more expensive because the owner can take a contrary position to the architect on all of this, thereby raising the costs to the architect to the point where it will not be cost effective for the architect to try to collect an unpaid fee, for example. Suppose the architect is not paid. Does he try to mediate? The owner would likely refuse to engage in mediation. What does the architect do then? Litigate? File a demand for arbitration? If so, with whom? If he litigates, the owner can try moving to dismiss and compel arbitration. If the architect wants to arbitrate, the owner will litigate. All because the contract is not clear.
There are many more questions that this poorly drafted letter agreement may raise. For instance, many disputes with an owner involve construction as well as design issues. The owner may want a single proceeding involving the owner, the architect and the general contractor, perhaps along with other consultants and subcontractors. Does the language in this agreement allow joinder of the various parties or not? If “binding dispute resolution” means arbitration, then it may be difficult to join other parties to the arbitration. Of course, we do not know what organization (such as AAA or JAMS) would administer the arbitration, if any. The major organizations have detailed rules about such things, but private arbitrators (and there are many) may not. Here again, the AIA documents cover this situation while the letter agreement does not.
The architect in this case probably believed he was creating a simple process for dispute resolution in a friendly way. If a dispute were to arise, however, the architect would likely find that his friendly agreement will backfire. Any ambiguity will be held against him because he drafted this document. The lack of clarity could cause the loss of a significant part of his fee, or worse.
February 05, 2014 in arbitration, contracts, general, litigation, Mediation | Permalink
An unpublished California opinion, Paul Ryan Associates v. Welch Marble & Tile, Inc. (Cal. App. 1st App. Dist, Sept. 17, 2013), demonstrates the difficulty faced by parties in drafting appropriate forum selection provisions in construction agreements. Weisel, a California resident hired Ryan, a California corporation, to be the general contractor for a residence in Hawaii. Ryan, in turn, subcontracted part of the work to Welch, a Hawaii corporation. A dispute arose and Weisel brought suit against Ryan in San Francisco. Ryan then filed a cross-complaint against Welch. Welch filed a motion to quash, contending it was not subject to jurisdiction in California and no forum selection clause was enforceable against it. The trial court granted to the motion to quash and the appeal followed.
The prime agreement between Weisel and Ryan consisted of an AIA Document A111 (presumably a 1997 version) and an AIA Document A201 (also presumably the 1997 version). This contract was modified by an attachment that read as follows:
"If either Owner [Weisel] or Contractor [Ryan Associates] brings any suit or other proceeding with respect to the subject matter or the enforcement of this Agreement, the prevailing party (as determined by the court, agency, or other authority before which such suit or proceeding is commenced), in addition to such other relief as may be awarded, shall be entitled to recover reasonable attorneys' fees, expenses, and costs of investigation actually incurred. The foregoing includes, without limitations, attorney's fees, expenses, and costs of investigation incurred in appellate proceedings, costs incurred in establishing the right to indemnification, or in any action or participation in, or in connection with, any case or proceeding under Chapter 7, 11, or 13 of the Bankruptcy Code, 11 United States Code Section 101 et seq., or any successor statutes. [¶] Owner [Weisel] and Contractor [Ryan Associates] agree that any dispute which may arise from the performance of this contract shall be subject to resolution pursuant to California law. Furthermore, should any dispute arise resulting in arbitration or litigation, the proceeding will take place in San Francisco, California." (Italics added.)
The subcontract between Ryan and Welsh:
. . . does not contain any provision by which the parties explicitly consent to, or agree upon, jurisdiction, venue, or any particular "forum" in the case of litigation. Nor does the subcontract contain anything like Paragraph 24.3.3 of the General Contract. The only reference to a location for litigation appears in Paragraph 17 of the subcontract, which is actually entitled "ARBITRATION." Paragraph 17 provides that Ryan Associates may demand that subcontractors become a party to an arbitration between Ryan Associates and Weisel, that certain disputes arising out of the subcontracts may be subject to arbitration, but that Ryan Associates may elect to have certain disputes litigated only "in a Court of Law where all parties can be joined."
Ryan argued that Welch consented to personal jurisdiction in California by signing a subcontract that incorporated the terms of the General Contract, which included Paragraph 24.3.3, by which Ryan and Weisel agreed that California law would apply to their disputes and a lawsuit between them would be held in San Francisco. The court, however, found the contract to be ambiguous:
The effect of the incorporation of Paragraph 24.3.3 into Welch's subcontract is subject to two interpretations. On the one hand, Welch agreed it would "abide by and comply with" the term that, as to "any dispute which may arise from the performance of this [General Contract]," arbitration or litigation "will take place in San Francisco, California." This could be interpreted to mean that Welch agreed that any litigation between Weisel and Ryan Associates — even if Welch became a part of it — would take place in California, and Welch therefore submitted to the California forum too.
On the other hand, it could be also concluded from the contractual language that Welch acquiesced in the agreement between Weisel and Ryan Associates that any litigation between Weisel and Ryan Associates would take place in California, but because Paragraph 24.3.3 nowhere mentioned a venue or forum for subcontractors, Welch did not consent that it too would be bound to litigate in California.
Since the language of the contractual provisions is reasonably susceptible of both of these interpretations, the language is ambiguous. Contrary to Ryan Associates' argument, the ambiguity is not resolved by Paragraph 5.3.1 of the General Contract, since the vitality of Paragraph 5.3.1 is expressly conditioned on there being a separate "agreement," which never came into existence. Nor is the ambiguity resolved by any tenet of contractual interpretation raised by the parties, and no extrinsic evidence on the issue was presented in the trial court. We must therefore resolve the ambiguity pursuant to Civil Code section 1654, interpreting the language most strongly against the party who caused it to exist. That party was Ryan Associates, since it was Ryan Associates — not Welch — that drafted Paragraph 24.3.3. Resolving the ambiguity in Welch's favor, Paragraph 24.3.3 does not apply to Welch, and it therefore does not constitute any consent by Welch to the litigation proceeding in San Francisco. On this basis, the court did not err in granting Welch's motion to quash.
The court also had a second reason to affirm the trial court. It found that Paragraph 24.3.3 did not mention anything about personal jurisdiction. A forum selection clause alone is generally insufficient to confer personal jurisdiction over a defendant. Here is the court’s analysis of why enforcing the forum selection clause in the general contract against the subcontractor would be unreasonable:
Here, enforcement of Paragraph 24.3.3 as a forum selection clause against Welch, so as to subject Welch to personal jurisdiction where it otherwise would not exist, would be unreasonable. Although Paragraph 24.3.3 had some nexus to Weisel and Ryan Associates (since they are both from California), it had little if any nexus to Welch (a Hawaii company, with no business or office in California, working on a project in Hawaii). Nor did it give Welch adequate notice that Welch was submitting itself to the personal jurisdiction of the California courts. Certainly there was no express warning of such a consent, and while the subcontract stated that Welch knew or was familiar with the General Contract's terms, it would be unreasonable to expect Welch to infer a jurisdictional consent from Paragraph 24.3.3 under the circumstances. Welch would have to figure out that Paragraph 24.3.3 — placed near the end of a contract spanning roughly 50 pages, and entitled "Attorney's Fees and Costs" — not only existed, but actually contained a provision regarding the location of litigation that might result from disputes. Then Welch would have to recognize that Paragraph 24.3.3, which addresses where Weisel and Ryan Associates will litigate their disputes but does not mention Welch, any other subcontractor, or even the word "subcontractor," nonetheless applies to disputes with Welch too. Then Welch would have to discern that the provision, which does not state that anyone is submitting to personal jurisdiction, was subjecting Welch to personal jurisdiction in California. And this deduction might be quite elusive, for two reasons: Article 5 of the General Contract, entitled "Subcontractors," does not mention anything about subcontractors submitting to personal jurisdiction in California or even litigating in California; and Paragraph 17 of the subcontract promises that Ryan Associates would bring litigation only in a court in which all parties can be joined, without any mention of California.
There are lessons in this case for drafters of construction agreements. First, the language must be clear and clearly state what is intended. If the general contractor intended that the subcontractor be subject to personal jurisdiction in San Francisco, the subcontract should have stated this clearly and not merely by a general incorporation provision that incorporates language that is meant for an owner-general agreement. Second, the various documents must be consistent. The subcontract could easily have had parallel provisions that made the intent to confer jurisdiction clear to all parties.
While it often seems a good idea to simply incorporate other documents into a contract, the drafter should read the document being incorporated to see if it is clear and makes sense when viewed from the point of the new contract.
January 30, 2014 in arbitration, contracts, litigation | Permalink
Poor Contract Drafting Leads to Ambiguity as to Whether Arbitration Is Required
A Hawaii case, Safeway, Inc. v. Nordic PCL Construction, provides a lesson in how not to draft construction agreements. The owner, Safeway, hired Nordic to be the general contractor for a Safeway store and retail shops. In early 2006, Safeway’s architect assembled a project manual consisting of standard forms prepared by Safeway and including a list of supplementary conditions. This manual was distributed to potential bidders, including Nordic. Nordic was selected to perform the work.
Subsequently, Safeway made further revisions to various contract documents, including an AIA Document A101-1997 and A201-1997. The final executed documents contain numerous modifications to the standard form AIA documents. After a dispute arose, Nordic sought to compel arbitration of the dispute, but the court refused that request, finding that there was an ambiguity as to whether arbitration was required.
The A201-1997 General Conditions contained an arbitration provision that was not modified within that document. However, the Supplementary Conditions deleted the arbitration provision. The issue was whether the Supplementary Conditions were incorporated into the contract or not.
The agreement between the parties was the A101-1997, which was the vehicle by which other documents were incorporated into the contract. Article 8 was entitled “Enumeration of Contract Documents.” Section 8.1.3 read:
§ 8.1.3 The Supplementary and other Conditions of the Contract are those contained in the Project Manual dated , and are as follows:
Neither the date nor any listing of documents was filled in. The trial court found that this raised a question as to whether the Supplementary Conditions were actually included as Contract Documents, and that, therefore, the contract was ambiguous. On that basis, the motion to compel arbitration was denied.
On appeal, the appellate court also found the contract ambiguous. The court said that whether the arbitration agreement exists and is enforceable turns on whether the Supplementary Conditions form a part of the Contract Documents. Nordic argued that, because Safeway modified many provisions of the form contracts, it would stand to reason that Safeway would have properly filled in the blanks to indicate that the Supplementary Conditions were incorporated so as to delete the arbitration provision.
The appellate court held that the trial court erred by not holding an evidentiary hearing to resolve the ambiguity. It apparently found Nordic’s arguments somewhat persuasive and sent the case back to the trial court for an evidentiary hearing on the matter.
Even sophisticated parties can neglect to properly prepare contracts. The AIA form contracts contain various spaces where information is to be included. If that information is available, then it should be included within the document, otherwise words such as “to be determined at a later date” could be used to indicate that such information is then not known.
With the use of electronic AIA documents, it has become even easier to modify AIA documents. Using such software makes the inclusion of supplementary conditions unnecessary. Indeed, it is probably a mistake to use supplementary conditions instead of making modifications directly within the general conditions. Placing all "conditions" in one document would have avoided the problem raised in this case.
January 28, 2014 in arbitration, contracts, litigation | Permalink | TrackBack (0)
New Article about Arbitration in Licensed Architect Magazine
Read the new article by Shawn Goodman in Licensed Architect entitled "Few Good Options when one Party Refuses to Pay its Share of the Arbitrator's Fee," starting on page 16. This article discusses a situation that is sometimes encountered in arbitrations, where one party refuses to pay its share of the arbitrator's compensation, and what can be done about it.
October 17, 2013 in arbitration, contracts, litigation | Permalink | TrackBack (0)
Supreme Court Narrows Review of Arbitration Award
On June 10, 2013, the Supreme Court in Oxford Health Plans v. Sutter, declined to overturn an arbitrator's decision to permit class arbitration. Various commentators have written about this decision, including this one at the International Institute for Conflict Prevention & Resolution. In Oxford, the arbitrator was asked by the parties to interpret the agreement and decide whether it permitted class arbitration. Unlike another recent Supreme Court case, Stolt-Nielsen, where the court overturned the arbitrator's award allowing class arbitration, the court here found that the arbitrator had the authority to decide the issue because the parties asked him to do so, and whether he was correct or not did not matter:
But Oxford misreads Stolt-Nielsen: We overturned the arbitral decision there because it lacked any contractual basis for ordering class procedures, not because it lacked, in Oxford’s terminology, a “sufficient” one. The parties in Stolt-Nielsen had entered into an unusual stipulation that they had never reached an agreement on class arbitration. In that circumstance, we noted, the panel’s decision was not—indeed, could not have been—“based on a determination regarding the parties’ intent.” Id., at 673, n. 4; see id., at 676 (“Th[e] stipulation left no room for an inquiry regarding the parties’ intent”). Nor, we continued, did the panel attempt to ascertain whether federal or state law established a “default rule” to take effect absent an agreement. Instead, “the panel simply imposed its own conception of sound policy” when it ordered class proceedings. But “the task of an arbitrator,” we stated, “is to interpret and enforce a contract, not to make public policy.” In “impos[ing] its own policy choice,” the panel “thus exceeded its powers.”
The contrast with this case is stark. In Stolt-Nielsen, the arbitrators did not construe the parties’ contract, and did not identify any agreement authorizing class proceedings. So in setting aside the arbitrators’ decision, we found not that they had misinterpreted the contract, but that they had abandoned their interpretive role. Here, the arbitrator did construe the contract (focusing, per usual, on its language), and did find an agreement to permit class arbitration. So to overturn his decision, we would have to rely on a finding that he misapprehended the parties’ intent. But §10(a) (4) bars that course: It permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly. StoltNielsen and this case thus fall on opposite sides of the line that §10(a)(4) draws to delimit judicial review of arbitral decisions.
Of particular importance to construction attorneys is the reaffirmation of the limited review that an arbitrator's decisions are given under the Federal Arbitration Act ("FAA"). The American Institute of Architects provides in its latest documents that, if the parties opt for arbitration, the FAA will apply.
All we say is that convincing a court of an arbitrator’s error—even his grave error—is not enough. So long as the arbitrator was “arguably construing” the contract—which this one was—a court may not correct his mistakes under §10(a)(4). The potential for those mistakes is the price of agreeing to arbitration. As we have held before, we hold again: “It is the arbitrator’s construction [of the contract] which was bargained for; and so far as the arbitrator’s decision concerns construction of the contract, the courts have no business overruling him because their interpretation of the contract is different from his.” Enterprise Wheel, 363 U. S. at 599. The arbitrator’s construction holds, however good, bad, or ugly.
June 13, 2013 in arbitration, contracts, litigation, news | Permalink | TrackBack (0)
New Website Provides Language for Arbitration and Mediation Agreements
The American Arbitration Association has announced a new website that allows a party to construct clauses for a contract providing for alternative dispute resolution. The site is ClauseBuilder.org. Anyone drafting a contract, including non-attorneys, can take advantage of this site. It goes through a series of steps where the user responds to questions, such as the number of arbitrators to use, discovery, and so forth. It then provides appropriate language to meet the party's needs.
Although this site seems to be best suited for attorneys, particularly those not intimately familiar with arbitration and mediation, it is simple enough for a layman to use in proposing modifications to draft agreements. One of the criticisms of arbitration is that the parties who draft the agreements do not give any thought to how disputes will be resolved. They often use form contracts without modifying them for the particular situation. Often, the transactional attorneys who draft these contracts have little or no experience with either mediation or arbitration and may not even know that there are many options available to the parties in drafting these clauses. This site should help to address these issues.
December 05, 2012 in arbitration, news | Permalink | TrackBack (0)
Supreme Court Overturns Oklahoma Arbitration Decision
The United States Supreme Court has overturned an Oklahoma Supreme Court decision in Nitro-Lift Technologies LLC v. Eddie Lee Howard (No. 11-1377, Nov. 26, 2012), involving arbitration:
The Oklahoma court had held that a state statute that restricted covenants not to compete provided the basis for review by the courts of a dispute that included an arbitration provision in the context of an employment agreement. The respondents had worked for Nitro-Lift and quit to work for a competitor. Nitro-Lift claimed that this violated the non-compete provision of their employment agreement and filed a demand for arbitration under that agreement. The respondents filed suit, asking that the court declare the agreements null and void and to enjoin enforcement. The trial court held that the agreements contained a valid arbitration agreement under which an arbitrator, and not the courts, should decide the dispute between the parties.
The Oklahoma Supreme Court reversed, holding that “existence of an arbitration agreement in an employment contract does not prohibit judicial review of the underlying agreement.” It further held that the noncompetition agreements were “void and unenforceable as against Oklahoma’s public policy.” The US Supreme Court vacated the Oklahoma decision, admonishing that state (and others) that the federal policy of favoring arbitration cannot be undone by the states. “[W]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.”
November 26, 2012 in arbitration, litigation | Permalink | TrackBack (0)
Alternative dispute resolution, or “ADR,” comes in many forms. Arbitration and mediation are the two most commonly used techniques to resolve disputes outside the courtroom. Yet many people, including sophisticated businesspeople and even attorneys, do not fully understand the differences between the two or how they are used.
In our practice, we focus on construction disputes. We often represent architects, owners, contractors and others involved in construction projects. Sometimes this means litigation in a court. Often, however, we wind up mediating or arbitrating a dispute. Knowing the process is vital for obtaining the best result for our clients. Because I (Werner Sabo) have also been both an arbitrator and mediator in numerous disputes over the last twenty years, I have had a chance to observe the processes from a different side: a neutral side without a stake in the outcome. Some observations follow.
Mediation is essentially a settlement process, while arbitration is similar to court in that a decision is made for you by a neutral party. In mediation, the parties can work out a solution, essentially having control over their own destiny with the help of the neutral party. In arbitration, on the other hand, each side presents its case to the arbitrator. The arbitrator acts like a judge or jury and determines who is right or wrong and who wins and who loses.
When a dispute arises, the parties can talk and negotiate a resolution. They can bring in their attorneys and they can have meetings to work things out. All of this does not guarantee that the dispute will be settled. Mediation is simply an extension of this with the help of a third party, the mediator. Why even bother with a mediator, given that there is usually a cost involved? Simply, an experienced mediator can often get the parties to a common point to settle the case, a point the parties are unable to reach on their own. The skill of the mediator has a lot to do with a successful mediation, but the willingness of the parties to actually reach a deal is also important. When the participants want to continue to do business in the future, mediation is much more likely to succeed than where the parties have entrenched positions and are sworn enemies. This is often the situation where litigation has been going on for some time and the mediation is imposed by a court.
The advantages of mediation are many. If the parties can settle, the cost savings over litigation or arbitration are substantial. Most mediations last only a single day, following perhaps a few weeks of preparation. The cost of the mediator plus the costs for each side, such as attorneys’ fees, are modest. Success rates for many mediators is often above 80%, depending, of course, on many factors. A successful mediation may also salvage a business relationship. This is rarely the case where one party beats the other in court or arbitration.
If the parties cannot settle a matter, there are usually two remaining choices: go to court or arbitrate. With either of these processes, a neutral third party imposes a decision on the parties. Traditionally, arbitration’s advantages have been that it is overall less costly and quicker than litigation; you get to pick a neutral who is better versed in the subject than the typical judge (especially true in construction disputes); and it is final and private. However, because many attorneys are not completely comfortable with arbitration, they handle the arbitration as if it were court. This means that there is a lot of discovery, such as depositions, interrogatories, as well as motions and other costly trial tactics. All of these processes can dramatically increase both the cost and time involved in the arbitration. The clients are frustrated that the arbitration takes forever and costs a fortune. The loser also finds that it is virtually impossible to appeal an arbitration award, adding to the misery.
What can a party do to make arbitration better? For starters, the arbitration agreement needs to be written by someone who understands arbitration. While standard industry contracts, such as those by the American Institute of Architects, are a good start, they may not fit a party’s needs. These agreements are typically drafted before there is any dispute, and usually by attorneys who are not conversant with arbitration. Have this reviewed by an attorney who has actually arbitrated cases. The agreement can specify how the arbitrator is chosen; how many arbitrators there will be; what rules will be followed; how much discovery there will be; and so forth. A good arbitration agreement can go a long way to minimizing costs by limiting discovery, by including good rules, and so forth.
Second, if there is a dispute, hire an attorney who is experienced in arbitration. There are always numerous issues involving strategy even before the arbitration is initiated. Experienced litigators may do a good job in court, but are not always a good fit for arbitration. We have seen several examples where a very experienced trial attorney undertakes to represent a party in an arbitration and conducts himself as if he were in court. This is a mistake and can lead to a bad result for the client. Arbitration is different from litigation, and it is meant to be. Understanding the nuances is vital for an attorney who wants to do a good job for the client and minimize expenses along the way. Even a simple question such as when to demand arbitration may require sophisticated thought in order to maximize a party’s chances in the matter. The bottom line for the client in this regard is to choose an attorney with substantial arbitration experience, particularly for an important matter.
Mediation and arbitration are two ways to avoid expensive litigation. Successful mediation is the best alternative. If that does not work, a well-designed arbitration, with a good arbitrator and experienced attorneys, will be far less costly for all parties and can result in a decision that is as good or better than a court will provide.
October 23, 2012 in arbitration, general, Mediation | Permalink | TrackBack (0)