Construction Law

The Arbitration Process and the Construction Industry

Alternative dispute resolution (ADR) services like arbitration are often a necessary means for resolving a dispute with another entity. This is especially true in construction, where an ironclad contract can mean the difference between success and failure on any project. As a common provision in the contract, many contractors discover that arbitration is their only option for resolving an issue with an owner.

As ADR services become more common for resolving a dispute, contractors and construction firms need to weigh the advantages and drawbacks of arbitration proceedings. Whether your contract requires you to go down the ADR path, or litigation is a preferred option, consult a Nashville construction dispute lawyer for all of your construction legal needs. At Cotney Attorneys & Consultants, our construction attorneys can review your contract and provide the best path to take when you’re dealing with a legal dispute.

Finding the Right Structured Resolution

Arbitration is one of the most common alternatives to going to court. Generally, arbitration is performed because both parties mutually agree that they do not want to spend time and money going through a lengthy litigation process. Moreover, arbitration proceedings are confidential, so both parties can agree to keep the final decision private.

Time and money aside, arbitration and litigation do have some similarities in their formal processes on the surface level; however, there are significant differences between the two. One of the most notable differences is that the arbitration process is usually over in a year or less with the hearing segment often taking a week or less, whereas resolving a case through litigation can take anywhere from 18 months to several years to navigate your way through the court system.

Related: Arbitration vs Litigation

What Exactly is Arbitration?

Often performed to resolve business disputes, arbitration is the process of presenting a legal argument in front of a third-party, unbiased arbitrator. One advantage of arbitration is that the parties involved in a dispute have flexibility in controlling the proceedings as opposed to a trial, including:

Both agree to the selected arbitrator or arbitration panel
Both agree on how evidence will be presented during a hearing
Both agree on whether witnesses will be cross-examined or provide written statements

Generally, arbitration proceedings are considered to be a much more streamlined legal process than litigation, allowing both parties to have more control over the formal steps of the proceedings.

What’s the Process Like?

An arbitration process is usually performed through an organization like the American Arbitration Association (AAA). After one party files a request for arbitration through an organization like AAA, both parties involved in the dispute determine a criteria for resolving the dispute (unless previously stipulated in their contract).

From here, each party’s legal counsel begins the preliminary hearing process, and more details of the proceedings are ironed out. Similar to a trial, each side’s legal counsel will prepare documents and exchange relevant information with the opposing counsel. Once each side is on the same page and a date is set, the hearing process begins. During a hearing, the Nashville construction dispute attorney for each side will present their client’s legal argument.

After both parties present their side, the arbitrator will issue a legally binding decision. One potential downside to participating in an arbitration is that the final decision is in fact final, so if you are unhappy with the “verdict,” there is little wiggle room to challenge the ruling.

Is Arbitration the Right Process for My Dispute?

Arbitration is an excellent form of legal recourse, assuming that the right parameters are in place. For example, arbitration is a great process to undergo when there are two similarly situated parties that want to maintain a working relationship and resolve a dispute in a quick, flexible, and private manner.

Arbitration is also typically less costly than litigation. A party involved in arbitration will need to pay administrative fees, compensation for the selected arbitrator, and attorney fees, among additional fees. Depending on the final decision by the arbitrator, a party may be required to pay a fiscal award to the other party, including attorney fees. Fortunately, with the arbitration process, there is light at the end of the tunnel for when a dispute will be resolved by. With litigation, a dispute has the potential to continue on for several years.

Does Your Contract Have an Arbitration Clause?

Many contractors discover the hard way that they “elected” to pursue an arbitration process unknowingly. In fact, most arbitration agreements occur well before a dispute emerges. Typically, construction contracts will feature an arbitration clause requiring both parties to agree to settle a dispute through arbitration proceedings instead of litigation. Without a thorough review of your contract, you may accidentally agree to a form of alternative dispute resolution you weren’t aware was on the table.

Even worse, if the party you are entering into a contract with is a much larger corporation than your own business, there’s a high likelihood that the arbitration clause featured in the contract favors their best interests. Although arbitration has the ability to bring both sides closer to a resolution, this is typically when they are on an even playing field and desire a fair compromise. When one side dwarfs the other, arbitration can be an extremely one-sided affair.

Anything not specified in the arbitration clause is subject to litigation. Before signing any legally binding agreement, it’s best to have a Chattanooga contractor attorney review the contract. A construction attorney can review any clauses related to ADR, identify any unclear or broad language, and provide provisions to the contract if necessary. Ideally, the clause should feature exactly how the resolution process will take place, including the venue, whether or not an arbitrator or panel will be selected, and even specifics in regard to the process. As drafting and reviewing an arbitration clause requires careful attention to detail, consult our Chattanooga construction lawyers for contract drafting and review services.

A Few Final Things to Consider

Before you elect to pursue arbitration, here are a few final thoughts from our Knoxville construction attorneys on the arbitration process, including the advantages and drawbacks:

Weighing the Cost: Although arbitration is traditionally considered to be more affordable, there’s no guarantee that resolving your dispute through arbitration will be cheaper than litigation. In complex cases, there may be many breaks and scheduling conflicts that impact the process. There can also be additional fees involved like paying the travel costs of expert witnesses or extending the time of the process to accommodate scheduling needs.
It Can Be a Time-Consuming Process: If you have never been involved in arbitration, it’s important to understand that the legal proceedings are not bound by the same rules and restriction of a courtroom. Without certain court-imposed rules in place, the discovery process can be unlimited, schedules can be extended, and the total amount of time you spend selecting an arbitrator, accommodating their schedule, and involved in the entire process can add up in the end.
The Final Decision Can Impact Everything: Although arbitration does allow control over the proceedings in ways not offered in a traditional courtroom, one area that it is pretty strict is in regard to the final decision. More often than not, the arbitrator’s final decision is considered an ultimate decision that cannot be undone by an appeal. Although protecting business practices is at the forefront of every construction employer’s mind, in some cases, the benefit of privacy is outweighed by the finality of a decision by an arbitrator.
The Challenges of Choosing the Right Arbitrator: Although the process for selecting an arbitrator is often featured in the construction contract, the preliminary hearing process may require both parties to mutually agree to an arbitrator or arbitration panel. Depending on the nature of the dispute (legal, financial, or the construction process), the best potential arbitrator can differ drastically. One benefit of partnering with a Knoxville construction attorney on an arbitration proceeding is that they can effectively vet candidates and determine the best fit for the parameters of your case.
Understanding the Intricacies of the Process: As we stated above, although they may seem similar on the surface, the formal rules of arbitration greatly vary from the legal proceedings of a trial. From selecting expert witnesses that can provide insightful testimony to the formal process of arbitration, there can be many intimidating factors to consider for a party entering arbitration for their first time.

Although arbitrations have many advantages over litigation, there are many factors to consider before a construction firm enters any agreement, especially contractors with arbitration clauses. When you partner with a Chattanooga construction lawyer from Cotney Attorneys & Consultants, their knowledge, experience, and foresight can help you determine the best route to take in regard to dispute resolution.

With the right arbitration clause outlined in your contract, you can reduce liability and protect the best interests of your business. If there does come a day in which you are required to pursue the arbitration process, our attorneys are highly experienced in this form of dispute resolution and can assess and resolve any construction disputes that may arise.

If you would like to speak with our Chattanooga contractor attorneys, please contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.