Using Arbitration in a Construction Dispute

Association of Construction and Development
May 25, 2012 — 1,589 views  

American Arbitration Association president Mark Appel once said of construction, “It is the industry that sponsors our work.” The American Bar Association notes that costs for construction disputes exceed $5 billion annually and have increased 10 percent per year over the past decade.

Arbitration provides a way for both parties in a construction dispute to save money on court-related expenses. With arbitration, a third party listens to a case and renders an impartial and binding judgment. Before arbitration begins, however, many disputing parties usually go through several contractual steps to attempt to reach an agreement.

Negotiation in good faith sometimes allows construction disputes to circumvent arbitration. If negotiation does not work, then disputing parties can employ a mediator. A mediator is an impartial party who works to help both sides to reach an agreeable solution. When mediation fails to resolve the dispute, arbitration is the last available option outside of the courtroom.

Some construction contracts specify the method of progressive dispute resolution, which limits the flexibility of both parties. For instance, if both parties wrap themselves in the contract rather than discussing their differences, then they may head for arbitration or for court when other less expensive methods would have resolved the construction dispute.

Also, dispute resolution choices aren’t standalone options. Experts argue that a progressive and flexible dispute resolution system would allow parties to retreat to non-litigious forms of resolution if they were able to make progress during the arbitration hearing. The ABA states that flexibility during the construction process and early intervention in a dispute can both help parties to avoid arbitration or litigation.

To prevent construction disputes before they begin, the ABA states that construction contracts should include a detailed project scope definition that includes both risk assessment and allocation. Partnering together to create common project goals and including a flexible dispute resolution framework in the contract will ensure that parties do not progress to the point of arbitration or, even worse, the courtroom. Owners also have to avoid shifting risk to the contractor without appropriate compensation.

Far too many construction disputes end up in arbitration. If more companies created contracts that emphasized the partnership rather than combativeness, then many arbitration proceedings could be avoided. Working together before the problem accelerates will prevent many costs down the road. A “loser pays” mentality inevitably hurts both parties.

Association of Construction and Development