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Arbitration: What Is It and Why Should We Do It?

When parties to a construction project find themselves in a disagreement, there are several options to resolve the dispute. These include: (1) informal settlement discussions (often with “high level” executives); (2) turning the dispute over to an “initial decision maker” (often identified in the contract as the architect, project engineer or construction manager); or (3) engaging a neutral third-party to help the parties mediate the dispute. If none of these measures successfully resolve the dispute, litigation often occurs. This can be slow and costly, in terms of both time and money.

The Alternative

As an alternative to litigation, we often counsel our construction clients, both owners and contractors, to consider arbitration. Arbitration is a semi-formal hearing where the parties present their cases to a neutral arbitrator or panel of arbitrators who then issue(s) a decision which the parties may or may not be required to abide by. This is known as binding or non-binding arbitration, respectively. Our Construction Law Team has often found arbitration to be a faster, less expensive and more private means of resolving construction project disputes.

When to Arbitrate

Arbitration can be provided for by a provision within a construction contract or required by statute or court order as a prerequisite to litigation. Parties can also voluntarily submit to arbitration when they cannot resolve a dispute through one of the other dispute resolution procedures identified above.

The Process

Once the parties have submitted to arbitration, the parties choose their own arbitrator(s). The parties can either employ an organization specializing in alternative dispute resolution (“ADR”) to organize and direct the arbitration, or they can handle the process themselves. Arbitrators are usually experienced in the construction, engineering or contract administration areas, and are frequently either practicing or former attorneys, although this is not required.

An arbitration proceeding generally resembles a court proceeding in that both parties make opening statements, call witnesses who are then cross-examined by the other party, and make closing statements. Parties in an arbitration hearing are usually represented by legal counsel, but can represent themselves. Following the conclusion of the arbitration proceeding, the arbitrator issues a ruling, which is usually supported by a written opinion, including findings of fact and conclusions of law, and award. After the decision is rendered, a party seeking to enforce the arbitration award may petition a court of competent jurisdiction to confirm the award. Once confirmed, the award has the same enforceability as a judgment rendered by a court.

So What’s the Big Difference?

Practically, the three biggest differences between arbitration and litigation are that arbitration is generally a: (1) faster, (2) less expensive and (3) more private means of resolving construction project disputes. A faster, more economical dispute resolution process can pay huge dividends to both owners and contractors, particularly for projects where the critical path schedule is very tight. In addition, resolving disputes in the privacy of an arbitration room, as opposed to a public courtroom, can help both owners and contractors avoid the “cloud” of bad publicity when planning or bidding on future projects.

From a procedural standpoint, even though an arbitration hearing can closely parallel a trial, it is more informal. For example, arbitrations do not follow the strict rules of evidence that are adhered to by courts of law; these rules are relaxed in favor of permitting evidence to be submitted. In general, evidence is admitted unless it is redundant, excessive or cumulative. In addition, documents admitted into evidence in an arbitration hearing are not subject to authenticity requirements unless the opposing party objects and provides a legitimate basis for concerns over authenticity. Another key difference between arbitration and litigation is that an arbitration hearing produces a result that is less likely to be overturned by the courts than a trial court ruling.

Why Do It?

Owners and contractors alike should recognize that every construction project is unique, and arbitration/ADR may not be appropriate for every project. However, because arbitration can be started much sooner and concluded in less time, with limited discovery, it is often cheaper and faster than traditional litigation. More importantly, the relative privacy of an arbitration room can benefit both owners and contractors beyond the individual project/dispute at hand. As a result, both owners and contractors should consider including arbitration/ADR provisions in future construction contracts.

For more information about arbitration or construction dispute resolution, please contact Steve Theising at stheising@KDDK.com or (812) 423-3183; or contact any member of the KDDK Construction Law Practice Team.

About the Author

Steve Theising

Steven M. Theising, an attorney at Kahn, Dees, Donovan & Kahn, LLP (KDDK), in Evansville, Indiana, practices primarily in the areas of business, construction, real estate, tax, and collection and creditors’ rights law. Steve utilizes his accounting and financial background to provide both legal and practical business analysis in negotiating, resolving and closing business, construction and real estate transactions and disputes. He also assists clients with addressing and resolving environmental and estate planning issues.