Dispute resolution clauses: getting the prenup right before you say "I do."

Before using AIA forms  or any other agreement to begin a project, owners should review and revise those forms to ensure that they contain appropriate provisions governing dispute resolution. Otherwise, you may be stuck suing different parties in different forums for the same set of construction and design defects, you may be unable to recover the costs of litigation if you prevail, or the cost may be too high because you did not select an economical arbitration service.

Arbitration

The choice between litigating in arbitration or litigating in court is complex, and you should consider that choice carefully in each contract. However, arbitration generally saves time and is procedurally simpler. Arbitration also allows you to avoid a jury trial, which may be tremendously beneficial to parties trying to focus attention on defects and away from irrelevant or unfairly prejudicial matters.

In court, any reference to a defendant’s insurance coverage is possible grounds for a mistrial, while in arbitration, most arbitrators are fully aware whether coverage likely exists. The awareness of insurance coverage is particularly important in construction and design defect cases. Owners require designers and contractors to obtain coverage precisely because they want to be compensated for defects, and want the referee resolving their claim to consider that coverage. Preserving your ability to consider insurance coverage is another factor favoring the choice of arbitration over court.

Consolidated arbitration

On most construction jobs, whether commercial or residential, there will be more than one party potentially responsible for a defect. Therefore, your dispute resolution clause must allow you to force different parties into one arbitration proceeding for claims arising from the same or similar defects on the same site.

If you do not require consolidation of related claims, you may end up in more than one arbitration over the same set of defects. This not only increases legal costs associated with litigation, but may produce two different results. An arbitrator in one arbitration proceeding may not feel compelled by the holdings of another arbitrator, even if they are hearing cases arising out of the same set of defects. The arbitrator hearing your claim against the designer may hold that, though the building is defective, it is not due to design defects. Another arbitrator hearing your claim against the contractor on the same building may agree that the building is defective but that the defects are not due to the contractor. In theory, you could fail to collect in both cases.

Attorney fees

Be sure to consider a clause which awards attorney fees to the prevailing party. An attorney fee clause is a double-edged sword. You want it when you have a strong case and are likely to prevail; you want to avoid it when you are not likely to prevail. Of course, at the time of contracting, you have no idea what litigation position you may be in some day, making it hard to decide if you want the clause or not. Many parties who feel they have an economic advantage over the other party to the contract opt for no attorney fee clause, assuming they can outlast their opponent in a litigation battle. Other parties feel that attorney fee clauses encourage litigation because they give the potential plaintiff a belief that its recovery will be that much larger. Finally, owners in particular should consider that most states’ lien statutes give designers and contractors a prevailing party attorney fee right in cases where the designer or contractor are suing for additional compensation (which is the most common claim by those parties). If the owner does not have an attorney fee clause in the contract allowing the owner to collect fees in cases where the owner is plaintiff (the most common being construction defects and delay claims), then the contractual relationship between the parties is unequal. If the owner wants to avoid attorney fees for both sides, it needs to include in its contract an affirmative waiver by the designers and contractors of the attorney fees rights bestowed by lien statutes or other statutes.

Subcontractors and sub-consultants

The agreement between you and your contractor or designer is not an agreement between you and your contractor’s subcontractors or designer’s sub-consultants. So, for example, requiring your contractor to agree to consolidated arbitration will not mean you can force the subcontractors to consolidate if their agreement with the contractor does not require them to. Review subcontracts and agreements with sub-consultants to ensure that those agreements require the parties to agree to consolidate.

Arbitration service providers

There are many different organizations that provide arbitration services. You can compare them by fee structure, the quality of the mediators and arbitrators on their panel, and the procedural rules governing the arbitration. While standard form AIA contracts designate the American Arbitration Service as the default provider, many parties opt for smaller local services with lower fees and good panels.
 

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