While parties can agree to alternative dispute resolution at anytime, the most appropriate time for parties to plan dispute resolution procedures is during contracting.
ADR provisions in contracts come in all shapes and sizes, and can be as general or specific as the parties elect. Typically, the more complex a project, the more specific the ADR clause. However, whenever drafting any contract, there are important considerations to keep in mind. This article will explore the ADR clause, and the things you should keep in mind when creating an alternative dispute resolution process.
It’s common in the construction industry to use certain popular form contracts, such as documents published by the American Institute of Architects or ConsensusDOCS.
These contract document sets are drafted by the respective trades and associations, and are generally great contracts for the right types of projects. The documents are extensive, intricate and expensive, however, and in many instances they aren’t right for a project.
These contract documents usually allow the contracting party to “elect” which type of dispute resolution procedure they’d like to use, and contain basic ADR provisions therein. The ADR provisions can be added to by the parties with some of the detailed clauses discussed in this article.
If you’re not using a contract document set (which applies to tradesmen and most small to mid-sized construction projects), you can still craft usable ADR scenarios. Start with the basic provision discussed immediately below, and add the detailed clauses that are applicable to your project.
There isn’t anything fancy about the standard alternative dispute resolution clause. If you’re interested in binding the parties to arbitrate or mediate in the event of a dispute, the following standard clauses should do the trick:
Standard Arbitration Clause
Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by binding arbitration, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
Standard Mediation Clause
If a dispute arises out of or relates to this contract or the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try to settle the dispute by mediation before resorting to arbitration. If a party fails to respond to a written request for mediation within 30 days after service or fails to participate in any scheduled mediation conference, that party shall be deemed to have waived its right to mediate the issue in dispute.
Because of the flexibility of the ADR process, the parties are essentially free to construct a custom dispute resolution process. The manners in handling your dispute are limited only by the needs and creativity of the parties. Before adding any type of “custom” or “detailed” provision into your contract, however, you should consult with an attorney to discuss how the provision might affect your project.
Selecting the Arbitration Association
Every major city has a competitive arbitration market. While the American Arbitration Association is clearly one of the most popular and deeply rooted arbitration providers, by no means are they the only game in town, nor are they required to be the arbitration provider of your choice.
Small and local arbitration companies offer a more personalized service than the larger providers, and sometimes they can be much less expensive than the national outfits.
You should research the ADR options in your jurisdiction before establishing your “choice” in contract. Once you agree on an arbitration provider, however, it’s simple to make that company the official provider for any dispute under your contract. Simply add a provision in the basic arbitration clause as follows:
(i.e.) …shall be settled by arbitration by the American Arbitration Association…
You can even get so specific as to stipulate which set of “rules” will govern the arbitration. Each arbitration association has its own rules and procedures. For construction projects arbitrated by the AAA, the following provision is common:
(i.e.) …shall be settled by arbitration by the American Arbitration Association under its Construction Industry Arbitration Rules…
How Many Arbitrators? How are Arbitrators Selected?
The parties may elect to have one, or more than one arbitrator. Typically, more complex projects will lend itself to an increased number of arbitrators…but, it’s not always the case, and even the smallest projects may request more than one arbitrator.
The purpose of having more than one arbitrator, of course, is that there is less risk of a single rouge arbitrator handing down an unfair decision. Requiring a majority from three arbitrators, in theory, should be consistently more fair than allowing a single person to make the final decision.
Of course, the more arbitrators used, the more expensive the proceeding.
The number of arbitrators, and the method of their selection, may be handled in contract with the following example provisions:
1. Tying No. of Arbitrators with the Size of Dispute
In the event that a claim exceeds [$1,000,000], exclusive of interests and attorney’s fees, the dispute shall be heard and determined by a panel of three arbitrators…
2. Regulating Who Can Serve As Arbitrator and How Selected
- The arbitrator(s) shall be a civil engineer
- The arbitrator(s) shall be a practicing attorney specializing in construction law
- A balanced panel of three arbitrators, such as one consisting of one contractor, one design professional and one construction attorney
The Applicable Law and Location for Arbitration
Once a dispute arises on your construction project, those in charge of settling your dispute are going to be faced with some preliminary questions: (1) What law applies?; and (2) Where to hold the actual arbitration.
If two local companies are contracting in relation to a project in their company’s city, then these questions are really no-brainers. In construction, however, it’s n
ot uncommon for out-of-state general contractors to contract with local companies, or vice versa. Depending on the situation, these two simple questions can become quite sticky, and in some cases may even be the source of leverage for one party over another.
As such, it may be beneficial to choose the applicable law and the locale of the proceedings at the onset. Making these decisions via contract is simple, and you can use language similar to this:
- The place of arbitration shall be [city], [state] or [country]
- This agreement shall be governed by and interpreted in accordance with the laws of the State of [specify]. The parties acknowledge that this agreement evidences a transaction involving interstate commerce. The Federal Arbitration Act (Title 9 US Code) shall govern the interpretation and enforcement of the arbitration clause in this agreement.
- This contract shall be governed by the laws of the State of [specify]
It’s a general rule in the American legal system that each party bears its own legal expenses, including the expense of attorneys fees. Of course there are a number of exceptions to this rule, but by far the most concrete and certain exception is when the parties contract otherwise.
Each type of “attorneys’ fees” provision is interpreted differently, and in some cases, an arbitrator might find that a general attorneys fees provision does not apply to fees incurred in connection to a mediation or arbitration. In other words, an unspecific attorneys fees provision might only provide reimbursement of fees in the event of actual litigation.
It might be prudent, therefore, to include attorneys’ fees provisions directly within your arbitration clause. See some of the following examples:
- The prevailing party, as determined by the arbitrator, shall be entitled to an award of reasonable attorney fees.
- The arbitrator(s) shall award to the prevailing party, if any, as determined by the arbitrator(s), all of its costs and fees. “Costs and fees” mean all reasonable pre-award expenses of the arbitration, including the arbitrator(s)s’ fees, administrative fees, travel expenses, out-of-pocket expenses such as copying and telephone, court costs, witness fees and attorneys’ fees.
- Each party shall bear its own costs and expenses and an equal share of the arbitrator(s) and administrative fees of arbitration.
- The arbitrator(s) may determine how the costs and expenses of the arbitration shall be allocated between the parties, but they shall not award attorneys’ fees.
Even More Detailed
By no means does this article exhaust the types of detailed provisions available to those contracting to engage in alternative dispute resolution. In fact, it’s just the beginning.
Other provision amendments can me made to regulate the form and scope of arbitration awards, the ability to appeal an arbitration award, the statutes of limitations applicable to certain claims, the confidentiality of arbitration proceedings, the type of remedies available to parties, the type of awards allowed to be granted, the duration of ADR proceedings, the discovery process related to the proceeding, and more.
When customizing your contract and ADR provision, its best to speak with a knowledgeable attorney.
The Next Series
Next in this three part series on Alternative Dispute Resolution is the final article, a discussion on choosing ADR Post-Dispute and post-contract. This is important for parties who failed to add an ADR provision within their contract, but who still want to take advantage of ADR’s benefits.