Posts Tagged ‘Arbitration Clause’

Construction Contracts: Mediation Is A Great Alternative To Litigation

Mediation bigstock-Attorney-at-Law-sitting-at-des-49285283 copyMediation and Construction Law are two of my favorite topics to discuss. These are my favorite aspects of the practice of law. Every construction law dispute I encounter starts with the premise of getting contractors paid. No matter the dispute, the underlying factor is withholding of money along the hierarchical chain of characters.

Owners need to get cash from the lenders. General Contractors need to get progress payments from the Owner. Subs are always waiting on the GC to pay out. Suppliers provide goods on credit with the hopes of getting paid once the other parties take their share. There are small margins for error and high possibility of dispute.

With such small percentage of money actually going to profits its no wonder owners, general contractors, subcontractors and suppliers cannot afford expensive litigation. There are efficient and cost effective means to settle disputes without having to tee it up in the courts, Mediation and Arbitration. For the purposes of this blog, I will be speaking to the more flexible of the two forms of alternative dispute resolution methods, Mediation.

Do Construction Contracts Contain Mediation Clauses?

It depends on the contract. Many American Institute of Architects (AIA) form contracts will allow for an option to include both a mediation and arbitration clause for alternative dispute resolution. If you are unsure if your contract has  mediation clause you should look to see if there is some type of language like the following provided by the American Arbitration Association (AAA), who is the leader in the arbitration and mediation space.

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 in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Construction Industry Mediation Procedures before resorting to arbitration, litigation, or some other dispute resolution procedure.” AAA Construction Industry Arbitration Rules and Mediation Procedures (pg 14).

There are many variations on this type of clause. Courts are very keen on upholding mediation clause language because courts favor resolving disputes through other means.

Construction Disputes Settle With Mediation

Some disputes will never settle. The parties are so entrenched to a position that they become irrational and will not compromise. The construction industry is different. Contractors tend to want to continue doing business and therefore do not want to burn bridges.

I have personally been witness to numerous construction disputes setting through mediation. The parties agree to meet with a neutral third party, the mediator, and go through the process until a compromise is reached. Conventional wisdom states that the best settlements are those where both sides leave unhappy.

Construction disputes are no different. Each party negotiates some give and take until a compromise is reached. I see it all the time. Have your attorney put mediation clauses in your company’s contracts. Do not sign contracts unless they have a mediation clause. Finally, even if there is not a specific clause mandating mediation, you can still mediate! All that is required are two parties who want to solve a dispute.

 

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Louisiana Arbitration Law

Over the past few months here at Wolfe Law Group, I’ve been involved in a number of disputes where where arbitration clauses were invoked and the matters traveled the path of arbitration rather than ordinary judicial proceeding. Mediation and Arbitration have been touted as the faster, cheaper and more efficient way to handle legal disputes. While this may be true due to the enormous built in delays and catastrophic costs of “going to trial” there are a number of ways that contractors can be disadvantaged by dealing with lawyers who are not experienced with this process.

First and foremost, there is no standard for the rules. This means that, unlike the slow judicial process, the rules by which each arbitration play by can be changed and altered based on the contracts between the parties and document that they incorporate. For example, the American Arbitration Association (AAA) is one of the leaders in construction arbitration. They publish a set of rules called “Construction Industry Arbitration Rules and Mediation Procedures.” These rules are the rules that govern the entire proceeding. What this means is that there is a completely different set of operations for an arbitration than there would be for a judicial proceeding. As all lawyers know and most laymen do not, procedural tactics and expertise can make or break a case, even before it gets to be heard on the merits.

The key to getting this set of rules to apply is by having a good unambiguous arbitration clause in your construction contract. The AAA even gives example clauses that a construction company can use in its construction contract:

“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Construction Industry Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.” See AAA’s Guide to Drafting Dispute Resolution Clauses for Construction Contracts 

On of the more important aspects of the quote above it that it incorporates the AAA Construction Industry Arbitration Rules. The same can be said for just about any arbitration company, but the AAA tends to be the leader in the commercial and construction industry. Further, you can even go as far as having a local company such as ADR, Inc., host the arbitration and then the AAA rules will apply to that proceeding.

Another reason why this is important this that the law in Louisiana governing arbitration proceedings is relatively short and references other parts of the Civil Code and the Code of Civil Procedure. Louisiana Civil Code in its Revised Statutes §9:4201§9:4217 encompass Louisiana Arbitration Law. These statutory provisions are helpful in filling in the gaps where other rules fall short and that point to other areas of Louisiana law that govern arbitration proceedings.

Typically the process works like this: 1) first you look to the contract to see how the parties have agreed to have the matter arbitrated, such as a clause saying that arbitration is proper and which rules apply. 2) Then you see which rules apply (if any) and then that will be the governing set of rules for the proceeding. 3) In matters where the rules are silent, then parties are forced to look to the Louisiana Arbitration Law section of the Revised Statutes as gap filler. 4) Finally, if all areas are silent, then you seek a decision form the arbitrator for what to do or how to proceed based on public policy.

Knowing the rules is critical to the success of an arbitration or any type of legal proceeding. The term “the devil in the details” cannot be more applicable. Arbitration proceedings can save a company thousands of dollars and lots of time. The one negative is that the are final and cannot be appealed, save extreme circumstances.  Always consult with an attorney before deciding to insert an arbitration clause into your construction contract and if you decide to invoke it.

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