Print

Library

Risk Management Articles


Dispute Resolution and the Owner: Is Mandatory Arbitration the Right Choice?
By Albert E. Phillips, Esquire


Taken singularly, there is nothing unique about most construction tasks. Given application of the requisite skill by each person involved, almost every single work task can be performed over and over without difficulty or mistake. Why then do problems invariably arise?

Construction of even the smallest project involves a process which is dynamic - not static - in nature. From the time the venture is conceptualized, until the last punchlist item is completed, something that never before existed, in exactly the same setting, is being created by numerous people, who work for numerous parties, each with diverse interests and differing motivations. Cooperation among all participants is a necessity, while coordination of each function is no less important. Delay on the part of one subcontractor puts others out of sequence, causing additional delay, disruption, inefficiency and higher costs.

It is practically impossible to foresee all of the problems that will arise during the process. Some may be caused by the Owner, who decides to make drastic changes in the middle of the project, while others may stem from a mistake in the plans or specifications. Some may be caused by the Contractor's failure to properly schedule or clearly understand the multitude of activities required. Still other problems may arise which are the fault of no one, such as unexpected weather delays. However, one thing can be anticipated with certainty: problems will arise.

In order for the process to function most effectively, and for problems to be handled fairly, efficiently and satisfactorily, it is imperative that the Owner begin by entering into contractual arrangements with the design professional and with the Contractor which anticipate the types of problems most frequently encountered and which provide a contractual framework for their prompt solution. No single step which the Owner takes during the entire construction process is more important.

The construction industry has evolved numerous form agreements. These include standard form agreements published by The Associated General Contractors of America (AGC), The National Society of Professional Engineers (NSPE), the American Institute of Architects (AIA), and the Construction Owners Association of America (COAA). However, the most popular forms currently in use are those published by the American Institute of Architects. From the Owner's viewpoint, the AIA forms are, with the notable exception of the COAA documents, probably the best standard forms now available. Yet, as noted by one court, the printed AIA contract is replete with ambiguities, contradictions, and is an attempt to give all things to both parties.1 For the Owner to be adequately protected, some modification of whatever form is chosen is usually desirable.

Disputes

It is unlikely that any major construction project has been completed without any disputes. Most of these disputes are resolved between the affected parties. However, one or more disputes may become claims, and some claims lead to litigation or arbitration. The goals of the Owner should be to:

With the exception of the COAA documents, most construction contracts contain mandatory arbitration clauses which require the Owner and Contractor to submit any unresolved claim to a panel of arbitrators. These standard form arbitration clauses usually do not serve the Owner well, as discussed below. Therefore, in most instances, the Owner should not bind itself, in advance, to any formal method of dispute resolution, except to the extent outlined above.

Most states encourage arbitration as a matter of public policy and provide for the enforcement of such clauses.2 One Florida court held that an arbitration clause was enforceable and would apply to an Owner's claim that the very contract of which the arbitration clause was a part was fraudulently induced.3

Additionally, most construction Owners will find that the provision is enforceable under the Federal Arbitration Act4 in contracts involving interstate commerce and as a matter of federal policy.5 As almost all construction involves the movement of equipment and personnel across state lines, a state jurisdiction that does not recognize the enforceability of an arbitration clause will generally be pre-empted by the Federal Act.6

The American Institute of Architects Document A2011997 provides for arbitration of all claims, disputes and other matters in question between the Contractor and the Owner7. These provisions8 are not difficult to understand and provide for arbitration proceedings in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. The provision excludes the Architect from such arbitration, thereby leaving out of the dispute one of the parties whose activities are frequently at the core of the dispute.9

Yet, it must not be forgotten that arbitration is a creature of contract and no party can be compelled to submit a dispute to arbitration without having given prior contractual consent to do so.10 Where the choice is the Owner's, it is recommended that arbitration not be made mandatory.

The main advantages of arbitration so often heard include its economy, its speed, its informality, and its ability to provide expert arbiters as the judge and jury. Yet, from the Owner's point of view, there are several reasons not to arbitrate:

Certain objections to arbitration listed above can be cured by appropriate changes to the arbitration clause. For example, provisions that may be useful under certain circumstances include: (1) a limitation upon arbitrability to disputes involving less than a stated amount; and, (2) an agreement to permit discovery of evidence pursuant to the Federal Rules of Civil Procedure.

Absent clear reasons for submitting to arbitration, it is recommended that the Owner refrain from including the provision in its contract, or that any provision that is included be expressly limited to circumstances satisfactory to the Owner.

Notes:

1

Fletcher v. Laguna Vista Corp., 275 So.2d 579, 580 (Fla. 1st DCA 1973), cert. den. 281 So.2d 213.

2 Palmer v. Duke Power Co., 499 S.E. 2d 801 (N.C. App.1998); Blanchard v. Petmecky, 709 So.2d 796 (La. App. 1997).
3 Medident Construction, Inc. v. Chappell, 632 So.2d 194 (Fla. 3d DCA 1994).
4 9 U.S.C. Sections 1-16.
5 Southern Oklahoma Health Care Corp. v. JHBR-Jones-Hester-BatesRiek, Inc., 900 P2d 1017 (Okla. App. 1995); Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 E2d 402 (2d Cir. 1959).
6 Southland Corp. v. Keating, 465 U.S. 1 (1984). 7. (Paragraph 4.6).
7 (Paragraph 4.6).
8 (Subparagraph 4.6.2).
9 (Subparagraph 4.6.4).
10 Scott v. Prudential Securities, Inc., 141 E.3d 1007 (11 Cir. 1998).
11 (Subparagraph 4.6.4).

Albert E. Phillips, Esq. a construction attorney and partner at the law firm of Phillips and Morgan in Atlanta, Georgia. Mr. Phillips has over 30 years of experience representing the interests of public and private Owners and is General Counsel of the Construction Owners Association of America. The above article is a brief excerpt from a detailed paper presented by Mr. Phillips at the Construction Owners Association of America Fifth Annual Meeting at Amelia Island Plantation, Amelia Island, Florida.

Reprinted with permission on behalf of Albert E. Phillips, Esq.

Privacy Policy | Legal Notice | Site Map | Search

Website 2006 InsPro Corporation.
All Rights Reserved.