CM 500 construction law

Arbitration and Construction Disputes

Personal views on arbitration

Larry Yenko

12/2/2010

Arbitration and Construction Disputes

In recent times, arbitration clauses have routinely been included in construction

contracts. Arbitration has been considered a more economical and time efficient method of

litigating disputes arising from construction contracts. In more recent times, arbitration has

become as burdensome, expensive and time-consuming as court litigation. It is the purpose of

this paper to explore some relative changes in the arbitration process to reduce costs,

eliminates burdensome procedures and expedite the process. This paper will explore various

sanctioning bodies including individual arbitrators and law groups and their procedures . The

focus of the paper will be recent changes in varying or eliminating procedures or rules in

arbitration making it less expensive and quicker than formal litigation. The perspective of this

paper is based on Nevada law and personal experience of the author.

The most cited and relied on sanctioning body is the American Arbitration Association

(AAA). The AAA recognizes that construction arbitration is a specialized field needing rules

tailored to construction disputes. The AAA are also recognizes that to make construction

arbitration successful, arbitrators must be familiar with the industry.

The AAA has separate rules for construction arbitration1. These rules include regular

arbitration procedures, procedures for the resolution of disputes through document

submissions, fast-track procedures and procedures for complex construction disputes2. Regular

arbitration procedures are applied absent the modified agreement to use the other procedures

just described. Regular arbitration procedures under the AAA provides for fast-track arbitration 1 American Arbitration Association, Construction Industry Arbitration Rules and Mediation Procedures, (Rules Amended and Effective October 1, 2009, accessed November 24, 2010)2 id

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for disputes where there are only two parties and $75,000 is at issue3. Implied with signing a

contract with an arbitration clause is acquiescence to the rules described above. The rules

provide for wide discretion of the arbitrator including the procedures to be followed in the

case. The rules also provide discretion vested in the arbitrator to schedule the proceedings

including discovery, time limits, witnesses, jurisdiction4, motions, rules of evidence and to make

awards.

Fast-track procedures include limits on the number of parties (2) in the amount of the

claim in question ($75,000). There are also time limits on filing a claim or counterclaim (7 days)

or modifying such. There are limited extensions of time (7 days). Fast-track allows telephone

notice of hearings and management procedures. Exchange of information (at least 5 days) is

determined by the arbitrator. No discovery absent extraordinary circumstances. Hearing is

limited to 1 day (absent extraordinary circumstances) and must be scheduled within 45 days of

telephone notice of hearing. The decision must be made within 14 days from the cloture of the

hearing.

Procedures for large complex construction disputes are basically the same as regular

arbitration with emphasis on the arbitrator discretion with expedient and efficient procedures

(limiting discovery and other procedures).

Finally, resolution of disputes through submission of documents are allowed if the

parties agree to such procedures. The rules provide for the use of technology to expedite the

3 id4 EXBER, Inc. v. Sletten Construction, et al. 92 Nev. 721; 558 P.2d 517 (1976), Broom v. Morgan Stanley DW, Inc. 169 Wn.2d 231. 236 P.2d 182 (2010)

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procedure and reduce costs. This procedure may be used for any size claim if agreed upon by

the parties.

Other organizations other than the AAA provide arbitration services. A construction

contract will specifically identified the arbitration organization that controls the procedures and

rules of the arbitration.

Besides the AAA, one such organization is the Construction Arbitration Service (ACBA).

The ACBA allows the arbitrator to use his/her discretion (unlike the AAA) for rules only. The

arbitrator must follow the procedures of the ACBA. The procedures are similar to the AAA

except for fees and time limits. The rules are similar to the AAA, however, they are more

general and less numerous. The rules of evidence (as with the AAA) allow for complete

discretion vested in the arbitrator to modify or ignore the strict rules of evidence except for the

attorney-client privilege and the work product privilege5.

Arbitration procedures and rules have even been presented by individual arbitrators6 .

Mr. Pierce has adopted by reference, procedures and rules from Arbitration Services of

Portland, Inc.7. These rules and procedures again are similar to the AAA giving the arbitrator

wide discretion in applying the rules of evidence, testimony, witnesses and other legal

procedures.

5 Construction Arbitration Service, Arbitration Procedures and Rules, (accessed November 27, 2010) http://www.acbaservices.com/Construction_Arbitration/CASRulesProcedures_J1125171.pdf6 Paul Pierson, Procedures and Rules for Arbitrations, (accessed November 27, 2010) http://brookingslaw.com/arbitration_rules.htm7 id

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There are several international bodies that provide procedures and rules for

international arbitration.

England has produced Model Rules of Arbitration consistent with The Arbitration Act of

1996 (England). The rules were promulgated in conjunction with many professional

organizations including engineers, architects, real estate interests, surveyors and architects8.

The procedures and rules are similar to the AAA. Consistent with the AAA, provisions for the

discretion of the arbitrator including discretion for the rules of evidence are provided for in the

model rules9.

The International Institute for Conflict Prevention and Resolution (IICPR), a Manhattan-

based nonprofit organization formed in 1979 to promote alternative dispute resolutions

established arbitration rules and procedures to be applied in arbitrations recognizing it as the

controlling body in the arbitration. The IICPR (consistent with other arbitration organizations

including the AAA) provides for expedited arbitration10. The organization promotes expedited

arbitration with additional expedited arbitration rules which includes discretion, vested in the

arbitrator, as to the application of the rules of evidence11. In the case of IICPR, the expedited

arbitration has 100 day time limit, limited discovery, possible mediation and other procedures

designed to reduce costs and expedite the arbitration while still maintaining fairness and

protections (prehearing procedures, privileges, secrecy/privacy, appointment of neutrals etc.).

Unlike most other arbitration clauses, the IICPR, including the expedited procedures, provide

8 Society of Construction Arbitrators, Construction Industry Model Arbitration Rules (CIMAR), CIMAR, 19989 id at: Rule 5.1 p. 510 id11 International Institute for conflict Prevention and Resolution, General and Introductory Rules, (2010, accessed November 27, 2010) http://www.cpradr.org/ClausesRules/ExpeditedArbitrationofConstructionDisputes/tabid/82/Default.aspx

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for an appeal to be heard by three Federal judges. Enforcement of the arbitration award (by

contract provision) is governed by the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.

The International Chamber Of Commerce established The International Court of

Arbitration and the rules that govern the court in 1998. The court itself does not hear

arbitration cases but it's there to expedite or control the process. The parties include the

arbitration body and rules they choose to incorporate in their contract. A separate arbitrator

makes the ultimate decision.

Because construction arbitration was as much as 20% of the total cases that were heard,

a commission was established to review the special needs of the international construction

industry. It appears from my research, that no specific construction arbitration rules have been

adopted by the Chamber's International Court of Arbitration, however, it's rules of arbitration

are very general and encourage adoption of rules pertinent to the international construction

industry which includes the Chamber's clause in their contracts12. The Chamber represents that

they are the largest provider of arbitration internationally13. As with all other organizations

cited above, the arbitrator is given wide discretion in the interpretation of procedures and

rules.

Individual states including Washington (Uniform Arbitration Act, Chapter 7.04A) and

Nevada (Uniform Arbitration Act of 2000, NRS Chapter 38) have adopted statutes covering

arbitration. As with all other arbitration acts, agreements or clauses, Washington statute gives

12 International Chamber of Commerce, Dispute Resolution Services-ADR, ADR Rules, (July 2001, accessed November 27, 2010) http://www.iccwbo.org/uploadedFiles/Court/Arbitration/other/adr_rules.pdf http://www.iccwbo.org/court/arbitration/id4399/index.html13 International Chamber of Commerce, Dispute Resolution Services-ADR, ADR Rules, (2009, accessed November 27, 2010) http://www.iccwbo.org/court/arbitration/id5256/index.html

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the arbitrator wide discretion in terms of conduct of the arbitration including receiving

evidence and the weight thereof, RCW 7.0 4A. 150. The Nevada Act provides for this same

process in almost the exact language, NRS 38.231.

The language of individual state arbitration acts are similar if not identical to the Federal

Arbitration Act, USC Title 9. This Act was originally passed in 1925. Congress recognized the

need for cost effectiveness of arbitration and set forth general rules that have been adopted by

the states and eventually organizations such as the AAA et. al.. The evolution of such rules and

procedures provide the current status of arbitration including arbitration and the construction

industry.

The importance of arbitration throughout the world is emphasized by nations

representing their fairness and expertise in the area of international arbitration including

construction arbitration.

Slovenia is geographically positioned at one of the most important trading crossroads inEurope. Being located in the heart of Europe and renowned for its neutrality between theEast and the West, it makes an attractive choice for international commercial arbitrations,especially because of its recent reform of alternative dispute resolution law which has beenharmonized with the UNCITRAL model laws on arbitration and mediation.14

The importance of arbitration in the commercial world wide venue, especially construction

arbitration, cannot be over emphasized.

It is clear that arbitration is an important part of the construction industry. The original

purpose of arbitration was to save time and money in construction disputes. The process has

14 International Chamber of Commerce, International Commercial Arbitration in Slovenia, How to Settle Your Business Disputes Efficiently, (2010, accessed November 26, 2010)

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evolved into a complex litigation process similar to court litigation. The process has been

abused to obstruct the process and muddy the issues. It's up to the arbitrator to control the

aspects of arbitration. This may be done in numerous ways including the appointment process

of an arbitrator, the way the issues are defined, setting time limits, limiting the number of

witnesses and the scope of their testimony, hearing live testimony versus documentary

submittals, discovery and procedures within the hearing itself including trial procedures. One

way that arbitration differs from formal litigation is in the conduct of the hearing, specifically,

adherence to the rules of evidence. It is hornbook law that the rules of evidence were designed

to protect fairness in light of laypersons (juries) generally hearing testimony and then deciding

the facts. Experienced arbitrators should not be influenced by non-adherence to the rules of

evidence. One must remember that the purpose of arbitration is to find a fair and just

settlement of disputes arising from a construction contract. We all know that contractors are in

business to build not to pursue lawsuits.

The history of arbitration through the centuries established that not only should the

process be streamlined and less formal but the arbitrator should have expertise in the area

he/she arbitrates. This is not to change the subject but to advocate for arbitrators with

expertise in the construction industry and its processes. The more knowledgeable an arbitrator

is in the field he/she is about to arbitrate the better he/she can apply the rules and procedures

to expedite the dispute and minimize the cost.

In Nevada, there is a statutory requirement for nonbinding arbitration in disputes of less

than $50,000, NRS 38.250. The rules of such an arbitration reflect that formal rules of evidence

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should be relaxed, Nevada Arbitration Rules (NAR) 8 (A).This author had participated in several

(6 ) arbitrations as the arbitrator. These arbitrations were heard in Nevada. The procedures

argued in this paper were applied in the arbitrations. The author is also experienced in

administrative hearings (Appeals Office, Nevada Workers Comp) where the appeals officer has

the authority to vary his acceptance to the rules of evidence in the semi formal proceedings.

Construction arbitration clauses often incorporate formal laws (in this case, laws of

Nevada) in the language of the contract. Consistent with the purpose of arbitration, the

arbitration clause supersedes the contract language and the arbitrator is given discretion

(reference to arbitration rules in the contract via controlling organizations such as the AAA) to

avoid such formalities (dictated by that law to be applied) in the interest of time and costs.

Because the arbitrator is both the finder of fact and decision-maker as to the law and

has expertise in the construction field, he/she is in a much better position to weigh the

evidence and give the weight it deserves (without the protections of the formal rules of

evidence as a layperson or jury may require for fairness). The arbitrator should hear evidence

that will reach the merits and truth of the claim (and defense to those claims) in a way that

requires the parties to be precise in their arguments and the evidence they present to avoid

unnecessary delays and expense15.

Construction involves complex activities including design, material compatibility,

installation and warranty. A subpart of the above process includes many relationships that may

be of project duration or longer-term. In all these long-term complex relationships (owner-

15 William C Turner, Esq., A Brief Overview of the Use of Evidence in Arbitration, October 2010 Nevada Lawyer 21 (2010).

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contractor, contractor-subcontractor, subcontractor-sub subcontractor) the parties must

survive time limits that are imposed to complete a project. Implied in such schemes is the need

for cooperation even in light of the souring of such relationships. To survive, the parties must

expedite disagreements as the project continues. This emphasizes the need for a timely

resolution to disputes not to mention minimizing the cost that may affect the bottom line

profitability of the project. Disputes can lead to intractable positions of the parties and counsel

may encourage the application of traditional litigation techniques. It is the job of the arbitrator

to fashion procedures that expedite the process and reduce costs. An article in The Dispute

Resolution Journal, authored by Allen L Overcash and Erin L Gerdes advocates a five step

process to accomplish the goals of arbitration especially in complex construction projects16. The

steps are 1) immediately after the arbitrator(s) is/are appointed the parties or their counsel

must submit a comprehensive detailed statement of their position and the evidence supporting

them giving all parties notice of the issues and proposed testimony and evidence. Discovery

should be postponed until the statements are given to the arbitrator and the opposing party

thereby automatically limiting and focusing the arbitrator to the need of discovery. 2) the

parties should submit a reasoned award proposal so that the arbitrator may focus on the

evidence needed to support the award. 3) limit discovery based on the parties position

statements. Discovery is usually the largest single delay and complex construction cases. 4)

arbitrators should develop a scorecard that includes all issues on the evidence supporting or

invalidating such. This would focus the arbitrator on the issues and evidence. 5) the arbitrator

should prepare a detailed hearing schedule. Continuances are discouraged and compliance with

16 Allen L Overcash and Erin L Gerdes, Five Steps to Fast Track the Large, Complex Construction Case, 64 issue 2 The Dispute Resolution Journal 36-41 (May-July 2009).

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the AAA Complex Construction Rules are encouraged17. These proposals are consistent with the

goal of arbitration and should be new tools in the arsenal of the arbitrator.

It has been estimated that even in its present status (litigation like), arbitration is

estimated to be 27% to 47% less expensive than litigation18. The latest concern of the parties

concerning arbitration is the cost. Arbitration has evolved into a "scorched earth" litigation

process19. Widened discovery, expand and motion practice, extended examination and cross-

examination, continuances and delays, all the practices that make litigation expensive and time-

consuming have overtaken the arbitration process. In 1994 the AAA created a task force of

construction industry representatives, design professionals and construction attorneys to

address the increasing costs and time expended. They came up with the three options listed

above, fast-track, standard, and complex construction case options. Since those modifications

to the AAA rules arbitration has evolved again into a expensive process, so much so that the

American Institute of Architects (AIA) has eliminated the arbitration clause as a default dispute

resolution process. The form now includes several options requiring the parties of a contract to

affirmatively check a box four arbitration. Failure to do so automatically places disputes into the

court system 20. The form now requires mediation as a condition precedent to proceed to

litigation or arbitration21.

17 Allen L Overcash and Erin L Gerdes, Five Steps to Fast Track the Large, Complex Construction Case, 64 issue 2 The Dispute Resolution Journal 36-41 (May-July 2009)18 Susan Zuckerman, Comparing Costs in Construction Arbitration and Litigation, 62 Issue 2, The Dispute Resolution Journal 42-48 (May-July 2007).19 Stephen A Arbittier, Conditional Arbitration: A New Approach to Construction Arbitration, 61 Issue 2 The Dispute Resolution Journal 38-44, 40 (May-July 2006).20 Stephen A Arbittier, Conditional Arbitration: A New Approach to Construction Arbitration, 61 Issue 2 The Dispute Resolution Journal 38-44, 40 (May-July 2006).21 id

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Mediation has become popular with large contractors since the gain far outweighs the

cost (low cost of mediation leading to possible settlement) especially since mediation is

nonbinding. Stephen A Arbittier, the author of Conditional Arbitration: A New Approach to

Construction Arbitration, advocates a new process of a mini trial he calls Conditional

Arbitration. In this process the arbitrator conducts a mini trial himself for a fixed fee. He may

rely on discovery he sees fit, he may require written reports, he may question witnesses

himself, except affidavits and modify the rules of evidence that assist him in making a decision

including an award. This decision is nonbinding and is time-limited (1 to 4 months). After the

decision either party has 30 days to accept or reject the arbitrator's findings. If the decision is

rejected the parties may ask the arbitrator to continue on as a mediator22.

Conditional Arbitration is just another suggestion to reduce costs and settle disputes in a

timely manner. A combination of streamlined procedures, discretion of the arbitrator to modify

traditional rules including the rules of evidence, nonbinding mini trials or mediation continue to

be attempts to improve alternative dispute resolutions. It is clear to me, that any

arbitrator/mediator must, to take advantage of new procedures, be familiar with the

construction process to make any construction dispute there, timely and cost-effective.

Arbitration and mediation will continue to be a major part of dispute resolutions in the

construction industry.

Bibliography

American Arbitration Association, Construction Industry Arbitration Rules and Mediation Procedures, (Rules Amended and Effective October 1, 2009, accessed November 24, 2010)

22 id at 41.

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2 Construction Arbitration Service, Arbitration Procedures and Rules, (accessed November 27, 2010) http://www.acbaservices.com/Construction_Arbitration/CASRulesProcedures_J1125171.pdf3 Paul Pierson, Procedures and Rules for Arbitrations, (accessed November 27, 2010) http://brookingslaw.com/arbitration_rules.htm4 Society of Construction Arbitrators, Construction Industry Model Arbitration Rules (CIMAR), CIMAR, 19985 International Institute for conflict Prevention and Resolution, General and Introductory Rules, (2010, accessed November 27, 2010) http://www.cpradr.org/ClausesRules/ExpeditedArbitrationofConstructionDisputes/tabid/82/Default.aspx6 International Chamber of Commerce, Dispute Resolution Services-ADR, ADR Rules, (July 2001, accessed November 27, 2010) http://www.iccwbo.org/uploadedFiles/Court/Arbitration/other/adr_rules.pdf http://www.iccwbo.org/court/arbitration/id4399/index.html7 International Chamber of Commerce, Dispute Resolution Services-ADR, ADR Rules, (2009, accessed November 27, 2010) http://www.iccwbo.org/court/arbitration/id5256/index.html8 International Chamber of Commerce, International Commercial Arbitration in Slovenia, How to Settle Your Business Disputes Efficiently, (2010, accessed November 26, 2010)9 William C Turner, Esq., A Brief Overview of the Use of Evidence in Arbitration, October 2010 Nevada Lawyer 21 (2010).10 Allen L Overcash and Erin L Gerdes, Five Steps to Fast Track the Large, Complex Construction Case, 64 issue 2 The Dispute Resolution Journal 36-41 (May-July 2009).11 Susan Zuckerman, Comparing Costs in Construction Arbitration and Litigation, 62 Issue 2, The Dispute Resolution Journal 42-48 (May-July 2007).12 Stephen A Arbittier, Conditional Arbitration: A New Approach to Construction Arbitration, 61 Issue 2 The Dispute Resolution Journal 38-44, 40 (May-July 2006).

Table of Cases

EXBER, Inc. v. Sletten Construction, et al. 92 Nev. 721; 558 P.2d 517 (1976)

Broom v. Morgan Stanley DW, Inc. 169 Wn.2d 231. 236 P.2d 182 (2010)

The Arbitration Act of 1996 (England)

Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.

Uniform Arbitration Act, Chapter 7.04A

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Uniform Arbitration Act of 2000, NRS Chapter 38

RCW 7.0 4A. 150

NRS 38.231

Federal Arbitration Act, USC Title 9

NRS 38.250

Nevada Arbitration Rules (NAR) 8 (A)

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