Tools of the Trade: Part 2 of 2

Read Part 1 Here

Arbitrations almost always arise out of contracts, further empowered through laws like the Federal Arbitration Act (FAA) or similar state statutory schemes. Courts up to and including the U.S. Supreme Court have consistently held that the arbitrator’s authority arises out of contract, meaning the contract, as further informed by arbitration rules and related federal and state laws, determines the limits and expanses of the arbitrator’s authority.

An arbitration begins when one party demands arbitration. Many contracts specify a particular process for initiating arbitration through an arbitration service, like the American Arbitration Association (AAA), JAMS, Miles Mediation & Arbitration, or others. The contract may also specify where the arbitration will take place, how arbitrators are appointed, how discovery or the exchange of information will be conducted, how an award may be enforced, and other details impacting the initiation, duration, and conclusion of the arbitration. In other circumstances, the parties may need to first file a lawsuit with a court and then move to compel arbitration. After the arbitration has been initiated, typically the parties will select one or more arbitrators. This arbitration selection process can vary greatly based on whether the contract provides a specific process and what arbitration rules govern. 

Once an arbitrator has been appointed, the arbitrator will schedule a preliminary hearing where the arbitrator will gauge whether there may be any jurisdictional or other threshold challenges to the arbitration, learn about the parties’ respective positions, understand any confidentiality concerns, and work with the parties to develop a plan for the exchange of documents and other information.

PROCEDURES

In its fullest form, an arbitration is a complete alternative to litigation in a court. A complex arbitration may feel much like accelerated court-based litigation proceedings with written interrogatories and formal document requests, depositions, various motions and hearings with arguments by attorneys, culminating in an evidentiary hearing—effectively, a trial—where the parties will provide detailed written legal briefs, call witnesses, show documents and other evidence, and offer opening statements and closing arguments of counsel.

Not all arbitrations are so complex. For example, the current AAA Construction Industry Arbitration Rules allow “Fast Track” procedures when a dispute is only between two parties with no claim or counterclaim exceeding $150,000. Typically, these accelerated procedures significantly shorten the hearing process, reduce the pre-hearing exchange of information, and limit the evidentiary hearing to one or two days. Under the AAA Rules, smaller disputes under $25,000 may even be decided on documents alone, with no live evidentiary hearing.

Regardless of the procedures, at the conclusion of the arbitration, the arbitrator will determine findings of fact and conclusions at law and issue an award (with varying levels of formality). Barring exceptional circumstances, the arbitration award is binding and cannot be challenged in a court or appealed unless the parties’ agreement allows. Further, an arbitration award can be confirmed by a court, entered as a judgment, and enforced like any other judgment.

CONCLUSION

While mediation and arbitration are very different legal processes, both may have a place in a construction industry professional’s toolbox. Due to its relatively low cost and time burden, many construction contracts require mediation before initiating an arbitration or litigation. This can provide the parties with an opportunity to reach a resolution without enduring the cost and burden of litigation, or at least to better understand the opposition’s position. The chief downside of including mediation as a necessary step prior to more formal proceedings is this sometimes serves to simply delay the inevitable. Relatedly, a mediation may prove fruitless if attempted too early in a dispute, as the parties are simply too set in their respective positions, and most courts or arbitrators will allow (or may even require) mediation later during the course of proceedings.

Arbitration is typically regarded as more expedient and less costly than traditional litigation. However, large and complex disputes in arbitration often still require months or years from the initiating demand to the culminating evidentiary hearing, with discovery of thousands of documents, dozens of depositions, multi-week evidentiary hearings, and administrative fees, arbitrator expenses, attorneys’ fees, and other costs that can often rival litigation in state or federal court. The lack of appealability is a risk with arbitration, as most often the parties must simply accept the outcome the arbitrator determines.

Confidentiality can be a particularly appealing aspect of both mediation and arbitration. In most jurisdictions, mediators are bound to maintain confidentiality, and in many even the parties may not discuss mediation proceedings. Arbitrations are likewise typically confidential, with the current AAA Construction Rules further embracing confidentiality unless otherwise required by law, a court order, or by the parties’ agreement. 

While both powerful tools, mediation and arbitration are not for every construction contract, and legal counsel can help determine whether and how these tools may prove beneficial. Including legal counsel in the process from the contract negotiating and drafting phase can ensure the right dispute resolution tools are in place. Legal counsel can also help to ensure that dispute resolution processes will function as intended, given disputes sometimes arise years after the ink has dried. Additionally, for arbitration particularly, some jurisdictions require specific language or notice for an agreement to arbitrate to have binding effect, particularly when the other party is a consumer. Of course, once a dispute arises, including legal counsel as early as possible can be critical to understating a contract’s dispute resolution provisions and to help ensure appropriate procedures are followed.

Arbitration and mediation (discussed in Part 1 of this article, published in December 2024) may sound similar, but they could not be more different than hammers and screwdrivers. As ultimately any contract may end in a dispute, understanding these two tools of the trade is crucial for any construction industry professional. 

about the authors

Dixie T. Wells is a partner in the Greensboro, North Carolina, office of Ellis & Winters LLP. She represents clients in lawsuits involving engineering issues, higher education law, complex commercial transactions, and products liability. She is a member of the Construction Law and Litigation Committee of the International Association of Defense Counsel. She can be reached at dixie.wells@elliswinters.com. Chris Flurry is an attorney in the Raleigh, North Carolina, office of Ellis & Winters LLP. He focuses his practice on construction law and commercial contract disputes. A Marine Corps veteran and son of a brick mason, he is a member of the Associated Builders and Contractors of the Carolinas. He can be reached at chris.flurry@elliswinters.com.