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Florida Construction Law News

16OCT 2013

Alternative Dispute Resolution (ADR): Arbitration in Construction Contracts

by Thomas Shea

When problems arise during a construction project, there are a few options that may help guide the parties to a resolution. For example, the parties may engage in informal settlement discussions, onsite arbitration conference, consult with neutral third-parties identified in construction contracts, or attend informal mediation, likely also established through the construction agreement. If the parties are unable to reach an informal agreement to resolve the matter at that point, the parties can turn to the courts and engage in litigation.

What is Arbitration?

Arbitration in Construction Contracts

The construction contract will play a large role in guiding the litigation and should be reviewed and scrutinized often. Specifically, many construction contracts contain provisions requiring the parties to the contract to resolve their differences through arbitration rather than litigation. Arbitration is a quasi-formal hearing where the parties in dispute present their case to a neutral arbitrator or panel of arbitrators that issues a decision which the parties may or may not be required to abide by. Arbitration may be required by statute or court order, but is typically included as a contractual provision. Historically, the AIA documents provided for arbitration as the default remedy when a dispute arose out of a construction contract. Recent updates to the AIA documents, however, provide that parties can now choose between arbitration, litigation, or another method, with litigation as the default rather than arbitration.

How to Compel Arbitration

If a party subject to an arbitration agreement files a lawsuit rather than proceeding with arbitration, the defending party may be able to file a Motion to Compel Arbitration asking the Court to stay the present lawsuit while the parties complete their obligation to arbitrate the disputed arbitrable issues. Often times, especially in Federal forums, written agreements to arbitrate are broadly construed and preferred by courts over formal litigation. For example, under the Federal Arbitration Act a written agreement to arbitration in a contract evidencing a transaction involving commerce is “valid, irrevocable, and enforceable.” Obremski v. Springleaf Fin. Servs., Inc., 2012 WL 3264521, at *1 (M.D. Fla. Aug. 10, 2012). Upon being satisfied that the issue involved is referable to arbitration under such an agreement, the Court “shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the [arbitration agreement].” Obremski, 2012 WL 3264521, at *1 (quoting 9 U.S.C. § 3). Even the issue of the validity of the contract requiring arbitration is subject to arbitration itself. See Integrated Security Servs. v. Skidata, Inc., 609 F.Supp.2d 1323, 1325 (S.D. Fla. 2009) (quoting Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 449 (2006)) (holding any challenge to the validity of a contract as a whole, and not specifically to the arbitration clause, must go to an arbitrator).

Once a party files a motion to compel arbitration, the District Court considers three factors:

  1. Whether a valid written agreement to arbitrate exists;
  2. Whether an arbitrable issue exists; and
  3. Whether the right to arbitrate was waived.

Integrated Security Servs. v. Skidata, Inc., 609 F.Supp.2d 1323, 1324 (S.D. Fla. 2009) (citing Sims v. Clarendon Nat’l Ins. Co., 336 F.Supp.2d 1311, 1326 (S.D. Fla. 2004)). If the court determines these three factors have been met, it must stay the action and require the parties proceed with arbitration as agreed in the contract.

Benefits and Pitfalls of Arbitration

Even though an arbitration hearing is similar to a typical courtroom trial, it is much less formal and yields results which are much less likely to be overturned by the courts. For example, arbitrators have their own code and do not follow the rules of evidence that are strictly adhered to by the courts. Generally, most evidence is admissible unless it is redundant, excessive, or cumulative. Moreover, relevancy and hearsay rules are typically relaxed in favor of permitting the evidence to be presented. When in doubt, arbitrators will side with admitting evidence so as not to infringe upon a party’s due process rights. The parties can also proceed with an arbitration hearing much sooner than with a typical lawsuit. Many times, this is more economical as it eliminates the need for lengthy depositions, interrogatories, document production, and other formal discovery.

Opponents of arbitration often criticize the procedure as not justly deciding a dispute due to the abbreviated nature of an arbitration proceeding. Specifically, because the discovery is so limited and rules of evidence so relaxed that parties are often prejudiced and the issues are not truly decided on the merits.

The bottom line is parties entering into a construction contract, or any contract, should carefully weigh the advantages and disadvantages of including an arbitration clause in their agreement. Parties should consult with counsel since, as discussed above, once a party agrees to an arbitration provision, a Court will likely require the parties to follow through with their agreement if a dispute arises.

Posted By Thomas Shea