Arbitration Provisions: Who Needs Them?
On July 30, 2019, Pennsylvania’s adoption of the Revised Uniform Arbitration Act (RUAA) officially went into effect. This new law should prompt all owners, contractors, subcontractors, or anyone else involved in the construction industry to revisit the impact of arbitration provisions in construction contracts generally and whether or not they will be beneficial.
First, it is important to know that standard construction contracting forms from the American Institute of Architects have a standard arbitration provision that can be altered or stricken altogether by contracting parties. However, at the very least, a party to a construction contract should consider its own goals for the project and should consult an attorney to make sure that the provision advances its goals and protects its rights.
A party to a construction contract should also consider whether an arbitration provision in the construction contract is desirable at all. As in most legal issues, there are pros and cons to be weighed. For instance, arbitration is generally lauded as being cheaper and more efficient than traditional litigation. However, as sophisticated arbitrators have become the norm in construction arbitration, hidden costs arise. Merely filing an arbitration demand through the American Arbitration Association, the standard arbitration service organization specified in most arbitration provisions, can cost thousands of dollars depending on the amount of the claim—much more than the filing fee in a court system. Another hidden cost is the arbitrator’s hourly fees. Arbitrators, especially ones well-versed in the nuances and technical issues of construction law, can cost up to $500-$800 per hour. For clients who are also paying the hourly fees for their attorney, these costs can add up quicker than court-based litigation fees.
Additionally, while arbitration is relatively faster than going to court, the arbitration award is enforced through the court system. The prevailing party must file a lawsuit in court to obtain a judgment to impose the award. This can be a challenging and time-consuming process if the arbitration award is poorly written or goes outside of the scope of the initial issues.
Further, if a party believes that an arbitrator wrongfully decided the case, it will have an extraordinarily difficult time changing the award. Arbitration awards are notoriously difficult to appeal successfully or vacate. Usually, one needs to demonstrate fraud or bad faith by either party, partiality by the arbitrator, or patent abuse of discretion. Even arguing that an award is not supported by the evidence presented or arguing that the arbitrator erroneously applied the law is not enough to change an arbitration decision.
On the other hand, depending on the claim, there can be numerous reasons to go to arbitration instead of a court. Indeed, depending on the claim, the procedural posture, and the situation of the individual parties, these negative aspects of arbitration may actually be reasons to provide for an arbitration provision in a contract. Nonetheless, the ability to control the venue, the substantive law involved, as well as the limited scope of discovery, are also reasons to negotiate for a favorable arbitration provision. The fact that arbitration decisions are not published may also be an advantage as this guarantees more privacy to a well-known entity seeking to limit repeat claims from multiple parties. The flexibility and speed of arbitration are also usually seen as persuasive reasons to include arbitration in a contract.
All of these considerations require anyone entering into a contract, especially when the standard form includes an arbitration provision, to engage an attorney to ensure that their needs are met, both in the contract and in the inevitable dispute resolution process. An attorney can negotiate to add potential improvements to standard arbitration provisions, such as limiting discovery depending on the size of the claim, capping the fees of selected arbitrators, and specifying the applicable law to be used during an arbitration. Another potential addition is the requirement of a mandatory mediation before demanding arbitration so that the actual issues can be streamlined beforehand.
With the application of the RUAA revamping arbitration provisions in Pennsylvania and many other states, retaining an attorney is more important than ever so that you can be apprised of new developments in the evolving case law, shifts in standard arbitration practice, and whether an existing contract is affected by the new law. The lawyers at Cohen Seglias are ready and able to provide guidance for all your arbitration provisions and general construction law needs.