Arbitration Clauses Remain Popular, But Frequently Misunderstood And Poorly Drafted

Arbitration continues to serve as a popular forum for resolving construction-related disputes, but unfortunately, clauses compelling arbitration frequently are poorly drafted and misunderstood by the parties involved.

Each state’s laws compelling arbitration are unique and continue to evolve, especially when it comes to compelling arbitration by non-signatories to the arbitration agreement itself. For example, in May 2017, the United States Supreme Court overturned a state-court opinion, ruling that an attorney-in-fact could waive the right to a jury trial on behalf of a decedent even where state law otherwise conveyed to the decedent a “God given right” to a jury trial.

In Kindred Nursing Centers, Limited Partnership v. Clark, the Supreme Court held that the Federal Arbitration Act requires state courts place arbitration agreements “on equal footing with all other contracts.” In so ruling, the Supreme Court overruled the Kentucky Supreme Court’s ruling that to agree to arbitration, “the representative must possess specific authority to waive his principal’s fundamental constitutional rights to access the courts [and] to trial by jury.”shutterstock_376726306

Arbitration presents numerous disadvantages often overlooked by inexperienced parties. Architects, engineers, and other design professionals should consent to a mandatory arbitration clause in their contracts only after a thorough consultation with an experienced, local attorney to fully understand the unique advantages and disadvantages of arbitration in the specific jurisdiction.

Many design professionals wrongly believe that arbitration always offers a more cost-effective and predictable alternative to the jury trial system. While this can be true in some large, complex litigation matters, arbitration can be exceedingly more expensive than some parties believe.

The expense of an American Arbitration Association arbitration, especially if it is a mandatory 3-member panel, easily can exceed five or six figures, which would not be incurred if the case is presented to a judge or jury.

A surprising number of design professionals do not understand exactly what rights they are giving up. Design professionals should fully understand that once they agree to arbitration they almost always waive all rights to appeal except in a few, limited circumstances. Typically, the right to appeal will exist only in cases of corruption, fraud, evidence of partiality or misconduct by the arbitrator, exceeding jurisdiction, or refusing to postpone an arbitration hearing for a good cause.

The limited right of appeal and sweeping decision-making power of a single arbitrator often creates significant levels of anxiety among the participants, especially in high-exposure cases involving issues of law that have not been well-settled in the jurisdiction. Such uncertainty may present a strong incentive by one party to settle a claim it otherwise might be willing to try to a jury if the right of appeal were not waived.

The parties also should carefully draft arbitration clauses to agree in advance about what rules of discovery and evidence will apply to avoid future misunderstandings and confusion. For example, it is not uncommon for design professionals to be surprised that pre-arbitration settlement offers and the limits of existing insurance policies regularly are made known to the arbitrator. Such offers of settlement or existence of insurance policy limits rarely would be shown to a jury in a typical jury trial. Many believe such knowledge of pre-suit offers and insurance policy limits can sway arbitrators to award at least some damages to a party that may not otherwise be awarded.

Arbitrations also have distinct advantages of course. Generally, the parties can obtain a final resolution substantially sooner than with a jury trial. It is not uncommon for an arbitration, even in a complex construction matter, to be scheduled within 6 months to a year. The same matter may take 24-36 months to reach a jury trial. When you consider the waiver of any right to appeal, matters routinely are resolved much quicker in arbitration.

Design professionals, however, are often surprised to find that the other side can frustrate the process by refusing to pay their share of arbitration. This can lead to unexpected delays, which frustrates the purpose of arbitration. A well-drafted arbitration clause should include a harsh penalty for any party that fails to fund its share of the arbitration promptly.

One of the significant advantages of arbitration is the ability to adopt more lax rules of evidence and procedure than available in a court of law. This can make it substantially easier to obtain and admit evidence and witness statements (ie., affidavits). This can prove especially helpful in some construction claims, where work crews who are key fact witnesses have moved on to projects in other states or countries.

The ability to selected arbitrators with specific industry experience and technical backgrounds not usually possessed by a trial judge presents another strong factor in favor of arbitration. While the use of such specialized arbitrators can be substantially more expensive, many design professionals prefer arbitrators experienced in their industry because they believe they can more readily predict the results. If the design professional considers this a significant factor, the requirement to use an arbitrator with specific industry experience in construction-related claims should be included in the arbitration clause itself.

Some design professionals prefer arbitration because it affords the parties the opportunity to resolve their dispute without the public nature of a jury trial. The private resolution of disputes can prove especially advantageous when it involves a high-profile claim, the loss of life on a project, or the potential for long-term, reputational damage to the design professional that may far exceed the amount involved in the dispute.

Finally, many design professionals believe arbitration can level the playing field where they are the “out-of-town” party or the less influential or politically-connected party, such as in disputes with local governmental entities or a large, local employer.

Undoubtedly, arbitration clauses are here to stay in the construction industry. Design professionals, however, should carefully review with an experienced attorney whether arbitration may be the right choice on the project, and then carefully draft an arbitration clause that achieves the benefits intended.

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20170712_113656Timothy B. Soefje is Managing Member and head of the professional liability section at the boutique firm of Seltzer │Chadwick │Soefje, PLLC based in Dallas, Texas. For regular information about professional liability matters, follow him on Twitter at @TimSoefje and search #ProfessionalLiability. For more information, visit us at www.realclearcounsel.com or contact him at tsoefje@realclearcounsel.com.

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