Arbitration clauses play a crucial role in construction contracts, providing a structured and efficient way to resolve disputes. A well-drafted arbitration clause can save time and money while ensuring that conflicts are handled by a qualified arbitrator. This blog explores the essential elements of effective arbitration clauses, common mistakes to avoid, and key factors to keep in mind when drafting enforceable agreements. Because the law related to arbitration agreements changes periodically, this listing is for informational purposes only, and may not apply to every type of dispute. Accordingly, a contract should be drawn up by and/or reviewed and approved by an attorney who understands the issues and needs of the parties, as well as the applicable law pertaining to enforceable contract terms.
Key Elements of an Effective Arbitration Clause
A strong arbitration clause should include the following key components:
1. Scope of Arbitration
Clearly define what types of disputes will be subject to arbitration. One example: “Any dispute, claim, or controversy arising out of or relating to this contract, including the breach, termination, or validity thereof, shall be resolved by arbitration.” Alternatively, if the parties are looking to have all potential disputes between them be resolved through arbitration, something like the following might be used: “All claims and disputes between Owner and Contractor, including but not limited to, all claims which arise out of or relate to the Work, the Project, this Contract, or any breach thereof, shall be determined through binding arbitration….”
2. Selection of the Arbitration Provider
Although there are multiple arbitration providers, the selection of a specific provider helps avoid ambiguity. If the parties are unable to agree on an arbitration provider after the dispute arises, there may be a need to file a civil lawsuit to obtain a court order directing the claim to arbitration before a specific arbitrator or arbitration provider. By specifying the arbitration provider in advance, the parties may be able to file directly with the specified provider, avoiding the need to file a civil lawsuit first (one common exception is when Mechanic’s Lien claims are being initiated, where an action to enforce the Mechanic’s Lien is typically filed with a court first, followed by a Motion to Compel Arbitration). A court proceeding may potentially still be needed even if an arbitration provision has been well drafted, such as when the specified arbitration provider no longer exists, or where companion relief through a court is needed.
3. Selection of Arbitrator
Specify how the arbitrator will be chosen, such as: “The parties shall mutually select a single arbitrator with the American Arbitration Association with at least 10 years of experience in construction law to arbitrate their disputes. If the parties cannot agree, the arbitrator shall be appointed using the appointment procedures listed in the American Arbitration Association Construction Industry Arbitration Rules.”
4. Governing Rules
Identify the arbitration rules that will govern the proceedings: “The arbitration shall be conducted in accordance with the July 1, 2015 American Arbitration Association Construction Industry Arbitration Rules.” Or: “Unless otherwise agreed to between the parties, the arbitration shall be conducted in accordance with the American Arbitration Association Construction Industry Arbitration Rules which were in effect as of the date listed on page one of the contract.”
5. Jurisdiction
The contract language can expand or contract the ability of the arbitrator to rule upon important matters. For example, the contract language might confirm the authority of the arbitrator to rule on their own jurisdiction, such as: “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.”
6. Venue for the Arbitration
Define the location where the arbitration will take place: “Unless otherwise agreed to between the parties, the arbitration shall be held in [City, State].” Terms may also provide for arbitration proceedings to be held via video conference, such as: “The arbitration proceedings may be conducted via video conference (e.g., Zoom), unless otherwise agreed to between the parties or directed by the arbitrator.”
7. Applicable Law for the Arbitration
Confirming what law will be applied to the dispute, such as: “The law of the state of California shall be applicable to and govern the construction and interpretation of the terms and conditions of this Contract, as well as all other disputes between Owner and Contractor, without regard to California’s choice of law principles.”
8. Terms Governing Discovery in Arbitration
Significant restrictions may be on discovery, unless there are clear terms providing for discovery in the contract. Terms providing discovery vary substantially, but may be akin to the following: “The parties shall each have the right to conduct reasonable discovery, pursuant to Code of Civil Procedure §1283.05.”
9. What Costs and Expenses are Recoverable
It is important to clearly indicate whether attorney’s fees are permitted to be recovered. Typically, arbitration provisions will either provide for attorney’s fees to be awarded to the prevailing party or for the parties to each bear their own attorney’s fees.
10. Final and Binding Decision
Include language stating that the arbitration award is final and enforceable: “The arbitrator’s decision shall be final and binding on both parties and enforceable in any court of competent jurisdiction.”
Key Factors for Drafting Arbitration Clauses
- Avoid vague language: Ensure the clause is clear and enforceable, with specific terms related to the arbitration provider, venue, and applicable arbitration rules.
- Specifically confirm what discovery is permitted: If you don’t specify whether discovery is allowed in accordance with Code of Civil Procedure §1283.05, you may find yourself unable to conduct third-party discovery and/or restricted more than you’d like on both written discovery and depositions.
- Specify cost allocations: Indicate whether attorney’s fees and/or arbitration fees will be recoverable by the prevailing party.
- Confirm if specific language is needed to make your arbitration provision enforceable: Some contracts may have specific terms required by law to make them enforceable.
Conclusion
An effective arbitration clause can make a significant difference in how construction disputes are handled. By drafting a precise and comprehensive clause, parties can minimize uncertainty and ensure efficient dispute resolution.