Arbitration is a common method of dispute resolution in construction contracts between clients and contractors and clients and design professionals, on both residential and commercial projects. It is also used in other business areas, such as shareholder agreements and other types of contracts such as employment agreements. The key is that an arbitration provision must be in a signed, written agreement between the parties. Since litigation has become so public, with court documents being posted in e-courts and available for viewing by anyone, arbitration is that much more appealing due to the “privacy” it offers. The pleadings are kept private, as are all the document exchanges. On e-courts, all of the motions and exhibits are public. If you have proprietary designs or ideas that you want to keep private, arbitration is a good vehicle to use for dispute resolution.
If everything goes according to plan, when the parties have a dispute, one or both of them can commence an arbitration. I say, “according to plan,” because sometimes an aggrieved party simply ignores the arbitration clause in the contract and instead starts a lawsuit in court. That puts the burden on the other party to go to court to file a motion to compel that party to arbitrate instead, as required by the terms of the contract.
“Why would someone do that?” you may ask. Sometimes the party is just hoping you will not mind having the court decide it instead and will just proceed. They may be hoping you will not go to the trouble and expense of filing a motion to compel arbitration. Other times, they are focusing on a technicality and hoping to use that to be able to litigate. For example, sometimes one party has not countersigned the contract with the arbitration clause and they are hoping to use that to their advantage. The contractor may sign the contract, send it back to the client, then start the project without the client actually countersigning the contract. They go forward with the contract and make payments as though the contract was fully signed.
The argument that the arbitration clause is not valid usually does not work, because the “intent” to have the contract arbitration clause govern may be proven to the court. The party wanting arbitration would have to ask the court to “stay” the lawsuit and require the other party to arbitrate. Arbitrating might dispose of the entire dispute or it might dispose of some issues, then the parties would have to return to court to litigate what remains. You can have a situation where an issue is arbitrated, such as breach of a construction contract and after it is decided, it goes back to court for the court to handle the foreclosure of mechanic’s lien issues.
I never assume that there is a signed contract. Often when I ask clients for a copy of their contract, they send me an unsigned copy and say “Don’t worry. We have a signed one. I just can’t find it.” Other times, they give me a contract only signed by one party. Having an unsigned contract with an arbitration clause in it does not satisfy this requirement. In order to commence an arbitration, you have to furnish the American Arbitration Association (AAA) with a copy of the signed contract. If you start a court case, there is no need to attach the signed contract to the complaint.
What is being discussed here is different from the kind of arbitration which is contemplated in commercial leases, where the parties select arbitrators who are just experienced people from their industries
The dispute must be one that is arbitrable under the arbitration provision in the signed contract between the parties. In other words, let’s say that one party thinks he is entitled to a bonus, based on conversations which occurred between the parties, but this is not something that was ever drafted into the contract between them. Perhaps there is some email discussing the topic or there were just verbal discussions. They may have a signed written contract calling for arbitration of disputes under the contract, but this issue may not fall under the arbitration provision in the contract. This can be a tricky subject, because one party may start an arbitration over such a subject and the other party may try to block it. The issue of arbitrability may be handled by the organization overseeing the arbitration, such as the AAA, or it may require going to court.
Having to go to court to litigate these issues makes the notion of arbitration being an economical method of dispute resolution go out the window. The hearing process on such motions can be extensive, costly and time consuming. It involves appearing in court and filing briefs.
Some people mistakenly think of arbitration as a group of people sitting around a table and “talking it out.” In fact, it has become an extremely formal and expensive process. It is a lot like going to court, but a little looser as far as the rules of evidence, objections and motions. The claimant pays a filing fee when commencing the proceedings, based on a sliding scale and the amount in dispute. If there is a counterclaim, the respondent also has to pay a filing fee based on the amount of that party’s counterclaim. Next, the parties share equally in the expense of using the AAA venue for the hearings and the expense of the arbitrator’s time. All of those fees are paid up front, before the hearings begin. This may involve thousands of dollars of fees being paid before any hearings begin.
Mediation is often required before arbitration. It tends to be more like just sitting around a table and talking. It can be effective if the mediator handling the case really wants to try to resolve the matter by working with the parties. Some mediators say just look to see if the parties have tried to settle, then does not push further.
A less formal version of this is what occurs when courts have “settlement conferences.” They are a very expedited way of having a similar experience. The clients are usually not there when these discussions are initiated, but some judges will get the parties more involved if they see that there is progress being made. These discussions are not binding unless the parties actually agree to settle.
Any attorney who arbitrates has to be the kind of person who can think on her feet and deal with surprises. There is usually less discovery done before the hearings begin. This makes it more likely that issues will come up in the course of the hearings which require the exchange of more information. Be sure to work with an experienced litigator who will be able to handle such things.
C. Jaye Berger, Esq., is the principal of The Law Offices C. Jaye Berger, New York, N.Y.