Construction: Do We Really Have To Arbitrate?

Arbitration is a common way to resolve construc­tion disputes. Rather than starting a lawsuit and asking a judge to rule on the issues in a pub­lic courtroom, the parties hire a private arbitra­tor to decide the matter behind closed doors. Yet despite its wide use in the construction industry, arbitration is not for everyone.

Sure, arbitration has some advantages. It allows the parties to choose a decision maker with industry experience and technical knowledge rather than being assigned to the next judge on the court’s hearing list who may not know a Gantt cha rt from a grommet. It also lets the parties pick their proced­ural rules to streamline the process and minimize the cost. And arbitrations can be held in private, with neither the evidence nor the award becom­ing public knowledge.

But rightly or wrongly, sometimes a party to a dispute sees one or more of those advantages as the very reason why arbitration is not a good idea. For example, maybe one party ischallengingan entrenched industry practice and thinks a dispassionate judge with fresh eyes would be a better choice than an industry insider who is lost in the underbrush. Or maybe one side’s shenanigans have convinced the other side that the robust rules of court, enforced by a judge, are necessary to keep everyone in line. And sometimes what one side really wants is a public hearing followed by a published ruling from a judge that clarifies the law for future disputes.

So do we really have to arbitrate? Or more to the point, what happens when one side wants to submit a dispute to arbitration and the other side-stridently, ardently, vehemently-does not?

The first place to look in answering this question is in the contract governing the parties (assuming there is a written contract). It’s trite law that the parties must agree to arbitrate, and that agreement might be in a contract signed months or years ear­lier. If that contract does not mention or mandate arbitration, it is unlikely that one side can drag the other into an arbitration against its wishes.

(It’s worth remembering that subcontractors might be subject to the terms of prime contract between the general contractor and the owner, and the requirement to arbitrate-even for sub­contractors-might be found there.)

If the contract does provide for arbitration, the wording is crucial. Every contract is different, but there are some common themes.

First, some contracts make arbitration optional, requiringthe consent of allsides. lfoneside refuses, the other side cannot force arbitration and the dispute must go to court.

Second, in some contracts there is no arbitra­tion unless one party demands it, but when that demand is made the other side cannot refuse.

Finally, some contracts make arbitration man­datory. The parties agreed when they signed the contract to use an arbitrator to resolve their dis­putes. They are bound by that agreement and must abide by its terms. If they try to go to court, the judge will send them back to arbitration.

But even when the contract requires arbitration, the precise terms need to be considered carefully. It may be that the contract limits arbitration to specific issues. I had a case recently in which the contract required arbitration of disputes about performance and delay, but expressly excluded arbitration for disagreements about default or termination. We couldn’t agree and asked a judge; she said the claim was outside the issues the con­tract required to be arbitrated and directed that the underlying dispute be decided in court.

Similarly, the contract might require that the par­ties take certain steps within a certain time frame, such as giving notice or attempting to negotiate, as a precondition for arbitration. Ignore those steps or miss those deadlines and the right to demand arbitration may be forfeited.

In the end, there is no magic answer here: whether the parties must arbitrate a construction dispute depends on the precise terms of the agree­ment they made.