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March 2007

Legal Issues

Arbitration Clauses:
The Devil is in the Details

A great deal of attention is focused on the big question of whether arbitration is preferable to litigation. Many contractors overlook the hidden details that often can define the answer to that question. The method of choosing an arbitrator, initiating a proceeding, and selecting an administrative entity can have a huge impact on the costs and relative advantages or disadvantages of arbitration. The devil is often in the details.

Choosing the Entity Administering the Arbitration
One of the most important factors to consider when contemplating an arbitration clause is the choice of the entity administering the arbitration. In the construction industry, the parties often choose the American Arbitration Association (AAA), almost by knee-jerk reaction. The AAA is included as the arbitrator of choice in American Institute of Architects form contracts, along with those of other trade associations. In addition, the AAA has played a central, historic role in the development of arbitration. Finally, AAA has a well-developed list of potential arbitrators in most jurisdictions.

The AAA is facing serious competition, however, in some localities and regions. Before blindly accepting the AAA as your choice, you should analyze the filing fees, likely costs and the lists of available arbitrators provided by the different arbitration firms in your area. You may find that the competition has comparable or even better available arbitrators. You also may find that the alternatives in your area may be less expensive. For instance, in Virginia, there is a growing perception that the AAA fees are becoming prohibitively high and that the file administration service is lagging. Moreover, the competition over exceptional, third-party neutrals is quite fierce.

Choosing an Arbitrator
In addition to the choice of administrative agency, you also have control over the method, number and type of arbitrator you choose. By contract, you can agree upon a specific arbitrator or arbitrators up front, you can agree upon the number of arbitrators, and you even can agree upon a selection method for arbitrators without picking a specific person or persons at the time of contract formation.

Form arbitration contracts often designate a panel of arbitrators as the preferred method. You should consider closely whether your disputes would actually require more than a single arbitrator. Hiring multiple arbitrators can significantly increase arbitration expenses with little or no concurrent gain to the process. Indeed, the process of picking multiple arbitrators can actually become cumbersome, time-consuming, expensive and inhibit the arbitration.

If you decide to use a panel of three arbitrators, you can establish a selection method rather than having an administrative agency. You can, for example, establish that each party picks an arbitrator and those two arbitrators must jointly pick the third arbitrator. It is not, however, a good idea to agree to mutually select a single arbitrator. This arrangement frequently leads to disputes in trying to find a mutually agreeable arbitrator.

In selecting an appropriate arbitrator, you generally want to look for both professional competence and true impartiality. The competence prong of the question often can be substantively researched. With lawyer arbitrators, you want to look for publications, published cases, and decisions or verdicts in representative cases. Prior arbitration experience and training is also helpful. If you agree to use design professionals or contractors, you want to gain an understanding of the substantive construction and/or design experience of the arbitrator. The typical scenario is to use lawyers and judges as arbitrators; you really want arbitrators who will apply the law and legal reasoning to reach a firm result rather than "split the baby."

Finally, you want to pay careful attention to the background of the arbitrator. While most arbitrators will try to be impartial, a lifetime spent representing a single type of party may slant one's viewpoint. For example, if you are a subcontractor, beware of agreeing to a lawyer arbitrator who regularly sues subcontractors.

Conclusion
A careful consideration of the entirety of the arbitration clause is critical to evaluation of whether arbitration is good for your circumstances. In general terms, arbitration often is advantageous to the resolution of certain types of disputes; however, the details regarding the clause in question can often define whether it is best for you. You should always consult your attorney to discuss these factors before blindly accepting the terms of an arbitration agreement.








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