Arbitration and Dispute Resolution Clauses

Arbitration is the last main type of dispute resolution we will be going over this month. We’ve previously discussed easier and more cost-effective solutions, such as informal dispute resolution and mediation, as well as traditional litigation more commonly known as a lawsuit. Arbitration is very similar to litigation but has some aspects of mediation in it. In this blog we will discuss arbitration and dispute resolution clauses in your construction contract or subcontract.

About arbitration agreement

Arbitration is a dispute resolution process that is the most similar to the traditional litigation process held in our Texas Court System. In arbitration, parties pay a fee to have a case heard by an impartial third party, who has full authority to make a final and binding decision regarding the dispute. Most construction contracts use the AIA model which typically includes arbitration as a form of dispute resolution. Because arbitration can be much more costly than litigation, particularly upfront, arbitration is usually more beneficial to owners and general contractors with deeper pockets than subcontractors or individuals.

Are arbitration agreements legal?

Similar to litigation, arbitration begins by one party filing initiation forms with an arbitration association outlining the details of the claims being made. The arbitration association then notifies the other parties of the claims against it and they typically have a chance to respond and file a similar form indicating their claims or defenses. Parties can choose to be represented by an attorney in the arbitration process, but it is not required.

At the arbitration, each party will be able to offer evidence and witness testimony to prove or defend against claims brought forward. After each party is permitted to present their claim or defense, the arbitrator then makes a final determination regarding the dispute. There is no judge or jury, and the arbitrator’s decision is binding on all parties and is not subject to appeal. This is important to note when agreeing to submit your claims for arbitration. Although there are forms of “non-binding” arbitration, traditionally, this form of dispute resolution is intended to create a final resolution that is binding on all parties. In order to enforce an arbitration award, you have to file it in a traditional Texas court.

What is the arbitration process?

Most arbitration is mandated through contracts between parties entered into prior to a dispute arising. This means that parties may waive their rights to a jury trial before the anticipation of future litigation or before knowledge of a particular dispute occurs. This can be both beneficial and detrimental at the same time, as arbitration typically permits the prevailing party to recover all costs associated with the arbitration proceedings, including attorney’s fees, in addition to any damage award decision made by the arbitrator. It is becoming increasingly popular to have dispute resolution clauses in construction subcontracts stating that arbitration must be used if a dispute arises. For a subcontractor, this can be a very costly and risky way to resolve a dispute. We often recommend to either have that clause taken out of the contract, or have it changed to state that mediation takes place before going to arbitration.

This blog is part of our 2020 Mastering the Subcontract series. Come back each week as we deep dive and pull apart everything you need to know about a subcontract.