Arbitration is often touted as a more informal, affordable, and expeditious alternative to the traditional litigation and appeals process. Arbitrations also benefit from the involvement of one or more neutral third-party arbitrators (the “Panel”) who are usually experts in the subject field of the dispute and who presumably are better prepared to analyze expert testimony and make informed findings of fact. These advantages are particularly significant in disputes related to construction projects, where a judge or jury may have little or no experience evaluating such frequently contested issues as quality of work, construction pricing, standards of care for architects and engineers, and/or CPM schedule and delay analysis.

Although commercial contracts often stipulate that disputes will be resolved through arbitration rather than litigation, the typical arbitration clause does nothing more than spell out such basic procedural issues as the number of arbitrators that make up the Panel, the method of selecting those arbitrators, the choice of law to be applied by the Panel, and the venue for the hearing. Similarly, a boilerplate arbitration clause might stipulate that the arbitration will be administered by an alternative dispute resolution provider such as JAMS or the AAA, and run in accordance with the standard procedural rules used by that administrator.

As discussed below, the savvy contracting party should consider taking advantage of the contract formation process to craft arbitration provisions that provide for streamlined, cost-effective, and innovative procedures for the resolution of contract disputes. The discussion below outlines just a few of the subjects that contracting parties may wish to consider when drafting arbitration provisions for construction contracts. A carefully drafted arbitration clause has the potential to drastically reduce the cost, duration, and overall inconvenience associated with resolving what could be a very complicated construction dispute.

Streamlining Discovery and the Hearing

Discovery – the process by which a party to a lawsuit obtains information before trial through demands for production of documents, interrogatories, requests for admission, depositions, and other means – can account for up to 80% of the cost of a litigation. The cost of discovery can skyrocket when the procedures in place require reviewing and producing significant amounts of electronic information (not only e-mail, but electronic information contained on back up tapes, files, disks, and servers), as lawyers and litigants are now compelled to do under the Federal Rules of Civil Procedure pertaining to electronic discovery.

Contracting parties have the ability to streamline the scope of permissible discovery in arbitration in any number of ways – up front and in advance of any actual dispute – by including specific limitations on discovery in their contractual arbitration provisions. The most obvious way of containing the cost and duration of discovery is to include specific provisions regarding the number of permissible depositions, interrogatories, and requests for admission (if any).

Contracting parties can also place limits on the cumbersome document discovery process. For example, the parties might agree that some set scope of e-mail discovery will be produced by both parties. On the other hand, the parties might agree that other types of electronic discovery – which may require the costly retention of electronic discovery vendors to digitally image and copy disks and servers – will not be produced by either party, or will be strictly limited to certain types of files (for example accounting and cost-tracking files that are frequently maintained on electronic databases only).

Placing limitations on the length and scope of the hearing, as well as discovery, can also prove valuable. For example, the parties might agree to limit the number of witnesses that can be called to testify at the hearing and/or set time limits for each witness’s testimony. Alternatively, the parties could stipulate that the hearing will not last longer than a specified number of days (say, two calendar weeks) and that the parties will have equal time to present and cross-examine witnesses. Any reduction in the length of the hearing is likely to substantially reduce the cost of arbitration, especially because the parties are jointly responsible for compensating the Panel members for their time in a private arbitration proceeding.

Varying Tiers of Disputes Procedures

Contracting parties may choose to go further still when customizing an arbitration clause, and provide for different disputes procedures depending on the magnitude (dollar value) of the claims or credits at issue. By way of example only, for claims of less than $500,000,the parties might stipulate that there be no discovery except for an exchange of documents and/or that each party may present no more than two (2) witnesses at any hearing. For claims of less than $1,000,000, the parties might agree that each party may take a maximum of four (4) depositions and/or that electronic discovery be limited to the exchange of Project e-mails of no more than four (4)witnesses per party.

Similarly, the parties might agree to vary the time period for discovery, the extent of written discovery (in the form of interrogatories and requests for admission), the length of the hearing, the availability of expert testimony, or even the number of Panel members based upon the value of the claims at issue. Other issues that could reasonably hinge on the dollar value of the dispute include the availability of discovery from third parties and whether mediation shall be a mandatory pre-requisite to arbitration.

The ways in which the parties can tailor the contractual disputes procedures to the size of the dispute are almost endless. Counsel can be of great assistance in advising what disputes procedures are dispensable and/or cost-effective in comparison to the value of the claimed or expected recovery.

Limits on the Arbitrator’s Authority to Issue an Award

Standard arbitration provisions often include some limit on the Panel’s authority, such as the Panel’s ability to award attorneys fees and/or interest to the prevailing party. There are, however, some more innovative options available to parties that wish to place additional restrictions on the Panel’s authority to issue an award.

Rather than simply providing the Panel unfettered authority to issue an award of money damages based upon the evidence presented at the hearing (and bearing in mind that unlike in a legal action, an arbitration award typically cannot be appealed because the Panel made errors of law or fact), there are a number of ways in which parties may constrain the possible results of the arbitration. In “baseball” arbitration, for example, the Panel is required to make an award by selecting only the final offer made by either party. This either/or outcome provides both parties greater incentive to seek a reasonable award and arguably prevents the Panel from simply “splitting the baby” in any given dispute.

Similarly, the parties might elect “night baseball” arbitration, where the parties establish their final offers but do not reveal them to the Panel. The offer that is closest to the Panel’s decision then becomes the binding arbitration award.

Finally, the parties might elect a “hi/low” arbitration, where the parties must establish –prior to the hearing – a high and low award number, which act as the ceiling and floor for the Panel’s award. The high and low numbers are usually not disclosed to the Panel.

Whether the self-imposed award limitations of “baseball” and “hi/low” arbitration are a good thing is matter of some debate, and a party’s preference for such procedures is likely dependent on its aversion to risk. It is a good idea to discuss with counsel the merits and potential disadvantages of these alternative award procedures, and to seek assistance in drafting the relevant contract language, when including such provisions in your agreements to arbitrate.

Conclusion

Arbitration provisions provide contracting parties with the opportunity to craft disputes procedures that are responsive to the needs and preferences of the sophisticated parties to a construction contract and to the actual dollar value of the claims at issue. Arbitration provisions can be negotiated up front, prior to the emergence of claims or disputes, or even after the dispute has arisen and both parties are willing to recognize the benefits of establishing a streamlined disputes process. In fact, parties may be more willing to explore alternative means of structuring the arbitrator’s award, such as “baseball” or “hi/low” arbitration, when they have a better understanding of the dispute and the range of possible outcomes.

As always, it is a good idea to consult counsel when drafting the contract language for disputes procedures in arbitration, or, for that matter, when drafting any novel or complicated contract language. Particular care should betaken to ensure that the customized disputes procedures do not conflict with other provisions in the agreement, and that those procedures do not conflict with relevant statutory provisions, as outlined in such arbitration-enabling statutes as the Federal Arbitration Act or state codifications of the Uniform Arbitration Act.

The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.