Sunday, April 26, 2009

Should Every Construction Contract Have an Arbitration Clause?

I am an arbitrator for a number of arbitration organizations, but I have mixed feelings about arbitration clauses in constuction contracts. The interesting thing is that they are standard in many form contracts, and parties do not give them a second thought. As with all aspects of a contract, participants need to make informed decisions about what they are agreeing to, but I would guess that many contractors sign contracts that are presented to them without carefully reading them.

Arbitration is a terrific process. The arbitrator acts as a private judge and is chosen (usually) by the parties. The rules of evidence do not apply, the process can be scheduled at the parties' convenience, and it can save both money and time.

Here's the down side: arbitration is binding and non-appealable. The bases for overturning an arbitration are incredibly limited. In Massachusetts, an arbitrator's decision can only be overturned for fraud or bias on the part of the arbitrator. In other jurisdictions, "manifest disregard of the law" forms a basis for an appeal, but not in Massachusetts.

So, think carefully about agreeing to a process from which there is no return. Agree to it with your eyes open, and make sure that you pick your arbitrator carefully. That choice will determine the potential for a positive outcome.

The next post will discuss the wording of arbitration clauses.