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Take Control: Customize Construction Agreements to Limit the Time and Costs of Potential Arbitration

By James E. Braza

Arbitration was once the industry’s preferred mechanism for resolving construction disputes. This has changed significantly in recent years as construction disputes addressed via arbitration have become no less costly, timely, or efficient than traditional litigation. Often a party’s (or its attorney’s) zeal to engage in broad discovery efforts virtually double or triple the transactional costs of arbitration and prolong ultimate resolution by many months or even years. Similarly, post-decision litigation fights over an arbitration award’s enforceability sometimes unduly prolong the achievement of finality, which is one of arbitration’s most valued benefits. Burned by one or more of these experiences, construction players now often choose litigation instead, believing that they will not spend any more or delay the achievement of finality any further by avoiding arbitration altogether.

However, before permanently throwing arbitration on the trash pile, it is important to consider the extent to which you can control—through careful planning and contract drafting—the very processes that have created potential for bad arbitration experiences in the first place. Herein lies the most fundamental difference between litigation and arbitration. In litigation, all disputes are governed by pre-ordained procedural law, and the availability of discovery has few limits. To the contrary, arbitration is, first and foremost, a process that only governs a dispute by agreement of the parties. In which case, the parties have the power of defining the rules. Put another way, parties to a construction dispute can control their own destiny by agreeing in the construction contract itself (long before disputes arise) to certain limitations and rules that could: 1) substantially reduce the costs of the arbitration process; and 2) ensure that final resolution will be achieved within agreed-to time frames. Here are several alterations for consideration:

Streamline the Discovery Process

When finalizing the construction contract, consider streamlining the discovery process by agreement in the dispute resolution procedures. The reality is that the costs of discovery in arbitration often account for between 50% and 75% of the total costs of the proceeding (which often are not recoverable, even with a favorable arbitration award). So define and limit the bounds of this expensive process by including specific limitations on discovery in the contract itself. For example, the parties could consider some or all of the following:

    1. Deposition discovery could be altogether eliminated.
    2. Depositions could be limited to those of expert witnesses, plus one or two fact witnesses on either side.
    3. The number of depositions permitted could be tied to the amount in controversy. For example, for claims of $250,000 or less, depositions could be eliminated; for those of higher value, they could be limited to a specific number.
  1. Document discovery could be limited to specified items or categories. For example: a) document discovery could be limited to specific types of files on identified data bases (i.e., cost tracking or certain types of internal communications); or b) the parties will not be required to engage in expensive e-discovery vendors to find, image and copy data from servers as is often the case in modern litigation.

True, there are risks inherent in limiting discovery. And some lawyers will advise against it because they are conditioned to avoid any surprises at a trial by turning over every rock in search of the proverbial smoking gun. However, it is a rarity in which the value added by an extensive discovery process merits the high cost of such an approach. If a party can achieve 75% of the value of a discovery process for just 25% of the cost, then limiting the discovery process is likely a risk worth taking.

Limitations on the Process Itself

Also within the arbitration agreement, the parties should consider agreeing in advance to limitations on the duration of certain pre-hearing and hearing activities. Another major driver of the reticence to arbitrate in recent years is the sheer length of time that it takes to get from the filing of a claim to the issuance of a final decision. Here, too, the parties can control their destiny with front-end planning. Consider an arbitration agreement in which the parties agree to terms such as:

    1. The time between filing the complaint, the claim and the conclusion of the hearing be limited to 120 days.
    2. The arbitrator or arbitration panel be required to issue a decision within 30 days of the completion of the hearing.
    3. The hearing be limited to two days for claims of less than $500,000, and to one week for claims between $500,000 and $5 million.
  1. The parties agree to have equal time for the presentment of witnesses/evidence at the hearing, and specifically, with each witness.

There are many other ways in which parties can customize their arbitration agreements to take control of the process and ensure that arbitration will achieve the objectives of lower cost and timely resolution of construction disputes. With proper planning and negotiation during the contract drafting stage, parties can ensure that they will obtain the significant benefits of an arbitration forum while themselves managing the costs thereof.

If you have any questions regarding the applicability of these concepts within your future or pending construction contracts, please contact your Davis & Kuelthau, s.c. attorney or the author, James E. Braza, at 414.225.1421 /