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June 2020

Arbitrating Construction Matters: A Preferable Means of Resolution in Light of the COVID-19 Pandemic?

Do we advise our contractor clients to litigate or arbitrate? It is a question that is considered frequently in the construction context; however, with the COVID-19 pandemic and a “new normal” that is all but certain to develop, arbitration may become a preferred means to resolve disputes.

The general theme in Tennessee arbitration law (as well as federal law) is that courts will uphold the parties’ contractual agreement to arbitrate disputes. In fact, arbitration agreements are favored in Tennessee courts. See Benton v. Vanderbilt University, 137 S.W.3d 614, 617 (Tenn. 2004). In adherence with the Tennessee Arbitration Act, courts are required to construe an arbitration agreement as broadly as the words and intentions of the parties and will resolve any ambiguities in favor of arbitration. Wachtel v. Shoney’s Inc., 803 S.W.2d 905, 908 (Tenn. Ct. App. 1991).

With that being said, here are some key factors to consider when advising a client whether to agree to arbitrate:

  1. Ability to have all Players Agree to Arbitrate

A party cannot compel another to arbitrate unless that person agrees and if parties have contractually agreed to arbitrate, one party cannot compel another party to litigate. Thus, it is important that all potential parties have a consistent dispute resolution protocol in place. For example, if a prime contractor is involved in a claim from an owner and seeks to assert a corresponding claim against a subcontractor, it is important that they be involved in the same dispute resolution process to ensure a consistent outcome. To do so, the prime contractor must make sure that each contract it enters has consistent dispute resolutions protocols.

  1.  Need for Discovery

While litigation affords parties the opportunity to conduct whatever discovery that is “relevant to the subject matter involved in a pending action” as per Tennessee Rules of Civil Procedure, the amount of discovery allowed in arbitration is generally far more limited, since arbitration rules do not give the parties the right to conduct discovery. In situations where reducing costs is a high priority, arbitration – with its limitations on discovery – would be the preferable option over litigation.

  1. Ability to Appeal a Decision

Both federal and state arbitration law provides the bases to vacate an arbitration award; however, successfully doing so is extremely difficult. Thus, it is safe to say that a decision rendered in arbitration will not be subject to review by a court. Additionally, arbitration rules have not included a process by which a party can appeal a decision. As such, if a client has misgivings about bestowing the decision-making over to an arbitrator without the chance for judicial review, then the inability to appeal would be a drawback to arbitration.

  1. Predictability

Litigation is governed by various rules set forth in the Rules of Evidence, Civil Procedure, and common law. For example, an attorney representing a prime contractor will generally be able to predict what other party(ies) may be joined to the case based upon the nature of the claim, how much discovery will be needed to prove or defend against a particular claims, and what to expect from a particular judge or within a particular venue. Thus, with litigation comes a certain degree of predictability. Conversely, in arbitration, a lot of these issues are left to the discretion of the arbitrator and thus more difficult to predict how they will be decided.

  1. Costs

Traditionally, recognized arbitration providers (e.g., American Arbitration Association) have advertised arbitration as a more cost-effective means to resolve disputes than litigation. Recently, however, such a position has been called into question, largely due to the administrative fees charged by the nationally recognized arbitration providers. For example, the American Arbitration Association charges fees ranging from $1,550.00 for a claim up to $75,000.00, and $77,500.00 for a claim that exceeds $10 million. In addition, parties must also pay the arbitrator’s fees. Such fees vary based upon the nature of the claim. In a large, complex construction dispute, which typically involves a three-person panel of arbitrators (who may each bill an hourly rate of $400.00 + per hour), the fees could become significant. Therefore, as a general rule, arbitration is usually less expensive in small cases but is not always the case in more complex matters.

The arrival of the COVID-19 pandemic has impacted all aspects of daily life and the full extent of its fallout has yet to be determined. The extent of the impact on local contractors, business owners, design professionals and the construction industry itself remains to be seen; however, it is almost certain that those most affected psychologically and financially will want to reassess their respective state of affairs, including any dispute resolution procedures. Arbitration agreements may afford the means to achieve a more controlled, cost-effective resolution process for disputes. But since every client is unique, this process becomes a fact-drive, case-by-case analysis.

Construction

Adam J. Hiller



Construction