Contract Drafting Tips - Arbitration Clauses in Construction Contracts

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June 19, 2007

Because construction projects can be so complex, and it is likely that the subject matter will be beyond the realm of experience of most laypersons who may sit on a jury, the construction industry has a long tradition of providing, in contracts, for disputes to be resolved through arbitration proceedings.

If you choose arbitration, consider these issues in drafting such a provision, regardless of whether you are an owner or even a general contractor:

  • Should you use a neutral service provider, such as the American Arbitration Association (“AAA”), which has published procedural rules and an established roster of neutrals?
  • Do you want to provide for mediation as a condition precedent to arbitration?
  • Do you want all disputes to go to arbitration?
  • Will discovery (i.e. depositions, interrogatories and document review) be allowed?
  • How will the arbitrators be selected, what are their qualifications and how many will there be?
  • What, if any, rules of evidence will apply?
  • Can other parties be joined?
  • May the arbitrator award attorneys’ fees and/or the cost of the arbitration to the prevailing party?
  • Will the arbitration be confidential?
  • Will the award of the arbitrator be “binding and final” or subject to appeal and judicial review and, if so, on what grounds?

In drafting arbitration clauses on a construction project, the owner should take care that the clause in the owner-architect, owner-engineer, owner-general contractor and owner-construction manager contracts each provide that all parties may be brought into one proceeding. Otherwise, the owner may find itself in multiple proceedings with the attendant extra costs and fees and the risk of inconsistent results.

Another approach is to draft the arbitration clause to provide that the drafter of the clause – be it an owner or a general contractor – has the right to elect to proceed either in court or in arbitration.  This provides the flexibility of deciding which venue is appropriate for the particular dispute. 

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Before including such a clause providing the authority to elect between arbitration and court, the law of the state where the project is located should be reviewed. A few states have held that such clauses are unenforceable as they lack mutuality of consideration. Most states allow them in commercial contracts.

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