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Contract Documents Offer Flexible Dispute Resolution Options for Contractors and Owners

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No one working on a building project ever wants to see their efforts delayed or derailed by a disagreement. But building disputes happen all the time, so it’s important to be informed about and prepared for the dispute resolution process.

Most claims between the owner and contractor are resolved prior to binding dispute resolution; others are typically resolved by either arbitration or litigation, both of which are binding. Here is a look at the entire claims process as it is established in the 2007 AIA Contract Documents, with an explanation of the key differences between arbitration and litigation.

Under the 2007 editions of AIA Contract Documents, when a claim arises during a construction project, a few steps need to occur before binding dispute resolution comes into play. The matter is first referred to an Initial Decision Maker (IDM) who renders an initial decision on the claim. Traditionally, the IDM in disputes between owners and contractors has been the architect. However, the current AIA agreements include a provision allowing the owner and contractor to identify someone other than the architect who will serve as the IDM. They may choose the architect, who is the default, or they may choose a separate party whom they both agree upon. If the contractor and owner choose someone other than the architect as the IDM, the price of that person’s time will be an additional cost.

If one of the parties is unsatisfied with the judgment of the IDM, AIA documents mandate that the claim will advance to mediation before a binding dispute resolution method is employed. During mediation, a third party is appointed to try and resolve the dispute with a mutually agreeable solution. Unless otherwise agreed upon, mediation is conducted under the Construction Industry Mediation Procedures of the American Arbitration Association (AAA). A mediator provided by the AAA typically takes one to two days to review the matter before holding an active meeting between the owner and the contractor. During this meeting, the mediator acts as a go-between and attempts to find common ground and a mutually acceptable resolution. If a construction dispute cannot be resolved by mediation, the claim will advance to whichever means of binding dispute resolution the parties have agreed upon in their agreement.

Historically, the AIA has supported arbitration over litigation. However, in the current edition of AIA documents, arbitration is not prescribed. Instead, the parties to an agreement are able to choose from three options: arbitration, litigation or other. The agreements themselves contain check-boxes for each option. If the parties do not choose a specific means of binding dispute resolution and leave the check-boxes blank, then litigation serves as the default dispute resolution channel.

When it comes to choosing between arbitration and litigation, there are no right or wrong answers, only personal preferences and practical considerations such a time and cost.

The most substantive difference between arbitration and litigation is the process of adjudication. One benefit of choosing arbitration is that the arbitrator of a claim will typically be a current or former industry practitioner who is very familiar with construction. Many arbitrators are construction lawyers, architects, contractors and construction managers with years of experience in the construction industry. This contrasts with the process of litigation, where most jurors and even most judges are largely unfamiliar with the construction world. For this reason, more basic background and context needs to be explained in a trial. Those who favor arbitration will argue that litigation is more unpredictable, and that an arbitrator’s decision is likely to be more informed than that of a judge or jury.

Like most considerations on a building project, time and money are typically the central factors in choosing between arbitration and litigation, though there is no clear-cut answer for which method is cheaper and faster.  A proponent of litigation will note that there is no payment to a judge and jury, whereas an arbitrator is paid a substantial hourly wage. However, litigation can also entail expensive attorney’s fees. Litigation is usually a longer process, with motions and a full discovery process that can take considerable time and resources. Arbitration is a much more abbreviated process without the discovery phase, though this in turn means an arbitrator may be deciding a case with less information than a judge and jury

A final difference between arbitration and litigation is the appeals process. In contrast to litigation, there are few avenues of appeal in arbitration.

The vast majority of construction projects use arbitration or litigation as the method of binding dispute resolution, but in AIA documents, parties to an agreement may also check the “other” box in their contract. Typically when this occurs, the parties agree upon a specific person on the project team to act as a binding arbitrator. For example, the owner and contractor may wish to avoid the process and the cost of arbitration or litigation and decide to let the architect serve as the binding decider of any disputes.

Again, the ultimate decision of which binding dispute resolution method to use boils down to personal preferences. Many industry practitioners prefer one method over the other because of their past experiences. Agreeing to one approach is just one of the many details to discuss and negotiate when finalizing a building agreement.

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