Wednesday, November 18, 2009

Consistent Contract Drafting Will Keep You from Fighting the Same Dispute in Both Arbitration and Litigation

Opinions on arbitration as an alternative to traditional litigation are as varied as there are contractors and lawyers who draft the contracts. There are certainly benefits and drawbacks to both forms of dispute resolution. However, prudent contractors should decide which form is appropriate for the job and make sure all contracts within that project are consistent. Otherwise, you run the risk of having to fight the same battle in both litigation and arbitration at the same time.

Let me provide an example on the importance of consistency in dispute resolution forums. You’re the general contractor on a project, and the owner insists on an arbitration clause in your contract whereby all disputes between you and the owner will be sent to arbitration. You aren’t particularly a fan of arbitration, but it was a big deal to the owner, so you went along with it. With the prime contract in place, you execute contracts with all the subcontractors that are needed to bring this project to life. Since these contracts are for smaller dollar amounts, they are simpler, more form-based, and do not include arbitration agreements. So far, this probably sounds like a pretty common scenario. However, by this point, the potential for problems has already been created.

Things are going well on the project until the electrical contractors make a mistake (sorry to pick on the electricians in this hypothetical). They are willing to fix their mistake, but it has added 3 weeks to the project. They also blame the mistake on an ambiguity in the engineer’s plans and have requested a significant change order on the pricing for this correction. Unfortunately, by the time this mistake has been corrected and is ready for inspection, the engineer has gotten extremely busy and cannot make it to the project site for the inspection for another 2 weeks.

Then bad weather delays inspection by another week. All of a sudden, the project is 6 weeks off schedule. The owner is upset at the delay, you’re mad at the electrical contractors for getting the project off schedule, and the electricians are not happy because you’ve withheld payments because of their delay (which they blame on the engineer). Before you know it, you’ve been sued by the electrical contractor for payments, and the owner has begun arbitration proceedings to recover delay damages. You’d like to consolidate these disputes into one case–however, the owner has a valid arbitration clause and refuses to go into traditional litigation, and you have no basis to force the subcontractor out of court and into arbitration. So you’re left fighting two battles at twice the cost, twice the time, and twice the headache.

At some point, every contractor will have a project that involves both upstream and downstream disputes similar to this hypothetical scenario. So how can a builder avoid being torn in two directions? The key is through good planning at the contracting stage. Have a careful eye to the dispute resolution forums in your contracts. If the contract is silent on this issue, then that means any dispute will be traditionally litigated through the courts. If there is a valid arbitration agreement, then that is where any disputes will likely be determined.

To prevent being dragged into both arbitration and litigation at the same time, make sure all your contracts on a project are consistent on the dispute resolution forum. If one contract has an arbitration clause, make sure all your contracts contain a similar provision. Conversely, if the "upstream contract" makes no mention of arbitration (meaning litigation would be the dispute resolution forum), keep your "downstream contracts" silent as well.

As with any construction project, the key is good advance planning. Adding a little forethought to your contract will help avoid being torn in two directions later should disputes arise.


Hi Vis said...

Great suggestion.
I didn't know that this dispute inconsistency could cause such problems.

Hi Vis said...

If construction and the constant threat of litigation isn't bad enough,.... being involved in arbitration and litigation both at the same is more than I care to think about. Thanks for pointing out the potential pitfall. Hi Vis

Anonymous said...

Awesome! Immense information there.
electrical contractors

mark smith said...

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