Arbitration in Construction: A Growing Option for Settling Liability and Contractual Disputes
By Paul Hohlbein, Co-President, BTIS
Supply chain disruptions. Inflation. The labor shortage. The construction industry is grappling with several challenges that are resulting in an increase in contractual disputes and a significant rise in liability lawsuits.
To further exacerbate the issue, insurance-related construction claims have become more complex and larger in scale compared to those in previous years, with many involving damages above the $50 million mark.
According to the International Chamber of Commerce (ICC), these claims trends have many construction companies making the decision to settle disputes out of court by way of arbitration. The New York Law Journal notes that as it becomes more difficult to finance new and existing projects, more construction companies will likely continue to use the arbitration process in an effort to help recover lost capital.
Arbitration is essentially a lawsuit without the involvement of a court. If two parties cannot agree on a solution, the appointed arbitrator can make a binding decision to settle the dispute.
Why Arbitration?
Arbitration is essentially a lawsuit without the involvement of a court. If two parties cannot agree on a solution, the appointed arbitrator can make a binding decision to settle the dispute.
When settling a dispute in the construction industry, the arbitrator is typically a construction subject matter expert (unlike a judge who is likely a generalist, or a jury with no construction experience). For example, the arbitrator can be a construction lawyer or an individual with extensive construction industry knowledge.
According to the law firm Ward and Smith, enlisting an arbitrator who readily understands the construction industry helps “reduce the time and effort necessary for attorneys to educate the arbitrator on construction issues and makes them better suited to rendering a decision in the case.”
Arbitration is also a less formal process, making it (in most cases) a more time-efficient and cost-effective way to settle a dispute. Due to the more casual nature of the arbitration process, a certain degree of flexibility is permitted, allowing the two parties and the arbitrator to structure and conduct the proceedings in a manner that best serves the needs of all involved.
Another appealing factor of the arbitration process is that once an arbitrator has made a decision, it typically cannot be appealed unless there is evidence of fraud or other illegal conduct. As a result, a final resolution may be made much sooner. In fact, fast-track arbitration (an option set by the American Arbitration Association for cases up to $100,000 or by the ICC for cases up to $2 million) requires a decision to be made within 60 to 90 days after the initiation of a case in an effort to produce a faster and less costly outcome. Once the decision in a fast-track case is final, the award must be honored within seven days.
" ... enlisting an arbitrator who readily understands the construction industry helps 'reduce the time and effort necessary for attorneys to educate the arbitrator on construction issues and makes them better suited to rendering a decision in the case.'"
– Law Firm of Ward and Smith
Conclusion
Arbitration in construction contracts has become more common. And while the arbitration process may not be right for every construction business, for some it can be a less expensive and quicker way in which to settle insurance liability and contractual disputes.
Paul Holhbein is a Co-President of Builders & Tradesmen's Insurance Services, Inc., an Amynta Group Company.
Builders & Tradesmen’s Insurance Services Inc.
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