Get Results with Arbitration

I like arbitration. Contractors tend to get a fair shake when they arbitrate disputes. 

Arbitration is usually faster and cheaper than a lawsuit. Another advantage: Most construction disputes are questions of fact, not law. You need an arbitrator with common sense, not a judge and two attorneys with law degrees. Maybe the best reason to arbitrate: It puts the owner’s attorney at a disadvantage: Your dispute isn’t going to court. Threatening to sue is pure hot air. If your construction contract requires arbitration, no court will hear the dispute.

What Can Go Wrong?

Arbitration isn’t automatic. Your contract has to touch all the bases. Use this checklist to be sure your disputes get into arbitration – and stay out of court.

• Your contract has to make it clear, “owner and contractor will submit all disputes related to this job to binding arbitration.”
•  Identify the arbitrator. American Arbitration Association (AAA), Construction Dispute Resolution Services (CDRS) and JAMS (Engineering and Construction Arbitration) are common choices. But a Web search will turn up qualified independent arbitrators in your community. Consider a “mobile” neutral – someone willing to meet on the construction site. Ask about fees. Explain you’re looking for an arbitrator to name in your construction contracts.
•  Identify the arbitration rules. AAA, CDRS and JAMS rules are recognized as both fair and comprehensive. Selecting AAA, CDRS or JAMS rules does not mean you have to use an arbitrator recommended by AAA, CDRS or JAMS. Ask the arbitrator you selected about the arbitration rules he or she prefers.
•  Make the arbitrator’s decision final. The words are, “Judgment on the award may be entered in any court having jurisdiction.”
•  Decide on allocation of fees. If you want, give the arbitrator authority to award arbitration fees to the prevailing party.
•  Important! Eleven states void arbitration agreements for residential work if the contract omits special disclosures: CA, IL, MD, MA, MO, NE, OR, PA, SC, TX and VT. See my blog post of December 31, 2011.

 What Can Go Right?

A case decided in Connecticut last month (Ippolito v. Olympic Construction) answers the question. A storm damaged Paul Ippolito’s home in New Canaan. He selected Olympic Construction to make the repairs. Their agreement (AIA Form A133-2009) included an arbitration clause. Arbitration was a good choice. I can’t say the same for using an AIA contract. See my blog post of September 7, 2010.

Anyhow, before Olympic could finish the work, another storm came along, doing more damage. Ippolito and Olympic couldn’t agree on who was responsible for the extra work. The dispute went into arbitration. The arbitrator decided in favor of the contractor, Olympic. At that point, Ippolito took the case to court, claiming the arbitrator’s decision was in clear violation of Connecticut’s Home Improvement Act. The AIA contract didn’t have a starting date, didn’t have a completion date, didn’t have a notice of cancellation and didn’t have the signatures of both owners. All are required by Connecticut law.

Would the contractor have lost in court? We'll never know. The court affirmed the arbitrator’s decision, citing the rule, “the arbitrators' decision is considered final and binding; thus the courts will not review the evidence considered by the arbitrators nor will they review the award for errors of law or fact.”

My point is that a well-drafted arbitration clause can turn a job that’s becoming a sow’s ear into a silk purse. To get the benefit of arbitration in your contracts, consider Construction Contract Writer. The trial version is free.

A.I.A. Contracts vs. ConsensusDOCS

In April 2009, Bennett Builders signed a contract to remodel the Stamford, CT home of Tarun Mehta. It was a cost plus job at a price not to exceed $446,900. Under the agreement, work was to be completed by October 2009. Over a year later, work still wasn’t done and Mehta terminated the agreement. Bennett filed suit for $31,754.94 still due on the contract and asked the court for a pre-judgment remedy, an attachment of $32,000 on Mehta’s home.

This should have been a good job for Bennett Builders. They stood to earn a fee of $31,500. Even if the court denied payment in full under terms of the contract, Bennett should have been able to collect for the value of materials and labor that went into the job. Unfortunately, it didn’t work out that way. Bennett had made a serious mistake, using an A.I.A. contract.

The 17-page contract Bennett and Mehta signed was essentially the American Institute of Architects ("AIA") Document A107-1997 "Abbreviated Standard Form of Agreement Between Owner and Contractor for Construction Projects of a Limited Scope Where the Basis of Payment is a Stipulated Sum." Go to the A.I.A. site and you’ll discover that A.I.A. contracts are “accepted, reliable, fair and flexible.” Fine. But here’s what the A.I.A. doesn’t explain. A.I.A. construction contracts don’t comply with either state or federal law. In most states and for most jobs, a contractor who works under an A.I.A. contract risks serious legal trouble. That’s exactly what happened to Bennett Builders.

On September 23, 2011, the Connecticut Superior Court denied Bennett Builders any relief – nothing under the terms of the contract and nothing for the value of goods and services that went into Mehta’s home. Why? The law is clear. Connecticut’s Home Improvement Act and Connecticut’s Home Solicitation Sales Act require a notice of cancellation in at least 10 point bold type. The A.I.A. contract doesn’t comply with Connecticut law and won’t be enforced by Connecticut courts. You can read the case at 2011 Conn. Super. LEXIS 2481.

I’m often asked to make a recommendation. Which is better for builders, A.I.A. contracts or ConsensusDOCS? I can’t recommend either. Neither includes the notices and disclosures every state requires in construction contracts. These notices vary with the size of the job, type of work, materials used, who signs the agreement and even where the contract is signed. 

To avoid sharing the fate of Bennett Builders, take a look at Construction Contract Writer. The trial download is free – and complies precisely with both federal law and the law of your state.