April 19, 2016

Arbitration in Construction Disputes

There is rarely a construction project that is free from some type of dispute, whether it is workmanship issues, deficiencies, delay claims or simply getting paid for the work that is done. Traditionally, when parties are unable to sort through these items, the recourse has been to the courts. While courts are good at resolving disputes generally and have all the tools at its disposal to move parties along to an eventual trial, the court process can also be cumbersome, time consuming and costly. Judges understand the law, but they don’t always understand the intricacies of a construction project or have the expertise and background to come to the best decision. For these reasons, parties involved in construction projects are resorting more and more to arbitration. Arbitration clauses are common in construction industry contracts (such as CCDC 2) and are often incorporated into sub-contracts through reference to the head contract.

Arbitration is essentially private court with the arbitrator being the decision maker instead of a judge. Arbitration can have many advantages. Given that the arbitration is between parties, it is more private in nature. There is no open court and company documents and pleadings are not made public as they are in the court process. Depending on how detailed the arbitration clause in the contract is the parties have a lot of flexibility in determining how the arbitration will run, what rules will apply and how the arbitrator will be appointed. The process is limited only by the overarching requirement that the parties must be treated fairly and have a fair opportunity to present their case. When a contract doesn’t specify the number of arbitrators, the default position is that there will be one arbitrator. The parties can select an arbitrator who has the requisite expertise in handling the issues of the dispute. If the parties cannot agree on an arbitrator there are also methods to have an arbitrator appointed.

The court process can have multiple steps and applications before something ever makes it to trial. In contrast, arbitrations are usually heard relatively quickly with timelines agreed to by the parties and set by the arbitrator. Since the parties pay the arbitrator directly, the arbitrator(s) will usually release their decision quickly. Arbitrators have virtually all the powers of a court and their decisions are binding on the parties. Once the decision is released, it can be filed at the Court and becomes a judgment that can be enforced in the regular fashion.

Like any dispute resolution method, arbitration can also have its downside, depending on the precise matter in dispute. The provincial court of Alberta now is able to manage disputes up to $50,000. If the likely dispute is under this amount, the provincial court may still be a more cost effective method of resolution. In addition, the court process makes it easier to involve 3rd parties who may be liable but who may not be bound by an arbitration clause. Arbitration can also complicate builder’s liens issues or require that the lien action be stayed until the arbitration decision is reached.

In many construction disputes, arbitration is preferable to litigation. Generally, on large projects owners and general contractors have detailed dispute resolution clauses including mediation and arbitration. Sometimes as the chain of contracts moves down from contract to sub-contracts and sub-sub-contracts and suppliers those parties either do not have a contract at all or they have not turned their minds to the benefits of arbitration for resolving disputes. It behooves every party working on a construction project to turn their mind to how disputes will be resolved. Failure to do so can be costly or leave the balance of power in the hands of the party with the greater resources.

Should you wish to discuss how arbitration clauses can be of benefit to your contracts, lawyers at Walsh LLP have the expertise in drafting model dispute resolution clauses and can assist you should recourse to arbitration become necessary.