Five Reasons to Read the Dispute Resolution Clause in Your Construction Contract
Blog Post Date: 17-Oct-2016
Author: Corbin Devlin
Dispute resolution clauses are rarely the subject of negotiation. In my view, they are badly overlooked. Assuming that the construction contract in front of you proposes arbitration, what are some of the most basic, potential issues of concern?
Proceedings in a Distant Land
If your place of business is in Nisku, Alberta, do you want to have to travel to London, England or Abu Dhabi to resolve a payment dispute, because that’s where the contract says arbitration must take place?
The Other Guy Gets to Choose
The unilateral right to appoint the decision maker is a tremendous advantage in any dispute resolution process. This is rare but not unheardof. Don’t ever agree to such a clause.
A Slow Arbitration Process
One of the key advantages to arbitration over litigation is the prospect of a quicker resolution. While this is usually true, some arbitration processes are not speedy at all. I was recently involved in an arbitration process that required four months of procedural steps prior to even appointing the arbitrator. If the dispute resolution process involves multiple steps, and each step is mandatory, and each step has a timeline associated with it, add up those steps and timelines to see if you can tolerate how long it might take to get to a decision. Some arbitration processes are almost as slow as litigation, and even more costly.
A competing consideration is the reasonableness of the timelines. That is, timelines that are too short can also be problematic. In particular, avoid unreasonably short timelines for giving notice of a claim or dispute.
Many dispute resolution clauses do not contain any rules for the process. For example:
- Will there be one arbitrator or three?
- What is the process for selecting the arbitrator(s)?
- Will there be questioning?
- Document disclosure?
- A full blown oral hearing with live witnesses?
- What are the rules of evidence?
- What are the timelines?
These rules matter greatly, in terms of how quick/fair, efficient/robust, simple/costly the process will be. If there are no rules prescribed, then be warned: there will be extra time and cost involved to negotiate and/or have the adjudicator establish the rules.
Rules of arbitration are sometimes set out in the contract (or a schedule), but more often they are incorporated by reference. For example, a contract might simply make reference to the rules of dispute resolution published by an organization such as the Canadian Construction Documents Committee, the ADR Institute of Canada or the International Centre for Dispute Resolution. These rules vary significantly; all have pros and cons, and one set of rules might be perfect for one contract but wrong for another. The choice of rules deserves some advance thought. In my view, at the simplest, it is better to have any fair set of rules than to mandate arbitration without any rules at all. (Note: A clause that merely says arbitration will take place “in accordance with the Arbitration Act of Alberta” or something similar is still an arbitration clause without rules; the Arbitration Act deals with jurisdiction and rights of appeal… it does not set out rules for the arbitration process.)
Many Other Factors
There are a lot of other considerations that may be pros or cons depending on your perspective. Is the process final and binding? Is arbitration mandatory, or does the dispute go to arbitration only “if” the parties agree? Is non-binding mediation (and/or a progressive negotiation process) required, before the start of binding arbitration? Is arbitration suspended until completion of the project? Is the arbitrator allowed to award legal costs to the successful party? In a multi-party situation, are all necessary parties bound to the same dispute resolution process? (See also my prior post on the pros and cons of arbitration vs. litigation.)
Dispute resolution clauses are often taken “off the shelf.” Yes, there are other issues that are usually much more pressing when you are negotiating the terms of a construction contract. In the end you may decide to live with whatever dispute resolution process the other party has proposed. But don’t sign without at least considering if the dispute resolution clause is flawed or unfair.