Drafting Arbitration Clauses in Construction Contracts: Best Practices and Questions to Consider

Many construction lawyers who specialize in transactional work acknowledge that they do not spend much time considering or negotiating the arbitration clauses in construction contracts.  Should an arbitration clause be just a boilerplate provision, taken “off the shelf,” or should it be specifically negotiated and crafted for the particular construction project and to accommodate the parties’ requirements?

Some of the many questions to consider:

• Are any of the provisions of the proposed arbitration agreement inconsistent with other provisions of the contract in which the agreement is embedded, or provisions in any other contracts relevant to the transaction, so as to give rise to unwanted litigation to resolve the inconsistency?
• Should arbitration be mandatory or permissive?
• Should there be one or three arbitrators, should they all be neutral, and should they have particular qualifications or professional expertise?
• Should the arbitration clause specifically incorporate the rules of a particular ADR institutional service provider or should it be “ad hoc”?
• Should the clause contain provisions that modify institutional rules, or specific statutory schemes, or should it set out a detailed regime for the mechanics of the process, including venue, discovery, motions and scope of review?
• Should the arbitrator’s power be broader or more limited than otherwise provided by relevant statutes or rules?
• Should the clause cover claims by or against the parents or subsidiaries of the contracting corporate parties or provide for joinder of other nonparties to the agreement?
• Should the clause be limited to contract based claims and damages or include tort and statutory claims and extraordinary remedies?

Anecdotal, but informative studies appear to indicate that many clients feel that negotiation is not open-ended and that arbitration clauses are not a priority, particularly given many other, more significant business terms and conditions in play.  Thus, when an arbitration clause merely dictates a specific set of institutional arbitration rules to be used, parties may be reluctant to try to change the clause, even if they know they could likely negotiate something different or better.

One of the delicate balancing acts is between the “sin” of omission (i.e., omitting a crucial or useful element from an arbitration clause) and the “sin” of being overly specific (i.e., providing too much detail could produce a clause that is unnecessary or inappropriate for the parties’ actual dispute or is difficult to put into practice).

Ideally, arbitration clauses should be used to specify guidelines that facilitate better and efficient management of the process. They also may include a fair, but abbreviated timeline, limitations on discovery and motions in order to try to diminish delays and to reduce cost. Counsel who take the time to master the law related to the scope and enforceability of arbitration agreements and to understand the options as to rules and expedited procedures available with nearly every ADR provider can afford their clients the option to craft a private dispute resolution process that may better meet their needs and expectations in a particular transaction.

Patricia H. Thompson, Esq. joins JAMS after an esteemed career as a trial and appellate lawyer and arbitrator, concentrating her practice in construction, employment, surety, fidelity, financial insurance matters and other complex commercial disputes in state and federal courts. You may reach her at pthompson@jamsadr.com.