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CM 500 CONSTRUCTION LAW

Arbitration and
Construction Disputes
Personal views on arbitration
Larry Yenko

Arbitration and Construction Disputes


In recent times, arbitration clauses have routinely been included in
construction contracts. Arbitration has been considered a more economical
and time efficient method of litigating disputes arising from construction
contracts. In more recent times, arbitration has become as burdensome,
expensive and time-consuming as court litigation. It is the purpose of this
paper to explore some relative changes in the arbitration process to reduce
costs, eliminates burdensome procedures and expedite the process. This
paper will explore various sanctioning bodies including individual arbitrators
and law groups and their procedures . The focus of the paper will be recent
changes in varying or eliminating procedures or rules in arbitration making it
less expensive and quicker than formal litigation. The perspective of this
paper is based on Nevada law and personal experience of the author.
The most cited and relied on sanctioning body is the American
Arbitration Association (AAA). The AAA recognizes that construction
arbitration is a specialized field needing rules tailored to construction
disputes. The AAA are also recognizes that to make construction arbitration
successful, arbitrators must be familiar with the industry.
The AAA has separate rules for construction arbitration1. These rules
include regular arbitration procedures, procedures for the resolution of
1 American Arbitration Association, Construction Industry Arbitration Rules and
Mediation Procedures, (Rules Amended and Effective October 1, 2009, accessed
November 24, 2010)
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disputes through document submissions, fast-track procedures and


procedures for complex construction disputes2. Regular arbitration
procedures are applied absent the modified agreement to use the other
procedures just described. Regular arbitration procedures under the AAA
provides for fast-track arbitration for disputes where there are only two
parties and $75,000 is at issue3. Implied with signing a contract with an
arbitration clause is acquiescence to the rules described above. The rules
provide for wide discretion of the arbitrator including the procedures to be
followed in the case. The rules also provide discretion vested in the arbitrator
to schedule the proceedings including discovery, time limits, witnesses,
jurisdiction4, motions, rules of evidence and to make awards.
Fast-track procedures include limits on the number of parties (2) in the
amount of the claim in question ($75,000). There are also time limits on filing
a claim or counterclaim (7 days) or modifying such. There are limited
extensions of time (7 days). Fast-track allows telephone notice of hearings
and management procedures. Exchange of information (at least 5 days) is
determined by the arbitrator. No discovery absent extraordinary
circumstances. Hearing is limited to 1 day (absent extraordinary
circumstances) and must be scheduled within 45 days of telephone notice of
2 id
3 id
4 EXBER, Inc. v. Sletten Construction, et al. 92 Nev. 721; 558 P.2d 517 (1976),
Broom v. Morgan Stanley DW, Inc. 169 Wn.2d 231. 236 P.2d 182 (2010)
3

hearing. The decision must be made within 14 days from the cloture of the
hearing.
Procedures for large complex construction disputes are basically the
same as regular arbitration with emphasis on the arbitrator discretion with
expedient and efficient procedures (limiting discovery and other procedures).
Finally, resolution of disputes through submission of documents are
allowed if the parties agree to such procedures. The rules provide for the use
of technology to expedite the procedure and reduce costs. This procedure
may be used for any size claim if agreed upon by the parties.
Other organizations other than the AAA provide arbitration services. A
construction contract will specifically identified the arbitration organization
that controls the procedures and rules of the arbitration.
Besides the AAA, one such organization is the Construction Arbitration
Service (ACBA). The ACBA allows the arbitrator to use his/her discretion
(unlike the AAA) for rules only. The arbitrator must follow the procedures of
the ACBA. The procedures are similar to the AAA except for fees and time
limits. The rules are similar to the AAA, however, they are more general and
less numerous. The rules of evidence (as with the AAA) allow for complete
discretion vested in the arbitrator to modify or ignore the strict rules of

evidence except for the attorney-client privilege and the work product
privilege5.
Arbitration procedures and rules have even been presented by individual
arbitrators6 . Mr. Pierce has adopted by reference, procedures and rules from
Arbitration Services of Portland, Inc.7. These rules and procedures again are
similar to the AAA giving the arbitrator wide discretion in applying the rules
of evidence, testimony, witnesses and other legal procedures.
There are several international bodies that provide procedures and rules for
international arbitration.
England has produced Model Rules of Arbitration consistent with The
Arbitration Act of 1996 (England). The rules were promulgated in conjunction
with many professional organizations including engineers, architects, real
estate interests, surveyors and architects8. The procedures and rules are
similar to the AAA. Consistent with the AAA, provisions for the discretion of

5 Construction Arbitration Service, Arbitration Procedures and Rules, (accessed


November 27, 2010)
http://www.acbaservices.com/Construction_Arbitration/CASRulesProcedures_J112517
1.pdf
6 Paul Pierson, Procedures and Rules for Arbitrations, (accessed November 27,
2010) http://brookingslaw.com/arbitration_rules.htm
7 id
8 Society of Construction Arbitrators, Construction Industry Model Arbitration Rules
(CIMAR), CIMAR, 1998
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the arbitrator including discretion for the rules of evidence are provided for in
the model rules9.
The International Institute for Conflict Prevention and Resolution (IICPR), a
Manhattan-based nonprofit organization formed in 1979 to promote
alternative dispute resolutions established arbitration rules and procedures
to be applied in arbitrations recognizing it as the controlling body in the
arbitration. The IICPR (consistent with other arbitration organizations
including the AAA) provides for expedited arbitration10. The organization
promotes expedited arbitration with additional expedited arbitration rules
which includes discretion, vested in the arbitrator, as to the application of
the rules of evidence11. In the case of IICPR, the expedited arbitration has
100 day time limit, limited discovery, possible mediation and other
procedures designed to reduce costs and expedite the arbitration while still
maintaining fairness and protections (prehearing procedures, privileges,
secrecy/privacy, appointment of neutrals etc.). Unlike most other arbitration
clauses, the IICPR, including the expedited procedures, provide for an appeal
to be heard by three Federal judges. Enforcement of the arbitration award
(by contract provision) is governed by the Federal Arbitration Act, 9 U.S.C.
1 et seq.
9 id at: Rule 5.1 p. 5
10 id
11 International Institute for conflict Prevention and Resolution, General and
Introductory Rules, (2010, accessed November 27, 2010)
http://www.cpradr.org/ClausesRules/ExpeditedArbitrationofConstructionDisputes/tabi
d/82/Default.aspx
6

The International Chamber Of Commerce established The International Court


of Arbitration and the rules that govern the court in 1998. The court itself
does not hear arbitration cases but it's there to expedite or control the
process. The parties include the arbitration body and rules they choose to
incorporate in their contract. A separate arbitrator makes the ultimate
decision.
Because construction arbitration was as much as 20% of the total
cases that were heard, a commission was established to review the special
needs of the international construction industry. It appears from my research,
that no specific construction arbitration rules have been adopted by the
Chamber's International Court of Arbitration, however, it's rules of arbitration
are very general and encourage adoption of rules pertinent to the
international construction industry which includes the Chamber's clause in
their contracts12. The Chamber represents that they are the largest provider
of arbitration internationally13. As with all other organizations cited above,
the arbitrator is given wide discretion in the interpretation of procedures and
rules.
Individual states including Washington (Uniform Arbitration Act, Chapter
7.04A) and Nevada (Uniform Arbitration Act of 2000, NRS Chapter 38) have
12 International Chamber of Commerce, Dispute Resolution Services-ADR, ADR
Rules, (July 2001, accessed November 27, 2010)
http://www.iccwbo.org/uploadedFiles/Court/Arbitration/other/adr_rules.pdf
http://www.iccwbo.org/court/arbitration/id4399/index.html
13 International Chamber of Commerce, Dispute Resolution Services-ADR, ADR
Rules, (2009, accessed November 27, 2010)
http://www.iccwbo.org/court/arbitration/id5256/index.html
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adopted statutes covering arbitration. As with all other arbitration acts,


agreements or clauses, Washington statute gives the arbitrator wide
discretion in terms of conduct of the arbitration including receiving evidence
and the weight thereof, RCW 7.0 4A. 150. The Nevada Act provides for this
same process in almost the exact language, NRS 38.231.
The language of individual state arbitration acts are similar if not
identical to the Federal Arbitration Act, USC Title 9. This Act was originally
passed in 1925. Congress recognized the need for cost effectiveness of
arbitration and set forth general rules that have been adopted by the states
and eventually organizations such as the AAA et. al.. The evolution of such
rules and procedures provide the current status of arbitration including
arbitration and the construction industry.
The importance of arbitration throughout the world is emphasized by
nations representing their fairness and expertise in the area of international
arbitration including construction arbitration.
Slovenia is geographically positioned at one of the most important trading crossroads in
Europe. Being located in the heart of Europe and renowned for its neutrality between the
East and the West, it makes an attractive choice for international commercial
arbitrations,
especially because of its recent reform of alternative dispute resolution law which has
been
harmonized with the UNCITRAL model laws on arbitration and mediation.14

14 International Chamber of Commerce, International Commercial Arbitration in


Slovenia, How to Settle Your Business Disputes Efficiently, (2010, accessed
November 26, 2010)
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The importance of arbitration in the commercial world wide venue, especially


construction arbitration, cannot be over emphasized.
It is clear that arbitration is an important part of the construction industry.
The original purpose of arbitration was to save time and money in
construction disputes. The process has evolved into a complex litigation
process similar to court litigation. The process has been abused to obstruct
the process and muddy the issues. It's up to the arbitrator to control the
aspects of arbitration. This may be done in numerous ways including the
appointment process of an arbitrator, the way the issues are defined, setting
time limits, limiting the number of witnesses and the scope of their
testimony, hearing live testimony versus documentary submittals, discovery
and procedures within the hearing itself including trial procedures. One way
that arbitration differs from formal litigation is in the conduct of the hearing,
specifically, adherence to the rules of evidence. It is hornbook law that the
rules of evidence were designed to protect fairness in light of laypersons
(juries) generally hearing testimony and then deciding the facts. Experienced
arbitrators should not be influenced by non-adherence to the rules of
evidence. One must remember that the purpose of arbitration is to find a fair
and just settlement of disputes arising from a construction contract. We all
know that contractors are in business to build not to pursue lawsuits.
The history of arbitration through the centuries established that not
only should the process be streamlined and less formal but the arbitrator

should have expertise in the area he/she arbitrates. This is not to change the
subject but to advocate for arbitrators with expertise in the construction
industry and its processes. The more knowledgeable an arbitrator is in the
field he/she is about to arbitrate the better he/she can apply the rules and
procedures to expedite the dispute and minimize the cost.
In Nevada, there is a statutory requirement for nonbinding arbitration
in disputes of less than $50,000, NRS 38.250. The rules of such an arbitration
reflect that formal rules of evidence should be relaxed, Nevada Arbitration
Rules (NAR) 8 (A).This author had participated in several (6 ) arbitrations as
the arbitrator. These arbitrations were heard in Nevada. The procedures
argued in this paper were applied in the arbitrations. The author is also
experienced in administrative hearings (Appeals Office, Nevada Workers
Comp) where the appeals officer has the authority to vary his acceptance to
the rules of evidence in the semi formal proceedings.

Construction

arbitration clauses often incorporate formal laws (in this case, laws of
Nevada) in the language of the contract. Consistent with the purpose of
arbitration, the arbitration clause supersedes the contract language and the
arbitrator is given discretion (reference to arbitration rules in the contract via
controlling organizations such as the AAA) to avoid such formalities (dictated
by that law to be applied) in the interest of time and costs.
Because the arbitrator is both the finder of fact and decision-maker as
to the law and has expertise in the construction field, he/she is in a much

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better position to weigh the evidence and give the weight it deserves
(without the protections of the formal rules of evidence as a layperson or jury
may require for fairness). The arbitrator should hear evidence that will reach
the merits and truth of the claim (and defense to those claims) in a way that
requires the parties to be precise in their arguments and the evidence they
present to avoid unnecessary delays and expense15.
Construction involves complex activities including design, material
compatibility, installation and warranty. A subpart of the above process
includes many relationships that may be of project duration or longer-term.
In all these long-term complex relationships (owner-contractor, contractorsubcontractor, subcontractor-sub subcontractor) the parties must survive
time limits that are imposed to complete a project. Implied in such schemes
is the need for cooperation even in light of the souring of such relationships.
To survive, the parties must expedite disagreements as the project
continues. This emphasizes the need for a timely resolution to disputes not
to mention minimizing the cost that may affect the bottom line profitability of
the project. Disputes can lead to intractable positions of the parties and
counsel may encourage the application of traditional litigation techniques. It
is the job of the arbitrator to fashion procedures that expedite the process
and reduce costs. An article in The Dispute Resolution Journal, authored by
Allen L Overcash and Erin L Gerdes advocates a five step process to

15 William C Turner, Esq., A Brief Overview of the Use of Evidence in Arbitration,


October 2010 Nevada Lawyer 21 (2010).
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accomplish the goals of arbitration especially in complex construction


projects16. The steps are 1) immediately after the arbitrator(s) is/are
appointed the parties or their counsel must submit a comprehensive detailed
statement of their position and the evidence supporting them giving all
parties notice of the issues and proposed testimony and evidence. Discovery
should be postponed until the statements are given to the arbitrator and the
opposing party thereby automatically limiting and focusing the arbitrator to
the need of discovery. 2) the parties should submit a reasoned award
proposal so that the arbitrator may focus on the evidence needed to support
the award. 3) limit discovery based on the parties position statements.
Discovery is usually the largest single delay and complex construction cases.
4) arbitrators should develop a scorecard that includes all issues on the
evidence supporting or invalidating such. This would focus the arbitrator on
the issues and evidence. 5) the arbitrator should prepare a detailed hearing
schedule. Continuances are discouraged and compliance with the AAA
Complex Construction Rules are encouraged17. These proposals are
consistent with the goal of arbitration and should be new tools in the arsenal
of the arbitrator.

16 Allen L Overcash and Erin L Gerdes, Five Steps to Fast Track the Large, Complex
Construction Case, 64 issue 2 The Dispute Resolution Journal 36-41 (May-July 2009).
17 Allen L Overcash and Erin L Gerdes, Five Steps to Fast Track the Large, Complex
Construction Case, 64 issue 2 The Dispute Resolution Journal 36-41 (May-July 2009)
12

It has been estimated that even in its present status (litigation like),
arbitration is estimated to be 27% to 47% less expensive than litigation18.
The latest concern of the parties concerning arbitration is the cost.
Arbitration has evolved into a "scorched earth" litigation process19. Widened
discovery, expand and motion practice, extended examination and crossexamination, continuances and delays, all the practices that make litigation
expensive and time-consuming have overtaken the arbitration process. In
1994 the AAA created a task force of construction industry representatives,
design professionals and construction attorneys to address the increasing
costs and time expended. They came up with the three options listed above,
fast-track, standard, and complex construction case options. Since those
modifications to the AAA rules arbitration has evolved again into a expensive
process, so much so that the American Institute of Architects (AIA) has
eliminated the arbitration clause as a default dispute resolution process. The
form now includes several options requiring the parties of a contract to
affirmatively check a box four arbitration. Failure to do so automatically
places disputes into the court system

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. The form now requires mediation as

a condition precedent to proceed to litigation or arbitration21.


18 Susan Zuckerman, Comparing Costs in Construction Arbitration and Litigation, 62
Issue 2, The Dispute Resolution Journal 42-48 (May-July 2007).
19 Stephen A Arbittier, Conditional Arbitration: A New Approach to Construction
Arbitration, 61 Issue 2 The Dispute Resolution Journal 38-44, 40 (May-July 2006).
20 Stephen A Arbittier, Conditional Arbitration: A New Approach to Construction
Arbitration, 61 Issue 2 The Dispute Resolution Journal 38-44, 40 (May-July 2006).
21 id
13

Mediation has become popular with large contractors since the gain far
outweighs the cost (low cost of mediation leading to possible settlement)
especially since mediation is nonbinding. Stephen A Arbittier, the author of
Conditional Arbitration: A New Approach to Construction Arbitration,
advocates a new process of a mini trial he calls Conditional Arbitration. In
this process the arbitrator conducts a mini trial himself for a fixed fee. He
may rely on discovery he sees fit, he may require written reports, he may
question witnesses himself, except affidavits and modify the rules of
evidence that assist him in making a decision including an award. This
decision is nonbinding and is time-limited (1 to 4 months). After the decision
either party has 30 days to accept or reject the arbitrator's findings. If the
decision is rejected the parties may ask the arbitrator to continue on as a
mediator22.
Conditional Arbitration is just another suggestion to reduce costs and settle
disputes in a timely manner. A combination of streamlined procedures,
discretion of the arbitrator to modify traditional rules including the rules of
evidence, nonbinding mini trials or mediation continue to be attempts to
improve alternative dispute resolutions. It is clear to me, that any
arbitrator/mediator must, to take advantage of new procedures, be familiar
with the construction process to make any construction dispute there, timely
and cost-effective. Arbitration and mediation will continue to be a major part
of dispute resolutions in the construction industry.
22 id at 41.
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Bibliography
American Arbitration Association, Construction Industry Arbitration Rules
and Mediation Procedures, (Rules Amended and Effective October 1, 2009,
accessed November 24, 2010)
2
Construction Arbitration Service, Arbitration Procedures and Rules,
(accessed November 27, 2010)
http://www.acbaservices.com/Construction_Arbitration/CASRulesProcedures_J
1125171.pdf
3
Paul Pierson, Procedures and Rules for Arbitrations, (accessed November
27, 2010) http://brookingslaw.com/arbitration_rules.htm
4
Society of Construction Arbitrators, Construction Industry Model Arbitration
Rules (CIMAR), CIMAR, 1998
5
International Institute for conflict Prevention and Resolution, General and
Introductory Rules, (2010, accessed November 27, 2010)
http://www.cpradr.org/ClausesRules/ExpeditedArbitrationofConstructionDispu
tes/tabid/82/Default.aspx
6
International Chamber of Commerce, Dispute Resolution Services-ADR, ADR
Rules, (July 2001, accessed November 27, 2010)
http://www.iccwbo.org/uploadedFiles/Court/Arbitration/other/adr_rules.pdf
http://www.iccwbo.org/court/arbitration/id4399/index.html
7
International Chamber of Commerce, Dispute Resolution Services-ADR, ADR
Rules, (2009, accessed November 27, 2010)
http://www.iccwbo.org/court/arbitration/id5256/index.html
8
International Chamber of Commerce, International Commercial Arbitration
in Slovenia, How to Settle Your Business Disputes Efficiently, (2010, accessed
November 26, 2010)
9
William C Turner, Esq., A Brief Overview of the Use of Evidence in
Arbitration, October 2010 Nevada Lawyer 21 (2010).
10
Allen L Overcash and Erin L Gerdes, Five Steps to Fast Track the Large,
Complex Construction Case, 64 issue 2 The Dispute Resolution Journal 36-41
(May-July 2009).
11
Susan Zuckerman, Comparing Costs in Construction Arbitration and
Litigation, 62 Issue 2, The Dispute Resolution Journal 42-48 (May-July 2007).
12
Stephen A Arbittier, Conditional Arbitration: A New Approach to
Construction Arbitration, 61 Issue 2 The Dispute Resolution Journal 38-44, 40
(May-July 2006).

Table of Cases
EXBER, Inc. v. Sletten Construction, et al. 92 Nev. 721; 558 P.2d 517 (1976)

15

Broom v. Morgan Stanley DW, Inc. 169 Wn.2d 231. 236 P.2d 182 (2010)
The Arbitration Act of 1996 (England)
Federal Arbitration Act, 9 U.S.C. 1 et seq.
Uniform Arbitration Act, Chapter 7.04A
Uniform Arbitration Act of 2000, NRS Chapter 38
RCW 7.0 4A. 150
NRS 38.231
Federal Arbitration Act, USC Title 9
NRS 38.250
Nevada Arbitration Rules (NAR) 8 (A)

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