Arbitration Design and Arbitrator Selection to Manage Risk

Article excerpt

Two important issues in construction arbitration from the point of view of a senior counsel at a well known engineering, procurement and construction management firm.

There are myriad ways to crafta dispute resolution process that ends with arbitration. The thoughtful drafter of the arbitration provisions will address, at a minimum, each of these key issues: (1) the scope of the disputes to be arbitrated; (2) the authority of the arbitrator; (3) the applicable procedural and sub stantive law; and (4) the venue of the arbitration. In construction contracts, the arbitration clause may have to take into account other provisions in the contract, such as those addressing limitations of liability and waivers of consequential and punitive damages.

Deciding the Scope of Arbitration

The scope of disputes subject to the arbitration clause is perhaps the most fundamental of the issues, since it determines which disputes the arbitrator has authority to hear and decide. It is possible to drafta broad clause that covers "all disputes" or a narrower clause that limits the scope of arbitration. Many contracts limit the arbitration clause to disputes arising under the contract itself that involve interpretation issues and the performance of the parties. The American Arbitra tion Association's (AAA) suggested arbitration clause is a good example:

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Construction Industry Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

Clauses like this one are sufficient for most construction contracts, but each project must be evaluated for more specific treatment. It may be that the duration, complexity and risk of the project will lead the parties to decide to limit the arbitrator's authority in various ways.

For example, if there is a limitation of liability provision in a contract for a very large, private project, the drafter may want to exclude fraud claims from the scope of the arbitration clause in order to remove the arbitrator's ability to vitiate the liability limitation. If fraud claims are excluded, the arbitrator cannot hear and decide a fraud claim in an arbitration demand or counterclaim.

Parties entering into arbitration often want to limit their potential liability exposure in other ways. This can be done by expressly prohibiting the arbitrator from hearing claims for punitive or consequential damages. This prohibition is formulated as a limitation on the scope of arbitral disputes, but it could be drafted instead as a limitation on the remedies the arbitrator can award.

Limiting Remedies

Under the AAA's Construction Industry Arbitration Rules, arbitrators can award any remedy they believe is just and equitable and within the scope of the parties' agreement, including injunctive relief or specific performance. This is within the law of states like California, which allow arbitrators to have almost limitless remedial authority.

It is especially important to deal with consequential damages in the arbitration clause when the contract contains a "waiver of consequential damages" provision. This is because the law in virtually all jurisdictions (including Cali fornia) distinguishes between an arbitration clause that requires an arbitrator to adhere to the law, and one that departs from the law by prohibiting the arbitrator from awarding an otherwise legal remedy (e.g., consequential damages) or voiding liability limitations. Courts will not overturn an award if the arbitrator made an error of law, but it could do so if the arbitrator has exceeded the delineated scope of authority granted in the parties' agreement.

Equitable remedies can present a serious problem in construction arbitration. It would be onerous to require specific performance or equitable relief in the context of a construction project. …