ABSTRACT:

Arbitration is the submission of a dispute to an impartial third party for judgement. In the construction industry, disputes between the owner and the contractor are usually handled by the Architect-Engineer (A-E). Owner contractor disputes that can not be handled by the Architect Engineer, or are beyond the scope of his authority and expertise are destined to end up in court unless an agreement, incorporated in the contract or agreed upon later on, submits the disco ate to a third party for arbitration.
 
 

Although arbitration is an alternative to litigation, it has not operated completely independent of the judicial system. Courts have been frequently called upon either to challenge the arbitration clause in a contract, or to frustrate an arbitration award. Some of the allegations frequently used to challenge the validity of arbitration are: fraud, timeliness, waiver, improper arbitration procedures, and adhesion con tracts.
 
 

Historically, courts have been hostile to arbitration and viewed it as a threat to their authority. However, this attitude has been continuously changing since the beginning of the twentieth century. Nowadays, arbitration awards are legally enforceable in all the 50 states, Puerto Rico, and the District of Columbia. Furthermore, the United States Supreme Court has disqualified courts from reviewing cases where an arbitration clause applies, except when the arbitration clause itself is attacked as being illegal. This has made arbitration an attractive instrument of settling disputes because it complained the legality and validity of litigation with the convenience and economy or informal devices.
 
 

INTRODUCTION:
 
 

In construction, disputes regarding the quality of materials and workmanship, interpretation of the plans and specifications; and compliance with the terms of the contract are usually handled by the Architect-Engineer (A-E). Owner-Contractor disputes that cannot be settled by the A-E or are beyond his authority are bound to end up in court unless an agreement incorporated in the contract, or otherwise, submits the dispute to an impartial third party for arbitration.
 
 
 
 

Depending on the size and characteristics of the dispute, arbitration can be a more efficient, less expensive and a better way of settling the dispute. Because it is, to a great extent, free of legal formalities, arbitration is a much faster procedure of dispute solving than the judicial system. Because of its advantages, the use of arbitration has tremendously increased in the last two decades (Figure 1).
 
 

Arbitration is a method of resolving disputes by seeking the judgement of a disinterested third party (An impartial person or committee interested in resolving the dispute but does not have an interest in the outcomes of the settlements whose findings and judgement are final and binding. Cases will go to arbitration if the contract specifies that the dispute in question should be resolved by arbitration according to specific rules or if all the disputing parties agree to seek arbitration regardless whether the contract calls for arbitration or not.
 
 

Arbitration differs from litigation in three ways:
 
 

Arbitration as an alternative process to litigation in settling disputes is as old as history. It has been used in most ancient cultures, and has been cited in their literature. In fact, even George Washington put an arbitration clause in his will.
 
 

Traditionally, courts have been hostile to arbitration and viewed it as a threat to their authority. In the 1920's, a significant change in this attitude took place. Commercial arbitration was greatly encouraged by statutory enactments. Gradually, courts became more supportive of arbitration and less inclined to interfere in cases involving arbitration except to determine the legality of the arbitration clause or to enforce the award.
 
 

Nowadays, arbitration awards are legally enforceable and binding in all the fifty states of the United States, Puerto Rico and the District of Columbia. Furthermore, the United States Supreme Court has made legitimate arbitration binding and disqualified courts from reviewing cases where an arbitration clause applies. In the Construction industry, another milestone was laid down when the American Institute of Architects incorporated an arbitration clause (section 7.9) in their ALA DOCUMENT A201 General Conditions of the Contract 'or Construction.
 

There are three types of arbitration: institutional arbitration, non-institutional arbitration, and reconcilational arbitration.
 
 

Institutional Arbitration is a structured and organized method of arbitration carried out, ruled and supervised by a recognized institution. In the United States, the American Arbitration Association is the most important, if not the only, institution that has developed arbitration into a formal structure and is efficiently functioning as an alternative to courts. Figure 2 illustrates the sequence followed by the AAA in handling disputes. In other countries, most Chambers of Commerce in large cities has arbitration rules and arbitrators capable of handling disputes in a wide range of areas.
 
 

On the other hand, arbitration can be carried disinterested independent third party, someone that does not belong to an arbitration institution such as the AAA. The disputing parties could agree on a third person, possibly a mutual friend, or a business associate in whom they have full confidence and are willing to abide by his decisions. More commonly, one party may select one person, the other party selects another person and the two selected persons mutually select a third person, thus forming an arbitration committee of three persons. For small disputes, this procedure works as well as institutional arbitration but is less formal, much less expensive (usually free) and even faster!
 
 

Lastly, Reconcilational Arbitration (or Arbitration from Within) is a modification of arbitration rather than a form of it. Here one party (the contractor) selects one of his employees, the other party (the owner) selects one of his employees and the two selected persons select a third person from an interested third party (usually the A-E). This constitutes a committee of three which will be charged with solving conflicts according to what they feel should be done. This procedure has many drawbacks if it is going to be used as a final decision making mechanism because each employee will stick to his employers point of view; and the person representing the A-E will side with the owner. Yet, this procedure could be of much help if it is used as a step before litigation or formal arbitration. Figure 3 illustrates a mechanism for selecting a level of arbitration compatible with the type and size of the dispute.
 
 

DISPUTES SUBJECTED TO ARBITRATION:
 
 

A wide range of disputes, ranging from small controversial change orders to total contract breach can be settled by arbitration. Criminal acts are the responsibility of the judicial system and are beyond the scope of arbitration. The arbitration clause, usually, sets the arbitration terms and defines the arbitrators' authority. It goes without saying that any matter not included in the submission cannot be properly settled by arbitration. For example, if the arbitration clause states that "all disputes regarding the compensation for change orders, if any, will be settled by arbitration in accordance with specific (e.g. AAA) arbitration rules", time delay and liquidated damages, among other potential disputes, are not covered under this arbitration clause.
 
 

ADVANTAGES OF ARBITRATION:
 
 

1 - Cost: For large disputes, the cost of time lost, attorney and other legal fees are much more than the cost of arbitration which has proven to be a cost effective alternative to litigation. This advantage might turn to a disadvantage in smaller disputes because fees for institutional arbitration are significantly more than those for court procedures (courts are supported by taxpayers' money and are practically free). This might be solved by making the arbitration clause call for different degrees of arbitration as shown in figure 3.

2 -Location: In the judicial process, the Miller Act could be used to take advantage of the court services at the location of the project; whereas, in arbitration, arbitration proceedings will take place at the location specified in the arbitration clause except in rare cases such as adhesion contracts.

3 -Lack of Legal Expertise: While one advantage of arbitration is professional expertise, one disadvantage is the lack of legal expertise. With the recent emphasis on arbitration, arbitrators are made to handle some fine legal matters such as contract fraud and arbitration waiver, something not necessarily within their professional expertise (these are legal problems and should be handled by legal professionals).
 

4- Lack of discovery: In the Legal system all parties are required to make all the evidence they have available to the other parties. In arbitration, there is no such requirement.
 
 

LEGAL CHALLENGES TO ARBITRATION:
 
 

Although arbitration is used as an alternative to litigation, many arbitration cases go to court because one (or more) of the parties try either to challenge the legal validity of the arbitration clause or to frustrate the arbitration award. Some of the allegations frequently used to judicially challenge arbitration are:
 
 

Fraud: In the past, courts have regarded the arbitration clause as an integral part of a contract which cannot be more valid than the contract it came from. So, courts gave themselves the authority to resolve alleged issues of contract fraud before letting the dispute go to arbitration (if no fraud is found). This attitude is illustrated in Mosely vs. E. and M. F. (374 US 167) in which the U.S. Supreme Court stated that the arbitration clause is no more enforceable than the contract which created it. But, later on, the Supreme Court partially reversed its attitude as illustrated in Prima vs. F & C (388 US 395) when it recognized the Divisibility Concept which was previously used by some lower courts. The Divisibility Concept differentiates between the fraud in a contract and the fraud in the arbitration clause of a contract. Thus, fraud issues should be arbitrated unless the alleged claim of fraud involves the arbitration clause itself.
 
 

The idea behind the change was to remove obstacles to arbitration and not to give extra time to a party wishing to delay settlement by a claim of fraud. Following the example of Prima vs. F & C, it is likely that cases involving fraud will go to arbitration (if there is an arbitration clause) and the arbitrator will determine whether there is fraud or not; and will act accordingly unless the arbitration clause itself is claimed to be fraudulent. In that case, the court will solve the issue of fraud and then order arbitration proceedings if no fraud is found.
 
 

Arbitration Timeliness: Most arbitration clauses contain time limits for requesting arbitration. AIA Document A201 sections 2.2 and 7.9 set the following time limits:
 
 

Another aspect of arbitration timeliness is illustrated in Westmoreland vs. Hospital Association (Jabine, p. 225 - Not Cited) where the contract stated that "demand for arbitration shall be made within 30 days after arisen, but no demands shall be made after final payment except in the case of a dispute arising in connection with the guarantee provisions of the contract." When the contractor filed for delay damages after the deadline, both the lower court and the court of appeals rejected his claim because "by accepting final payment, he has made arbitration proceedings impossible under the contract".
 
 

Waiver of Arbitration. Waiver of arbitration can take two forms: direct and indirect. A direct waiver is a written or oral statement made by one of the parties in which he gives this right to arbitrate. An indirect waiver, on the other hand, is based on the actions (and maybe the intentions if it can be proved) of one party which leads to the belief that he does not have the desire to arbitrate. Usually, if one party ignores the arbitration clause and goes to court, his action can be interpreted as a waiver. In Earle T. Browder vs. County Court (102 SE.2d. 425) the Supreme Court of Appeals of West Virginia, went one step further and held that the owners' failure to respond to the contractor's demand for arbitration is a waiver.
 
 

Court decisions on who should decide on whether there has been a waiver or not (the court or the arbitrator) have not been consistent. But, with the increasing trend of favoring arbitration, it is most likely that such a case will go first to the arbitrator who will resolve the waiver issue first, and then proceed with the arbitration proceedings if no waiver is found.
 
 

Judicial Review: Although arbitration clauses are enforceable under the prevailing arbitration laws and arbitration awards are final, current arbitration laws give courts the authority to supervise the arbitration process and to enforce both the arbitration clause and the arbitration award. If one party challenges the award in a court of law, the award will stand up unless that party proves that the arbitrator exceeded his authority, the arbitration process did not follow the rules it should follow or that the award did not cover all the points included in the submission documents. In short, the award should be explicit and complete. In the absence of any of these two conditions, a party trying to frustrate the award might find a listening ear in a court of law.
 
 

One court has summarized the court attitude in the judicial review of arbitration as follows:
 
 

CONCLUSION:
 
 

Arbitration has become a very important tool of settling disputes in the construction industry. It has saved time and money to parties wishing a fair and fast settlement. Yet, courts have interfered, though less frequently in recent years, to void the arbitration clause or frustrate the arbitration award. However, in the instances when courts have interfered, the arbitration clause was confusing as to whether arbitration applies to that particular dispute or not.
 
 

To sum up, the emphasis on arbitration within the judicial system and drawing the fine line between the cases where arbitration applies and where it does not have enhanced the arbitration process and made it more attractive than ever.