Should You Place an Appeals Clause in Your Construction Contract?

By Jill R. Johnson

This is the third in a three-part series. The first part is here and the second here.

Construction companies that routinely protect themselves from expensive, protracted litigation by including in contracts mandatory arbitration of disputes may be puzzled over whether to include a new, optional clause in contracts that allows for appeal of an arbitrator's decision. After all, isn't the point of arbitration to achieve a quick and final resolution? In November 2013, the American Arbitration Association and International Centre for Dispute Resolution adopted new rules that allow appeals of awards, provided that both sides agree to this provision in advance. The Federal Arbitration Act allows appeals of arbitration decisions to the courts in only limited circumstances related to fraud or misconduct, but the AAA rules provide for appeals to a three-member tribunal of neutrals on the much broader grounds of errors in applying the law or determining facts. The question, then, is what are the benefits and drawbacks to agreeing to be bound by optional AAA rules that allow appeal?

Potential benefits

In complex cases, there is a greater likelihood of a single arbitrator making a mistake in applying the law or overlooking key facts. An appeal not only provides the opportunity to review these mistakes, but also places the matter into the hands of three neutrals with significant appellate experience. (The AAA rules require the tribunal to be comprised of judges or other neutrals with substantial appellate experience.) In effect, the appeals option creates a middle ground between the potentially enormous costs and time involved in a court system appeal versus the near-absolute finality of a non-appealable arbitration decision.

Potential drawbacks

The drawbacks are the additional investments of time and money, which run counter to one of the basic reasons that parties opt for arbitration. Even if a decision is not appealed, including it as an option makes it necessary to create a record of the initial arbitration. That usually will involve retaining a court reporter, and perhaps additional investments in presentation technology. If there is an appeal, parties essentially are paying for a second arbitration. Although there won't be oral arguments, there is the cost of paying three neutrals, administration, compiling the record and attorney time. It also should be noted that cases are not remanded. The tribunal will confirm the original award or modify it up or down. Thus, the outcome of an appeal will not be the opportunity to "retry" the case. Given these considerations, construction professionals should carefully assess whether the complexity and financial magnitude of their dispute merits the "insurance" of an appeals option.

Jill R. Johnson is a commercial litigator with Chamberlain Hrdlicka (Atlanta), who counsels clients with construction and related disputes. She may be reached at (404) 588-3574 or jill.johnson@chamberlainlaw.com. Have an idea for a guest blog for Construction Today? Contact alan.dorich@phoenixmediacorp.com or jim.harris@phoenixmediacorp.com.  

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