Does your contract have an arbitration clause? What does that mean?
There has been a growing trend in the construction industry toward settling litigation and disputes in arbitration. Arbitration differs dramatically from normal litigation. Some important points about arbitration are as follows:
How Arbitration Differs from Court Litigation
In arbitration you generally present your case to a single individual that makes the decision. Sometimes there are three “panelists” that sit as arbitrators, but the norm is to only have one arbitrator. In litigation, you present your case to either a judge or a jury.
Arbitration does not usually follow the rules of procedure or the rules of evidence. As a result, arbitration usually allows evidence into the “courtroom” that normally is not considered by the judge or jury.
The final hearing in arbitration usually occurs much quicker than the final trial in litigation. It is not unusual for the final arbitration hearing to occur within four to six months. The typical trial in district or county court does not usually occur prior to 12 to 18 months, and sometimes much longer.
Arbitration Can Be More Costly
There is a misunderstanding in the business community that arbitration results in lower litigation costs. Our experience is just the opposite. The reality is that the amount of work a lawyer must do to prepare a case for trial in arbitration is not materially different than what must be done for litigation. Additionally, you still must pay the arbitrator. It is not uncommon for the actual cost of the arbitrator (not including the attorney’s fees) to exceed $10,000.
When Arbitration Applies
Arbitration can only be entered into if it is agreed to in writing by all parties. Therefore, you must have either agreed before the dispute arose, by way of a clause in the contract, or have agreed after the dispute arose to go to arbitration. Otherwise, you cannot be forced to take your dispute to arbitration.
Two bodies of law can govern a construction arbitration clause: the Texas Arbitration Act governs arbitration clauses in contracts not involving interstate commerce, or where the parties have specifically agreed that Texas law applies. The Federal Arbitration Act governs arbitration clauses in contracts involving commerce, which federal courts have interpreted very broadly to include most commercial transactions where parties or materials cross state lines. For most commercial construction contracts in Texas, the Federal Arbitration Act is likely to govern.
Arbitration Awards: Enforcement and Appeals
Winning an arbitration does not immediately give you an enforceable judgment. An arbitration award must be confirmed by a court before it can be enforced like a money judgment. The confirmation process is generally straightforward if the losing party does not challenge it.
A feature of arbitration that surprises many parties who receive an unfavorable award is how limited the right to appeal is. Courts can only vacate an arbitration award on specific narrow grounds: corruption or fraud; evident partiality of an arbitrator; arbitrator misconduct that prejudiced a party; the arbitrators exceeded their powers; or absence of an arbitration agreement. Errors of law and factual errors are not grounds for vacating an award. The arbitrator’s decision is effectively final.
Arbitration Clauses and Your Mechanic’s Lien Rights
Texas contractors regularly ask us whether an arbitration clause eliminates their right to file a mechanic’s lien. The answer is no. Mechanic’s lien rights in Texas are statutory rights created by the Texas Property Code, not contractual rights. An arbitration clause in a construction contract determines how payment disputes will be resolved; it does not take away the right to file a lien affidavit with the county clerk.
However, the foreclosure of the lien, the lawsuit to enforce it, may be subject to the arbitration clause, depending on how broadly the clause is written. If the clause covers “all disputes arising out of or relating to this contract,” a court may order the foreclosure claim to arbitration rather than district court. The specific language of your arbitration clause controls here, so it matters a great deal. If you have a contract with an arbitration clause and you are not being paid, contact us before taking any action.
What to Do If You Receive an Arbitration Demand
If you receive a demand for arbitration from another party to a construction contract, you must respond promptly. Failing to respond can result in a default award against you. Read the arbitration clause in your contract carefully and note what rules it specifies (American Arbitration Association, JAMS, or another body). Note the deadline to respond. Consider whether you have counterclaims that must be filed in the same proceeding. Contact an attorney immediately, because arbitration deadlines are strict.
Cook Keith & Davis represents Texas contractors and subcontractors in construction arbitration proceedings. If you have received an arbitration demand, call us at 214-368-4686.
Frequently Asked Questions
Can I be forced into arbitration if my construction contract requires it?
Yes. If you signed a construction contract with a valid arbitration clause, Texas courts will generally enforce it and order the dispute to arbitration. Both parties must have agreed in writing, either in the original contract or after the dispute arises. You cannot be forced into arbitration unilaterally without a written agreement.
Is arbitration faster than going to court for a construction dispute in Texas?
Usually yes. Final arbitration hearings often occur within four to six months. A typical district or county court trial in Texas does not occur until 12 to 18 months after filing, and sometimes much longer. However, speed is the main advantage arbitration has over litigation. Everything else, including cost, is not necessarily better.
Is construction arbitration cheaper than litigation?
Contrary to popular belief, arbitration is often more expensive. The legal preparation is substantially the same as trial preparation, and you must pay the arbitrator directly, costs that can exceed $10,000 in arbitrator fees before attorney's fees are even counted.
Does an arbitration clause in my contract eliminate my mechanic's lien rights?
No. Mechanic's lien rights are created by the Texas Property Code, not by your contract. An arbitration clause cannot eliminate statutory lien rights. However, the lien foreclosure lawsuit may need to proceed in arbitration rather than district court, depending on how the arbitration clause is written. Contact us if you have a contract with an arbitration clause and a nonpayment problem, because the interaction between the two requires careful analysis.
What happens if I receive an arbitration demand and ignore it?
Do not ignore an arbitration demand. Failing to respond or participate can result in a default award against you, an award that a court will confirm and enforce. Contact an attorney immediately upon receipt of any arbitration demand. The response deadlines are strict.