An arbitration clause in a contract requires the parties to settle any disagreements through arbitration instead of traditional court litigation. It is an alternative dispute resolution process that involves an independent third party, called an arbitrator, who hears both sides of the dispute and makes a binding decision.
If you have worked with contractors or construction companies, you’ve likely encountered these in your construction contracts. But what do they really mean for your projects, and how might they affect you if a dispute arises?
What should you review in an arbitration clause?
When reviewing the arbitration clause with your attorney, make sure to address the following questions:
- What types of disputes does it cover? Look for language that specifies which disagreements will fall under arbitration. Some clauses might cover all disputes arising from the contract, while others might only apply to specific issues like payment disputes or construction defects.
- How will the parties select the arbitrator? The clause should outline the selection process. This might involve each party choosing one arbitrator and those two selecting a third, or it could specify using a particular arbitration organization to appoint the arbitrator.
- Who pays for the arbitration? The clause should specify how the parties will divide costs such as fees for the arbitrator, facility rental and administrative expenses. Some contracts require equal cost-sharing, while others might make the losing party pay all expenses.
- What time limits exist for starting the arbitration process? Many clauses include deadlines for initiating arbitration after a dispute arises. These time limits can range from 30 days to a year. Missing these deadlines could result in losing your right to pursue the claim, so remain aware of any such restrictions.
By clarifying these details, you can better understand the implications of the arbitration clause and how it might affect your project if disputes arise.
Protect your interests
Every contract is unique. If you are unsure about your contract’s arbitration clause and need help interpreting its potential impact on your project, it’s best to consult with an attorney.
