As an owner of real property, who wants to construct, improve, repair, or extend improvements on that real property, before entering into a contract with your contractor it is important to be familiar with the terms of your contract and how it may affect your rights to recover in case of a breach or default of the contract. This article clarifies the dispute resolution methods that may be included in an American Institute of Architects (AIA) standard contract, which is used by many contractors.
AIA Standard Form Contracts Require Standard Steps to Resolve Disputes
Many contractors use a standard form of contract created by the AIA to govern the terms of the work to be performed for an owner of real property who wants to construct, improve, repair, or extend improvements on that real property. Amongst the terms contained in the AIA Standard Form of Agreement are what steps must be taken to resolve any dispute over the work performed or when there is a default or breach of the contract. The methods used to resolve these disputes might be unfamiliar to many, since they do not typically involve filing suit in a court of law.
Before entering into any contract, it is important to be familiar with the terms of your contract and how it may affect your rights to recover in case of a breach or default of the contract. The dispute resolution methods that may be included in an AIA standard contract, which changes the ordinary rules for dispute resolution, are briefly discussed below.
Many AIA contracts require that any disputes between the parties be submitted to mediation first. Mediation is a process whereby a third party (most often a professional mediator who has some experience in construction and real estate law) will hold an in-person meeting where both parties are allowed to state their positions and try to negotiate a settlement of the dispute. The mediator acts as a neutral party to evaluate claims, give advice to aid settlement, and propose solutions that the parties may not have considered. This process is typically not binding, meaning that any settlement recommended by the mediator cannot be forced upon the parties without their consent.
There are advantages and disadvantages to this mediation process. Since mediation does not require that a formal lawsuit or claim be filed in the courts, it is typically less costly then resorting to the courts of law since the process will usually take a day for most claims or, at most, a couple of days if the conflict involves a project with many issues to work through. Also, if either party is concerned with confidentiality of either the claim or the settlement amount, mediations are not part of the public record and often the process is protected by standard meditation confidentiality agreements. However, since the results are not binding, there is no guarantee that the mediation process will solve every dispute, especially when one of the parties absolutely denies any wrongdoing.
The majority of AIA contracts contemplate binding arbitration as the required method of dispute resolution under the contract. Arbitration is a process similar to a formal legal proceeding filed in a court of law, but it has some very important differences. The parties submit a claim to the arbitrating agency, which then chooses an arbitrator or arbitrators for the dispute. In AIA contract arbitrations, there are particular rules, which govern the process and the arbitrators chosen have a background or specialty in construction matters. The arbitrator acts as a sort of judge and presides over a proceeding, which looks very similar to a trial: evidence is presented, witnesses are examined, and the lawyers for each party will make arguments. At the end of the proceeding, the arbitrator will come to a decision.
Since the AIA contract contemplates binding arbitration, the decision of the arbitrator will be final and must be followed by the parties. There is a limited appeal right, but arbitration decisions are rarely overturned, since it must be proven that the arbitrator improperly considered the evidence or otherwise was negligent in performing his duties.
Arbitration, like meditation, is usually cheaper than a full trial in court and not subject to public scrutiny. Also, it is usually a faster resolution by a trier of fact who is guaranteed to have some background in construction, so that the important facts of the claim will be quickly identified and analyzed.
However, some rights and opportunities are waived by choosing arbitration over a formal lawsuit filed in a court of law. You cannot choose to have your case heard by a jury, some evidentiary rules followed by the courts may not be followed in the arbitration process, and the time to investigate the claim, take depositions, or do other discovery may be severely limited or denied by the arbitration process. The decision to submit to arbitration is not one which should be considered lightly, but many AIA contracts have this dispute resolution method as a default.
Filing a claim with a court of law whose jurisdiction the contract has identified is another way to resolve disputes, but often in an AIA contract, both parties must agree to waive the mediation and arbitration called for in the contract to enable the claim to be heard by the courts. If you would prefer to submit claims to a court of competent jurisdiction, it is an issue that is worth raising while the contract is still being negotiated, so that there are no surprises later for any of the parties on if a claim were to arise. Of course, litigation can be time consuming, as well as potentially expensive, but some parties would rather receive a decision after a full and complete discovery period and submission of the causes of action to a dedicated decider of fact, whether that is an elected or appointed judge or a jury of peers.
Although many parties do not want to consider the possibility that there will be a problem with the working relationship down the road, knowing what your rights and options are if a claim or default arises is an important factor to be aware of before entering into any contract, particularly a standard AIA contract which changes the ordinary rules for dispute resolution. As with all contracts, it is advised you consult with your lawyer before signing to ensure that you understand all of your obligations and rights under the AIA construction contract.