What to Consider When Analyzing Dispute Resolution Provisions

Article

Originally published by the Daily Journal of Commerce on June 20, 2024.

Many owners, contractors, and design professionals take a “boilerplate” approach to dispute resolution provisions and don’t consider the risks specific to the project at issue. Parties also often wait until an actual dispute arises before closely analyzing dispute resolution provisions. To avoid pitfalls and mitigate risk, consider the following issues on a project-by-project basis when reviewing your design or construction agreement:

What steps, if any, are required prior to litigation or arbitration?

The parties should envision the disputes that seem most likely for each particular project, consider their relationship with the other key parties to that project, and analyze whether mandatory pre-dispute meetings, mediation, and/or other precursor events might increase the possibility of resolving disputes, or create expensive hurdles to resolution. Many agreements have tiered or “waterfall” dispute resolution provisions that require the parties to engage in a series of events prior to submission of a dispute to binding arbitration or litigation. Examples include (but are not limited to) a meeting of key project personnel, a meeting of project executives, a meeting of company executives, submission of disputes to the project architect (or another designated “initial decision maker”), and/or nonbinding mediation. While there is no wrong answer for mandatory pre-dispute resolution steps, and the parties are limited only by their creativity in crafting these provisions, the makeup of the owner, contractor, design team, etc., on each project is unique and merits fresh consideration of these issues for each project.

Which state’s law governs disputes, and where must disputes be resolved?

Many agreements contain a forum-selection and choice-of-law provision that will specify where disputes must be resolved, and which state’s law applies to disputes. Typically, the forum-selection clause and choice-of-law provision will specify the state of the project or the home state of one of the parties. Many states, including Oregon, have statutes that void or make voidable forum-selection and choice-of-law provisions in construction agreements that require resolution of disputes in a foreign state or make disputes subject to the laws of another state. This issue can become more complex if the agreement also contains an arbitration provision, as statutes like ORS 701.640 may not apply to void a forum-selection or choice-of-law provision that requires arbitration in a foreign jurisdiction or under foreign law. As the applicable state law can have unique and often unexpected consequences for any number of construction issues, in addition to creating a possible “home field advantage” for one of the parties, these provisions should not be glossed over when reviewing a construction or design agreement.

If you’ve selected arbitration, the devil is in the details

For experienced construction counsel or parties that have been through multiple arbitrations, saying a dispute is subject to “arbitration” (as opposed to litigation) is only the tip of the iceberg. Which arbitral body? What rules apply? Is discovery limited? Are depositions allowed (and how many)? How many arbitrators? What evidentiary rules apply? Will testimony be submitted in advance or given orally? What are the timing restrictions? What if a critical party is not required to arbitrate and won’t agree to join the arbitration? The questions go on and on. In “What parties ought to consider when considering arbitration provisions,” published by the DJC last year, my colleague Zachary Davis touches on many of the key issues that should be considered for one’s next arbitration provision. While this topic merits a stand-alone article, the key reminder is that arbitration provisions should be tailored to the particular project and, depending on perceived risks with a given project, minor or major modifications to a company’s “standard” arbitration provision may be merited.

If you’ve opted for litigation, have the parties waived their right to a jury?

Do you want a jury to decide the fate of your next dispute? Maybe yes. Maybe no. Regardless, a jury will likely add more uncertainty because jurors are often unpredictable, and there is no guarantee your jurors will have much experience, if any, with construction or design issues.

If you’ve opted for litigation, is “removal” to federal court likely or possible?

One often overlooked issue is the possibility of “removal” of a dispute from state court to federal court — most often under diversity jurisdiction in construction disputes. Speaking generally, if one of the contracting parties is a “citizen” of a different state than your company or the location of the project, then there may be a possibility or likelihood that a dispute could be subject to removal to federal court even if it is first filed in state court. The “citizenship” of each party for this analysis is a technical question that will require legal analysis. There can even be unexpected avenues for removal depending on the applicable forum, such as “snap removal,” where a party’s citizenship might be ignored if that party has been sued but not yet served with the lawsuit at the time removal is sought. Like state-specific choice-of-law issues and questions of arbitration versus litigation, whether a dispute unfolds in state court or federal court can have a meaningful impact. For example, a state court lawsuit in Oregon may have no expert discovery while a federal court lawsuit in Oregon will likely have extensive and detailed expert discovery. Many lawsuits involving projects with regional or national general contractors can be removed to federal court.

While the preceding list is far from comprehensive, parties are encouraged to reread the next dispute resolution provision they encounter with these types of issues in mind. Most critically, parties should revisit these issues regularly for each project.

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