Proposed Federal Legislation May Impact Arbitration Rules
Arbitration rules have increasingly come under scrutiny by various state legislatures and courts. Oftentimes changes in state arbitration laws intended for other parts of the economy have found their way into the construction industry, with mixed results. Last Friday Andrew Ness of Howrey LLP posted in the kluwerconstructionblog an insightful piece on a consumer protection bill recently proposed in the House of Representatives.
Rather suddenly, a substantial backlash against mandatory arbitration has appeared on the scene. One of the clearest indicators is the proposed Arbitration Fairness Act (H.R. 1020) that was introduced in the House of Representatives in February of 2009, and is still very much in play. While the anger is not directed at construction dispute arbitration, the concern is that commercial arbitration will end up being limited in important ways, as well as mandatory arbitration schemes where the use of arbitration is seen as one-sided and unfair.
The bill is intended to limit the reach of the Arbitration Act including the authority of arbitrators in situations where individuals are in unfair bargaining positions, e.g., employer-employee relations, personal credit issues, and individual real estate transactions. Mr. Ness expresses concern about the potential application of these limitations to the construction industry.
While the construction industry is not specifically targeted by the AFA, concerns have arisen that subcontractors and suppliers, for example, may attempt to claim unequal bargaining power when confronted with standard arbitration clauses contained in many form subcontracts. As a result, those concerned about cost effective and efficient dispute resolution in the construction industry, both within the U.S. and internationally, are following the AFA’s progress through Congress closely.
My thanks to Mr. Ness for making us aware of the proposed Arbitration Fairness Act pending in Washington, D.C. and its potential impact on the construction industry. Arbitration provisions are bargained for rights in construction contracts.. They are intended to help parties resolve construction claims in an efficient manner. Legislation that potentially impacts contractual rights creates uncertainty which expands the risks associated with construction contracts. Therefore, I echo the warning of Mr. Ness's prescient post: those concerned with cost effective and efficient dispute resolution should follow this proposed legislation closely.
Ron,
While I rarely agree with legislation that limits parties ability to form contracts to their liking, I am also not a huge fan of mandatory arbitration in those contracts.
I find that in many construction disputes arbitration merely adds a layer of expense that would not be there with a judge. While some cases call for some background in construction for better resolution, I think that most judges can handle most construction disputes and the parties are already paying the judge through taxes, etc.
Mediation on the other hand is different and will be the subject of Monday's Musings.
Thanks Chris for you comment. I look forward to Monday's Musings about mediation.
Thank you, Christopher Hill, it's refreshing to see some support of the Arbitration Fairness Act. I also favor it. Cheating has become a profitable way of life for many businesses, leaving honest business people to be constantly underbid, tarnishing an industry's reputation, and creating more legislation and regulation for all. The cheaters just ignore new laws, while the honest ones have to abide by more paperwork and regulation. Arbitration should never have been allowed to be used as a tool to squelch legitimate complaints of consumers but that is exactly what happened. Consumers are nowhere near on equal footing with businesses, especially huge corporations like credit card co's, the big national builders, etc. When it was found by the MN attorney general that the National Arbitration Forum had actual financial ties to corporations it did arbitrations for, that was the last straw for me and many people. There is simply no way to fix the bias problem with private, industry run arbitration where there is a repeat player effect. Fixing the Federal Arbitration Act, law that has been on the books since the 1920s, is the solution. The wide open hole that allowed businesses to ever exploit it needs to be closed. After all, we are ALL consumers. We all have credit cards, may need to put someone in a nursing home or enter one ourselves, buy a house or car or computer, etc.
Thanks for your comments CSC. Your point is well taken about the need for consumer protection laws, so long as those laws do not result in unintended consequences for sophisticated commercial entities in the construction industry.