What’s in a Clause: What to Consider when Adopting an Arbitration Clause in Construction Contracts

Many in the construction sector are hesitant to dwell on dispute resolution clauses.  After all, when your goal is to build something together, anticipating conflicts at the outset of the relationship can feel unseemly.  But this hesitance relies on a misconception of what dispute resolution is: it isn’t the anticipation of conflicts, but instead the development of proactive systems to work through those conflicts with minimal disruption much in the same way that change orders or design modifications are managed in the ordinary course.  Proactive management of the dispute resolution process thus is not only consistent with a collegial working relationship but is imperative to achieving the environment of collaboration and partnership that are at the core of so many projects.

There are a myriad of popular form contracts in the construction sphere, including AIA and ConsensusDocs domestically and, internationally, the JCT, NEC, and FIDIC suites.  The benefit of relying on such contracts is obvious: their mechanisms and allocations of risk are widely understood, relieving the parties of the need to debate routine provisions.  But dispute resolution, although often considered such a provision, is anything but routine.  The dispute resolution clause can be one of the most important provisions in a contract, and even minor changes can significantly impact the course of a project and the cost, duration, and inconvenience of any resulting disputes. Jurisdictional and geographic variations can further modify the impact of even standard language.  In fact, dispute resolution clauses are one place where it is most important for a contracting party to be proactive in ensuring that its interests are met. Although the benefits of form agreements are manifest, it would be ill-advised to sign off on a dispute resolution provision without at least considering its material terms.  There is no one-size-fits all solution, but the following are some of the key issues that warrant consideration.

Notice and Development of Claims

Although not part of the dispute resolution clause in the strictest sense, every contract will articulate some procedure through which an aggrieved party gives notice of its potential claims, develops the particulars supporting those claims, and receives a formal response from the counterparty stating its position with respect to the claim.  This process provides the first and best opportunity to avoid disputes, and many potential disputes are resolved at this stage.  Notice and exchange of particulars are essential: without them meaningful negotiation and resolution of potential claims is impossible and the universe of claims in which the Parties find themselves is ill-defined.

Pre-Dispute Commercial Resolution

When a dispute cannot be resolved through the normal course of project correspondence and negotiation, it is desirable to provide an escalation mechanism prior to entering formal dispute resolution.  Often, this escalation mechanism takes the form of a meeting between “senior” managers of a pre-identified level (usually executives with regional or subject-matter oversight who do not have day-to-day responsibility for a project), with a built in period after the meeting for negotiations to continue before a dispute may be commenced.  This provides disinterested individuals from each Party the opportunity to negotiate a commercial resolution, and often represents the last turning-off point before a dispute.

Dispute Resolution Boards

On complicated projects where there are many interfacing parties, disputes are anticipated, or time is of the essence, it is increasingly common to implement a Dispute Resolution Board (DRB).  The DRB mechanism consists of a one-or-three-member panel established at the outset of the project that functions as an independent part of the project management team, monitoring progress and resolving disputes as they occur. Because DRB’s can hear disputes more-or-less contemporaneously, they benefit from access to the site, mobilized personnel, and project documentation that may be more difficult or costly to secure after a project concludes.  The DRB, by providing a determination shortly after a dispute arises, can also provide certainty for the Parties, allowing them to plan their actions based on the dispute’s outcome.

Despite the promise of the DRB mechanism, many commentators question its ultimate effectiveness.  Many DRB provisions are non-binding, such that any significant disputes can be revisited by the Parties during subsequent arbitration.  Resolving disputes before a DRB on a rolling basis can also divert resources away from progressing the Works and prolong the engagement of outside experts and counsel. Nevertheless, the DRB remains an increasingly common mechanism, and is worth considering where proactive resolution of disputes is a priority.


Once a dispute is noticed, particularized, and unable to be resolved through management escalation or a DRB, it will most likely advance pursuant to an arbitration clause.  The following are some of the key considerations in crafting such a provision.

Who will Conduct the Arbitration

There are a wealth of international arbitral institutions equipped with pools of arbitrators and supporting resources to efficiently resolve disputes.  Like the AAA in the United States, international bodies like the Singapore International Arbitration Centre (SIAC), International Chambers of Commerce (ICC), and International Arbitration Institute provide a common forum for arbitration with their own rules, procedures, and administrative infrastructure to administer the matter.  Although some arbitral institutes incorporate a location in their title, bodies like SIAC are truly international, with satellite locations around the globe.  Major cities are  increasingly  hosting their own international arbitral forums, operating either under bespoke procedures or providing a venue for proceedings administered under the rules of another arbitral institute.

An arbitration that is not conducted through an arbitral institution is known as an “ad hoc” arbitration.  Such arbitrations are common when a Party wants specific procedures (often procedures provided for by state or national law) to govern.  In an ad hoc proceeding, the procedures to be used are dictated by the arbitration agreement or the election of the arbitrators if none is specified.  Even in an ad hoc proceeding, however, it can be beneficial to engage an arbitral institution to manage administrative aspects such as receipt of the Parties’ deposits and disbursements to the tribunal.


Many dispute resolution clauses will call for arbitration at the location of the arbitral institute selected. In most cases, however, this is not a requirement, and it may well make economic sense to conduct an arbitration closer to a project site or the locations of the participants. Even if the intention is to use an arbitral institute’s default location, it is best to expressly state that location to avoid geographic disputes once arbitration is commenced.


If the Parties to a Contract come from countries with different primary languages, the dispute resolution provision should specify which language the arbitration will be conducted in.  The language selected can significantly impact the selection of advocates or experts and the ultimate cost and inconvenience of the arbitration.

 Number and Selection of Arbitrators

Most arbitration rules permit the Parties to determine (via their contract) how many arbitrators hear a matter and how those arbitrators are selected.

In the Construction context, it is essential that arbitrators have subject-matter expertise and the technical understanding necessary to grasp the issues. Technical experience in the field is a good start, but ideally the arbitrators selected will also be familiar with the specific form of contract and geographies at issue.  The difference between a design-build contract executed in the United States and an EPC contract executed in Africa can be huge, and it is important that the arbitrators understand the specific nuances applicable to the project in dispute. For this reason, we recommend that parties to construction contracts adopt mechanisms that allow them to select the tribunal, either by agreement (in the case of a one arbitrator panel) or through the selection of party-appointed arbitrators who then select a presiding arbitrator (in the case of three arbitrator panels).

It is also important to consider how many arbitrators to have on a panel.  Proceeding with only one arbitrator significantly reduces the costs of the proceeding (by removing two-thirds of the tribunal’s expenses) and can promote efficiency by eliminating the need for the arbitrators to confer prior to acting.  At the same time, in high-value disputes multi-member panels are perceived to reduce the risk of unexpected or erratic decisions, leading many to prefer the perceived safety of a three-member body.

Expedited Proceedings

Most arbitral institutions provide for opt-in expedited proceedings for disputes under a certain dollar amount (often in the USD 2m-3m range) with limited briefing, narrow constraints on discovery, and a specified period for a ruling to issue. The final awards in an arbitration under SIAC’s Expedited Procedure or the ICC’s Expedited Procedures, for instance, are expected to issue within six months of preliminary milestones in the arbitration (the selection of the tribunal in the case of SIAC, of the CMC in the case of the ICC). These procedures can offer significant cost-savings over traditional procedures as well as significant efficiency benefits as far as project close out is concerned.  That said, expedited proceedings are a relatively new creation and many are therefore hesitant to agree to their adoption notwithstanding the limited dollar values at issue.

Compliance with Award

It is often assumed that compliance with an arbitration award is a given—after all, an award is likely to be enforceable under the New York Convention.  Nevertheless, it is best practice to explicitly identify such compliance as a contractual responsibility.  Although establishing noncompliance with an arbitration award as an additional breach of contract provides little additional leverage to enforce compliance against the contracting party, it can secure valuable additional rights such as the right to claim the Award against a guarantor or the ability to set off any remaining contract payments due to the breaching party.

Fees and Costs

Many, but not all, arbitral procedures provide for the prevailing party’s receipt of fees and costs.  Care must be taken, though, as each arbitral institute or state statute adopts its own definition of when fees and costs can be recovered and what fees and costs are appropriately recovered. Parties contemplating an arbitration agreement should consider whether the standard described by the applicable rules is sufficient, or whether they require a clearer statement of the prevailing party’s right to recover.  In particular, it is worth considering (1) how prevailing party is defined for purposes of the fee award, (2) whether the prevailing party is entitled to “reasonable” fees and costs or whether the fee-shifting is a strict indemnification provision, and (3) what burden of proof applies to demonstrating fees and costs.


What is the takeaway from all of the potentially material considerations that I have raised? Simply put, it is that these clauses are not simple or standard and cannot be treated as such.  In order to avoid needless and prolonged disputes, contracting parties should be proactive in reviewing and evaluating potential dispute resolution clauses and in proposing new terms or approaches that will better embody the project’s goals and desired outcomes.  This does not mean that every form provision or standard clause should be rewritten, but it does mean that each should be analyzed in detail in light of the many material aspects that can be included or omitted and the resulting impacts on project execution and dispute resolution.

Care, however must be taken when the parties deviate from a standard form contract or adopt bespoke arbitration agreements.  Without careful drafting, bespoke arbitration agreements can be so uncertain and ambiguous that the Parties’ agreement to arbitrate itself becomes a topic of dispute. When drafting an arbitration agreement, it is essential to ensure that the agreement is drafted with clarity and expressly reflects the intent of the Parties to the agreement.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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