§25.7 ARBITRATION
Arbitration is a private proceeding in which parties submit their dispute, under rules of their own choosing, to an impartial third party for resolution. In essence, it is a private trial rather than a public one. It arises from, and is based upon, the agreement of the parties as expressed in their contract. It is a contractual remedy that provides a nonjudicial means to resolve disputes.
This section discusses the legal basis for arbitration in construction disputes, as well as the drafting of arbitration agreements and the mechanics of the arbitration process.
(1) The legal basis for arbitration
The American construction industry has long promoted and supported arbitration. There are a number of reasons for this. Construction disputes tend to be complicated. They often involve technical questions with which judges and jurors are not typically conversant. By allowing the parties to choose their own decision maker, the arbitration process permits them to select people knowledgeable about the complexities of both modern construction and of construction contracts.
Arbitration offers a quicker way to resolve disputes than the court system. It gives the parties the ability to choose the person or persons who will resolve their dispute. Whether arbitration is less expensive is debatable. Much depends upon the will of the parties. If they want an expedited proceeding that costs less than a court trial, they can
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so provide in their agreement by limiting discovery, controlling the length of the hearing, and agreeing upon a single arbitrator. If they contemplate potentially large claims and want a more thorough process, they can provide for significant discovery and a longer hearing before a larger panel of arbitrators.
Arbitration also offers the benefit of finality to the proceedings. The award is effectively the end of the dispute, and the parties do not face the uncertainty and delay of an often lengthy appeal process.
The industry's promotion of arbitration has been successful. Arbitration is now standard in construction disputes. Many of the form contracts commonly used in the industry require it.
(a) Arbitration is a creature of both statute and contract
Arbitration traces its existence and jurisdiction first to the parties' contract and then to the arbitration statute itself. Rimov v. Schultz, 162 Wn.App. 274,253 P.3d 462 (2011). Arbitration is a creature of statute, but it is only triggered by the agreement of the parties to invoke the remedy so created.
In Washington, there is no such thing as common-law arbitration. The proceeding is wholly statutory, and the rights of the parties are governed and controlled by the arbitration statutes. Godfrey v. Hartford Cas. Ins. Co., 142 Wn.2d 885, 16 P.3d 617 (2001). What this means in practice is that the parties are free to craft their arbitration agreement within the broad scope afforded by the Revised Uniform Arbitration Act (RUAA), adopted in Washington as Chapter 7.04ARCW, but they are not permitted to contract around the specific provisions of the RUAA that are not waivable. Rimov, 162 Wn.App. 274.
A few examples will illustrate this concept. The RUAA allows parties to seek to vacate an arbitration award, although it strictly limits the grounds for doing so. See RCW 7.04A.230(1) . If an arbitration agreement purports to provide for full appellate review beyond that limited scope of review permitted by statute, the Washington courts will decline to enforce the parties' agreement for broader appellate review. Barnett v. Hicks, 119 Wn.2d 151, 829 P.2d 1087 (1992).
Nor can the parties provide for de novo review of an arbitration award. There is no such thing. In Godfrey, the insurance policy in question required arbitration of a dispute over uninsured motorist coverage and provided that the decision of the arbitrators was binding unless either party demanded the right to a trial within 60 days. 142 Wn.2d 885.
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The court refused to enforce the provision because no such de novo review is allowed by statute. Although parties are free to decide by contract whether to arbitrate and which issues to submit to arbitration, once an issue is submitted to arbitration, the RUAA applies. See also Optimer Int'l, Inc. v. RP Bellevue, LLC, 170 Wn.2d 768, 246 P.3d 785 (2011).
(b) Does federal or state law govern arbitration proceedings?
The Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 -16, was first adopted in 1925. It applies in both federal and state courts to contracts executed under both federal and state law. Southland Corp. v. Keating, 465 U.S. 1, 104 S. Ct. 852, 79 L. Ed. 2d 1 (1984). The sweep of the FAA is set forth in 9 U.S.C. § 2—it applies to a written agreement "evidencing a transaction involving commerce."
The Uniform Arbitration Act was first promulgated in 1955 and was most recently revised in 2000 by the National Conference of Commissioners on Uniform State Laws. Washington adopted the original act and later enacted the RUAA, with an effective date of January 1, 2006.
The federal and state arbitration statutes are very similar, although the RUAA is more detailed than the FAA. Both provide that agreements to arbitrate are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of [a] contract." 9 U.S.C. § 2; see RCW 7.04A.060(1). Under both federal and state law, there is a very strong public policy favoring enforcement of agreements to arbitrate. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,103 S.Ct. 927, 74 L. Ed. 2d 765(1983);Satomi Owners Ass'n v. Satomi, 167 Wn.2d 781, 225 P.3d 213 (2009).
Given the broad sweep of the commerce clause and the federal courts' expansive interpretation of interstate commerce, it is inevitable that questions of preemption will from time to time arise, as happened in Satomi, 167 Wn.2d 781. The case involved the sale of units in a residential condominium. The court determined that because a substantial portion of the building materials used in the construction of the building had moved in interstate commerce, the FAA applied. RCW 64.55.100-.160, a portion of the Construction Defects Dispute Act, allows a party to demand arbitration, which by the terms of the statute is then subject to de novo review in the courts. That portion of the statute directly conflicts with the FAA's clear limits on judicial review of arbitration awards. The Washington Supreme Court held that
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the offending provisions of the state statutes were therefore preempted by the FAA. See §25.8, below, for a more complete discussion.
If the FAA conflicts directly with a section of the RUAA, and if the dispute in question involves interstate commerce (a low bar), the FAA will control. Absent a direct conflict between the two acts, the RUAA provisions will apply in this state. Because the difference between the two acts consists largely of the "gap fillers" found in the more detailed RUAA, the chances of direct conflict are lessened.
Parties are free under the FAA to choose the rules that will govern their arbitration. In Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 109 S. Ct. 1248, 103 L. Ed. 2d 488 (1989), the parties' construction contract provided for arbitration of disputes under the American Arbitration Association's Construction Industry Arbitration Rules. Although the contract did not specify whether federal or state arbitration acts would apply, it did include a choice of law clause providing for application of California law. The U.S. Supreme Court interpreted the choice of law clause to mean that the parties intended the California arbitration statute to govern the dispute even if arbitration could be stayed under the state act in situations in which the FAA would otherwise require it to proceed. A choice of law clause may therefore, in some cases, serve to invoke the procedural rules of a state's arbitration statutes even when those rules clash with the FAA.
(c) How to initiate arbitration
The parties are free to specify in their agreement how they are to demand arbitration and what pleadings (demand, answer, reply, etc.) they will use. Absent agreement on such matters, RCW 7.04A.090 will apply. All it requires to start an arbitration proceeding is that one party give "notice in a record" to arbitrate to the other as agreed in their contract. The notice must describe the nature of the dispute and the remedy sought. Absent other agreement, the notice is to be provided by certified or registered mail or by such service as is authorized for commencement of a civil action. The statute does not require any further "pleadings," although of course the parties may by their agreement require a response and specify the time limit within which the response must be provided.
(d) Can the right to arbitration be waived?
To sustain a claim that the opposing party has waived its right to arbitrate, the moving party must show that the other party knew of the right to compel arbitration, acted inconsistently with that right, and
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thereby prejudiced the moving party. Brundidge v. Fluor Fed. Servs., Inc., 109 Wn.App. 347, 35 P.3d 389 (2001). A party who has elected to litigate rather than arbitrate has waived the right to later demand arbitration. Otis House Ass'n v. Ha, 165 Wn.2d 582,201 P.3d 309 (2009).
Waiver of the right to arbitrate is most commonly found when a party has been joined in a lawsuit and fails in a timely manner to demand arbitration. In determining whether there has been waiver of the right, no one factor is controlling. Waiver depends on the facts of each case, and there is no bright-line rule as to when a party has failed to timely demand arbitration. Compare Saili v. Parkland Auto Ctr., Inc., 181 Wn.App. 221, 329 P.3d 915 (2014) (waiver found when defendant did not assert in its answer the right to arbitrate and...
