TO ARBITRATE OR NOT TO ARBITRATE? AN IMPORTANT QUESTION
There is a new trend within the construction industry to utilize form contracts that allow the parties to choose whether to resolve all disputes by binding arbitration instead of litigation. This is an improvement over the older forms that dictated which means of dispute resolution would be used. However, too many contractors now opt to use arbitration without any consideration. While arbitration has been embraced by many in the construction industry as a cheaper, faster, and better alternative to litigation, it does not always live up to these lofty expectations. This article will explain some of the advantages and disadvantages of opting to arbitrate construction disputes.
So what is the difference between arbitration and litigation? Litigation is the process of filing a lawsuit and going to trial. In contrast, arbitration is where the parties submit their claims to a neutral third party arbitrator or arbitration panel for a binding decision, instead of to a judge or jury.
Construction arbitrations are usually coordinated by arbitration administrators, the most common of which is the American Arbitration Association (“AAA”). To initiate arbitration, a party must file a claim and pay filing fees with the administrator identified in the contract. Filing fees with the AAA range between a minimum of $750.00 (for claims less than $10,000.00) to more than $10,000.00 (for claims between 5-10 million dollars). In contrast, the cost of filing a lawsuit in Idaho is currently only $88.00.
In addition to filing fees, the parties also must pay for the arbitration location, the arbitrator’s professional fees, and all expenses the arbitrator incurs throughout the arbitration. It is not unusual for the professional fees and expenses to exceed several thousand dollars per day. In the event the contract requires a three-person arbitration panel, which is quite common in construction arbitrations, these costs are tripled. Contrast this with a trial where the taxpayers pay the costs of the judges, juries, and courtrooms, instead of the parties.
Another thing to consider is whether you will be able to recover the attorneys’ fees you incur if you prevail on your claims. The prevailing party at trial will likely recover at least some of its attorneys’ fees. However, the prevailing party in arbitration cannot recover its attorneys’ fees unless there is a contractual provision allowing such an award. There are legitimate reasons why you may want each party to be responsible for its own attorneys’ fees regardless of the outcome of the dispute. However, this decision should be made only after careful consideration.
Arbitration is also generally viewed as faster and less formal than litigation. While this is generally true, it is not uncommon for construction arbitrations to be nearly as time consuming and formalistic as trials. Construction disputes commonly involve tens of thousands of pages of documents, involve numerous fact witnesses, and require expert witnesses to testify concerning the veracity of the competing claims. This often necessitates a time consuming, formalistic discovery process regardless of whether the parties litigate or arbitrate their claims.
One clear advantage of arbitration is that the parties are allowed to select arbitrators experienced in dealing with construction disputes. Construction arbitrators are typically experienced construction lawyers that understand the construction industry and construction law. This is knowledge that most judges and juries simply do not have. Construction disputes involve lengthy construction contracts, specialized industry standards, and technical plans and specifications. These are things that can be difficult and time consuming to explain to the judge or jury, but less so to a knowledgeable arbitrator.
Others cite that an advantage of arbitration is that it allows the parties to avoid the kinds of wild or unpredictable results that may come from a jury trial. However, the flip side of this is that it means arbitrators are much more likely to split the proverbial “baby.” While this may mean nobody loses, it can also mean that nobody wins. This can be a difficult pill to swallow after expending tens of thousands of dollars in attorneys’ fees and arbitration costs.
Another purported advantage of arbitration is the finality of the arbitrator’s decision. The bases to appeal an arbitrator’s decision are largely limited to cases of fraud, bribery, or other illegal conduct, but not for mistakes made by the arbitrator in deciding factual or legal questions. Consequently, the finality of the result is often advantageous for the prevailing party, but the non-prevailing party may feel slighted that it cannot appeal what it believes to be an erroneous decision.
As you can see, arbitration has pros and cons. The decision to opt for arbitration should be made on a case-by-case basis weighing these pros and cons and carefully analyzing the nature of the contract and the parties you are dealing with. Consultation with your construction attorney can help you to assess these risks or to draft contractual provisions limiting undesirable aspects of arbitration in the event it is chosen.