Though it’s common for contract provisions to require arbitration, owners, general contractors and subcontractors frequently disagree over the merits of this method of dispute resolution. Following are the top 10 pros and cons of mandatory arbitration.

1. Costs
Pro: Unlike court litigation, it’s not necessary to hire a lawyer to pursue a claim in arbitration. Also, arbitration does not ordinarily involve time-consuming and expensive “discovery,” during which attorneys for the parties subpoena each others’ documents and interrogate each others’ witnesses.

Con: Even though it’s not mandatory, most parties elect to be represented by a lawyer. Consequently, the cost savings of not using a lawyer often is not realized. And unlike court filing fees, which are relatively nominal, arbitration ordinarily entails substantial filing and arbitrators’ fees. For example, the American Arbitration Association (AAA) charges an administrative fee based on the amount of the claim or counterclaim that ranges from $975 for claims less than $10,000 to $8,700 for claims between $500,000 and $1 million. Additionally, the parties must compensate the arbitrator or arbitrators for their time. A single arbitrator’s fees can exceed $1,500 per day.

2. Time
Pro: The arbitrator sets the date, time and place for the hearing after consulting with the parties. It is common for an arbitration to take three to six months from the initial demand to the issuance of an award. Under the AAA rules, special fast-track procedures apply if neither party’s claim or counterclaim exceeds $75,000. In this case, the arbitrator is required to set a date for the hearing within 30 days of confirmation of the arbitrator’s appointment.

Con: A lawsuit ordinarily takes nine to 12 months to get from the initial filing to the trial. However, unlike in an arbitration, a lawsuit opens up the opportunity to have the court make legal rulings in advance of the trial that narrow the issues or dismiss all or part of the claims.

3. The Decision-Maker
Pro: In an arbitration, the parties can choose an arbitrator who has experience with construction. Additionally, unlike a judge in a court proceeding whose docket is often dominated by criminal, divorce and personal injury cases, an arbitrator ordinarily has the time to evaluate and decide the dispute.

Con: Unlike an arbitration, a judge or jury ordinarily does not have a background as an owner, general contractor, subcontractor or architect. Consequently, they do not have a bias in favor of one segment of the construction industry. In an arbitration, the appointed arbitrator is sometimes a person who is an architect, a general contractor or a subcontractor and this past experience in one sector of the construction industry sometimes generates a bias. For this reason, general contractors often object to the selection of a subcontractor as an arbitrator and vice versa.

4. Evidence
Pro: Because the rules of evidence do not apply in an arbitration proceeding, it is less time-consuming and less expensive to present a case in an arbitration proceeding than in a court trial.

Con: A party in an arbitration proceeding can be confronted with correspondence and affidavits from third-party witnesses who are not available for cross-examination. Likewise, a party in an arbitration proceeding can be confronted with testimony from witnesses who have no first-hand knowledge of the subject of their testimony. In a court proceeding, damages must be proven with reasonable certainty; in an arbitration proceeding, proof of damages can be based on speculation and conjecture.

5. Discovery
Pro: In an arbitration proceeding, the parties only have limited rights to discover damaging information from the opposing party. Among other things, this means that a party probably will not incur the significant costs of subpoenaing and reviewing the opposing party’s documents and taking depositions of the opposing witnesses. Under the AAA’s fast-track rules for claims under $75,000, there is no discovery (absent exceptional circumstances) except for an exchange of exhibits and lists of witnesses five days before the hearing. In other cases, the AAA rules state the arbitrator has the discretion to direct the parties to exchange documents and other information and identify witnesses, but there is no other discovery (absent exceptional circumstances) except for an exchange of exhibits seven days before the hearing.

Con: Court rules allow each party to use a variety of methods to discover information known only by the opposing party or a third party, including depositions, interrogatories (written questions) the opposing party must answer under oath and subpoenas for the production of documents. These procedures greatly increase the chances that each party will discover the weaknesses and strengths of their respective cases before trial.

6. Privacy

Pro: Arbitration proceedings are not open to the public and the parties can agree to keep the proceeding confidential.

Con:
In a court proceeding, confidential or embarrassing matters cannot be concealed from the public.

7. Joining Third Parties
Pro: Third parties who ultimately may be responsible may not be brought into the arbitration without their consent. The most common example of this is a dispute between an owner and a general contractor regarding an alleged error in the construction drawings. Under the arbitration rules, an architect who is responsible for the defective drawings may not join the arbitration between the owner and general contractor without the architect’s consent. Thus, most arbitration proceedings involve only the two parties to the contract.

Con: Court rules allow a party who has been sued for something for which a third party is ultimately responsible to bring the third party into the lawsuit by filing a cross-claim or third-party claim. In this manner, all the parties involved in the dispute are before the court at the same time in the same lawsuit, and the party who is ultimately responsible bears the ultimate liability.

8. Appeal Rights

Pro: Ordinarily an appeal from an arbitration award is permitted only on one of five narrow grounds:  
  • the award was procured by corruption, fraud or other undue means;
  • there was evident partiality, corruption or misconduct by the arbitrator; 
  • the arbitrator exceeded his or her powers; 
  • the arbitrator refused to postpone the hearing or hear evidence, or improperly conducted the hearing; or 
  • there was no arbitration agreement.
Consequently, an award in an arbitration proceeding is rarely overturned, even if the evidence does not support the result.

Con: The losing party in a court case has a right to appeal to a higher court. The basis for the appeal can include alleged errors made by the trial judge as well as alleged mistakes made by the jury, including that the result is not supported by the evidence.

9. Enforcement of the Award

Pro: In an arbitration, the prevailing party can file an application with the local court to confirm the arbitration award and enter judgment in conformity with the award. Once a court enters judgment, the award can be enforced just as any other court judgment, including garnishment of bank accounts and execution and seizure of assets.

Con: Unlike a court judgment, which usually allows the party to enforce the judgment within 30 days, an arbitration award cannot be enforced until a lawsuit is filed and a court formally confirms the arbitration award and enters a court judgment in conformity with the award. This process usually takes at least 90 days

10. Legal Errors
Pro: An arbitrator generally is not bound by legal principles, nor does he or she have to explain or justify the decision. Additionally, the decision is not reviewed for legal errors. An arbitrator is generally entitled to make a decision based on what he or she deems to be just and equitable within the scope of the contract between the parties.

Con: The court is required to enforce the terms of the contract between the parties in accordance with the contract’s plain terms. Thus, typical provisions in construction contracts such as pay-if-paid clauses, no damages-for-delay clauses, liquidated damages clauses and clauses requiring timely written notice generally must be enforced in accordance with their terms.

Weighing the Pros and Cons
The decision to agree to mandatory arbitration frequently depends on whether the company is viewed as a potential defendant or a potential plaintiff. Those who view their companies as potential defendants frequently strike arbitration provisions from their contracts. For example, many owners strike arbitration clauses from their contracts on the simple ground that they think there is no good reason why they should make it easier, less expensive and quicker for a contractor to pursue disputed claims. Using similar logic, many general contractors try to include a mandatory arbitration clause in their contracts with owners, but exclude the clauses from their subcontracts.

Another guiding consideration about whether to agree to mandatory arbitration is how much the company needs to rely on the written terms and conditions of the contract. Companies that rely heavily on risk-shifting clauses, such as pay-if-paid clauses and no-damages-for-delay clauses, may find that a court is more willing to enforce the clauses as written. In contrast, those companies that view such risk-shifting clauses as an obstacle may find that an arbitrator is more willing to overlook the clauses and make a decision based on what he or she deems equitable.


Robert F. Flinn is a partner in the law firm of Flinn & Beagan, Vienna, Va. For more information, call (703) 448-6800 or email rflinn@flinnandbeagan.com.