Benefits (and Detriments) of Construction Arbitration

When negotiating construction contracts, parties are typically focused on “big ticket” issues like scope of work, timing and payment. Often contracts are offered as “take it or leave it,” with little, if any, room for negotiation. Important issues can also be “hidden” in the boilerplate. One such important issue is dispute resolution. Most construction contracts now include an “alternative dispute resolution” clause that requires the parties to resolve all disputes by arbitration rather than by going to court. What does this mean and is it a good thing?

Arbitration is simply an alternative to resolving disputes by filing a lawsuit in court. There are important differences, however. The intent of arbitration is to try and resolve disputes more cheaply and more quickly than in court. With a lawsuit, the dispute is resolved in front of either a judge or jury. While the parties have to pay their own attorneys and experts’ fees, they do not have to pay for the judge and jury fees are minimal.

With arbitration, the dispute is resolved in front of a private individual, typically a lawyer or contractor, who is trained and experienced as an arbitrator. Unlike a judge, the arbitrator charges a fee for his or her services, which may be the same or even more than the fees charged by the parties’ own attorneys and experts. Each party to the arbitration must pay an equal share of the arbitrator’s fees. While the prevailing party in arbitration may be able to recover their share of the arbitrator’s fees as damages, they must still pay the fees in the first instance.

Because of this, arbitration may appear to be more expensive. However, as arbitrations typically proceed faster, the additional expense of the arbitrator may actually be less than the extra fees parties have to pay their attorney and experts if the case were to go to court rather than arbitration. While a party can expect four or five hours of testimony at day at trial, they may get seven to eight hours of testimony per day in arbitration. An eight to 10 day jury trial may be resolved in as quickly as three or four days in arbitration.

Another benefit of arbitration is that the case typically is resolved much more quickly. While it may take years to resolve a dispute in court, a typical arbitration may be decided in as little as six to 12 months. Another benefit is privacy. While much of what is filed or presented in court is a matter of public record, arbitration proceedings are private. Even the fact that a party has been involved in arbitration may never be known.

Probably the best benefit of arbitration, however, is that the parties are involved in selecting the arbitrator. They are able to ensure that the arbitrator is knowledgeable of the issues that typically arise during contract disputes (extra work claims, changed conditions, code requirements, etc.). The judge and/or the jury, on the other hand, may have little or no construction knowledge or experience at all.

There are some potential detriments to arbitration that a party needs to be aware of as well. As indicated, arbitration is a creature of contract; if the parties’ contract requires arbitration, it is hard to avoid that obligation. Also, because of the desire to keep costs down and to get to resolution quickly, arbitrators may also limit or prevent discovery (such as witness depositions). Additionally, arbitration (except in rare, limited circumstances) is not subject to appeal. If a party thinks a judge made an incorrect decision, they may appeal the result to a higher court. In arbitration the parties are typically stuck with the arbitrator’s ruling. The arbitration clause may also have notice and timing requirements that need to be strictly followed. Inadvertently missing one can potentially result in a party waiving its right to proceed.

The benefits outweigh any potential detriments of arbitration. It allows the parties to resolve disputes privately and, typically, in a more expeditious and cost effective manner before an experienced “private judge” who is more likely to understand the nuances of the parties’ dispute. The arbitrator’s construction knowledge and experience goes a long way to ensuring that the dispute is properly, and fairly, resolved. A word of caution, however - always ensure that all notice and timing requirements are followed.