Some Pros and Cons of Arbitration Clauses in Your Contract
Posted: June 23, 2023 | Legal
By Miles D. Jolley, Associate, Currie & Hancock LLP
There is no “one-size-fits-all” approach to choosing the dispute resolution procedure in construction contracts. The appropriate form of dispute resolution depends on the particular situation of each project and the parties’ priorities. In this article, I will give you some things to consider whether arbitration makes sense as the form of dispute resolution for your next project.
Cost is usually the first consideration, and there are two sides to this coin. If you choose to have a private organization administer the arbitration proceeding, those organizations tend to charge a filing fee that, in my experience, is significantly higher than the filing fee you may pay to a court to file a lawsuit. In most instances you also will have to pay the arbitrator(s) for their time devoted to the arbitration. You don’t have to pay a judge or jury for their time to decide your case.
Attorneys’ fees and costs are also an issue. Arbitration is intended to be more streamlined and efficient, but large cases will still require the cost of significant discovery and possibly experts to help prove claims and support defenses. That said, you can control those costs relatively effectively in arbitration. The parties can agree up front on the scope of discovery, number of experts, etc., to control costs. Further, most arbitrators understand that arbitration is supposed to be relatively simplified and will make decisions geared toward reasonably limiting discovery and avoiding unnecessary motions.
Time is another important consideration. The parties have greater control over the arbitration and final hearing schedule (although the schedule is still subject to the arbitrator(s) availability). Compared to courts, arbitration typically speeds up the time for parties to prepare their case and get to a final hearing. This is not guaranteed though. Court systems are making conscious efforts to speed up litigation in part spurred by the backlog of cases caused by COVID-19 court shutdowns in 2020. Courts and judges are still incredibly busy though. Again, as with the cost aspect, most arbitrators are aware that parties choose arbitration because they want a quicker alternative to courts. Arbitrators will typically try to get the parties to a final arbitration hearing reasonably quickly.
Another issue to keep in mind is the scope of discovery in arbitration, which is closely tied to the time and cost aspects. Parties and arbitrators use limitations on discovery as one of their main tools to control costs and get the cases to final hearing reasonably quickly. This is a double-edged sword though. You could find yourself in a situation where discovery is too limited and that prevents you from taking certain depositions (or any depositions at all) or requesting certain documents that would be important for your case. That’s not to say a judge in a court case would never unnecessarily limit discovery, but the scope of discovery in most courts is broader than what you might experience in arbitration. If saving time and money are the highest priorities then limitations on discovery might seem advantageous, but it can have negative consequences.
Appeal rights are also important. There are no courts of appeal in arbitration proceedings. Arbitration awards are almost always final and notoriously difficult to reverse. You can try to reverse an arbitration award in court but, in most cases, to reverse the award it has to be fraudulent or the arbitrator so clearly biased against or in favor of one of the parties. An arbitration award could be contrary to applicable law or a clear “split the baby” decision, and it would still be difficult to reverse. Courts provide more latitude for appeals. Judges are held accountable through multiple levels of appellate review to make decisions according to applicable law or the decisions are reversed. That same level of review is not typically available in arbitration.
Arbitration has several other additional advantages. The parties are generally free to include language that tailors the arbitration process to their needs. Like litigation in a court, the parties can specifically designate the locale for the arbitration hearing (although some states have statutes that obligate parties to arbitrate disputes in the state where the project is located). The parties also have the ability to determine specific procedures that will apply to the arbitration (in addition to the agreements on discovery noted above) like stating the specific types of claims subject to arbitration, monetary thresholds for claims subject to arbitration, or whether the arbitrators can decide the case before the final hearing on motions similar to motions for summary judgment in a court. Arbitration is also private by definition, so filings and evidence are not matters of public record unlike litigation. Lastly, arbitration allows you to stipulate that the arbitrator must have specific knowledge and/or experience with construction law or construction projects. Judges and juries are random and most often have no practical experience with construction.
If the above considerations have you leaning toward arbitration, ideally you will want to harmonize all of your contracts. Claims on construction projects will frequently require more than two parties to properly resolve. For example, in an arbitration of a subcontractor claim against the prime contractor for additional work directed by the project owner, the prime contractor will want to be able to add the owner since the owner was responsible for the claim. The prime contractor can’t bring the owner into the arbitration proceeding unless the owner-prime contractor contract allows it. You will need to have language in your contract that allows you to join the other party in any arbitration proceeding with a third party.
There are many advantages to choosing arbitration as the form of binding dispute resolution in construction contracts. If executed as intended, arbitration can be less expensive, quicker, and more efficient than other forms of dispute resolution like litigation. However, there is no guarantee that arbitration will always be preferable to litigation. Parties should consider the particular circumstances of each project and their own priorities when deciding on arbitration. An experienced construction law attorney can assist in drafting a dispute resolution to meet those priorities and circumstances.
Smith, Currie & Hancock LLP is a national boutique law firm that has provided sophisticated legal advice and strategic counsel to our construction industry and government contractor clients for fifty years. They pride ourselves on staying current with the most recent trends in the law, whether it be recent court opinions, board decisions, agency regulations, current legislation, or other topics of interest. Smith Currie publishes a newsletter for the industry “Common Sense Contract Law” that is available on their website: www.SmithCurrie.com.
The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.
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