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Key Considerations When Choosing Arbitration, Litigation or Mediation in Construction Contracts
By Daniel Kapner
This article originally appeared in Construction Executive Risk Management, Monday January 11, 2016
A critical decision for executives negotiating and drafting construction contracts is which dispute resolution mechanism is most appropriate for the project.
While to some the conventional thinking suggests that arbitration is faster, cheaper and better than litigation, the realty often proves otherwise. There are no doubt important potential benefits of arbitration. Because arbitration is a creature of contract, parties can agree in the contract or at a later stage for an arbitral award to remain confidential and out of the public record, and agree to various other factors to control the process, such as requiring the arbitrators to possess certain expertise, agreeing to certain discovery requirements or an expedited process.
However, there are aspects of arbitration that project participants should consider before agreeing to arbitrate disputes.
- Lack of appeal. Arbitration awards generally are not appealable and can only be vacated on extremely narrow grounds, such as the arbitrator was corrupt, biased, engaged in misconduct or exceeded his or her powers. After the U.S. Supreme Court’s 2008 decision in Hall Street Associates, L.L.C. v. Mattel, Inc., federal circuit courts have become divided as to whether a court may vacate an arbitral award under the Federal Arbitration Act that is based on a “manifest disregard of law.” In practice, this means that in some jurisdictions even a decision based on an error of law may be final and binding on the parties.
- An additional misconception about arbitration is that disputes are resolved more quickly than in litigation. Parties must appoint a panel, a process that can take weeks or, in some extreme cases, months. The winning party may need to enforce the decision in court, and parties may try to challenge the enforceability of an award or a poorly drafted arbitration clause. Moreover, the most time-consuming aspects of trial practice—motions and discovery—are increasingly being imported into arbitration procedures. As a result, the length of time of an arbitral proceeding may parallel litigation. In one survey, 69 percent of respondents reported that in their experience arbitration fails to meet the desires of business users “half” to “most of the time” when they want speed, efficiency and economy.
- Fees and costs. Several organizations provide arbitration services. The two organizations that have robust construction arbitration services are the American Arbitration Association (AAA) and JAMS. Parties must pay these organizations fees for administering the dispute at the time a claim or counterclaim is filed, in addition to compensating the arbitrator or arbitrators for their time. Fees are often calculated based on the claim amount; thus, larger claims typically result in higher administrative fees. According to a 2002 study by Public Citizen, “The cost to a plaintiff of initiating an arbitration is almost always higher than the cost of instituting a lawsuit. . . . [F]orum costs—the costs charged by the tribunal that will decide the dispute—can be up to 5,000 percent higher in arbitration than in court litigation.” Moreover, the greatest expense of arbitrating disputes—attorneys’ fees—are not necessarily less than in litigation due to the increasing similarities of arbitration and litigation trial practices.
- Arbitrator experience. While organizations such as the AAA may draw from a roster of experienced construction lawyers when constituting a panel, there is no guarantee that each of the arbitrators ultimately selected by the parties will be sufficiently qualified as adjudicators and/or experienced in the types of complex issues that may be in dispute.
Regardless of whether parties to a construction contract select arbitration or litigation, they should require mediation as a condition precedent to either dispute resolution process.
Mediation is “marriage counseling for business people.” In mediation, the parties engage a neutral third party to facilitate negotiations to try to reach a settlement on mutually acceptable terms. Mediations are private, flexible, informal and confidential. There are no rulings or decisions in mediation. Parties are not obligated to agree to a settlement. Additional advantages include:
- parties retain control over the outcome, as opposed to litigation and arbitration where the risk of an adverse outcome cannot be eliminated;
- mediation, even in complex cases, is generally conducted in a day or two, and therefore requires relatively minimal investment of time and money;
- mediation is confidential and inadmissible in subsequent litigation, thus parties may have little to lose by mediating disputes; and
- mediation may preserve ongoing business relationships.
A mediation facilitated by an experienced construction lawyer with a track record of success is an effective way to resolve disputes efficiently while avoiding the risks, financial costs and time demands of arbitration or litigation.
Reprinted with permission from Construction Executive, a publication of Associated Builders and Contractors Services Corp. Copyright 2016. All rights reserved.