With increasing regularity, construction contracts are providing for the resolution of disputes through arbitration, rather than litigation through the court system. For example, the American Institute of Architects (AIA) 1987 and 1997 contracts contain a provision which requires arbitration through the American Arbitration Association (AAA). Unlike litigation, arbitration does not involve the use of a judge or jury to resolve disputes. Instead, the arbitrator or a panel of arbitrators decides the dispute after each side presents their case. Generally, the arbitrator(s) decision is final and binding as to each of the parties to the arbitration.
There is no right or wrong answer to the question of whether arbitration or litigation is the better choice to resolve a dispute. Each dispute has to be evaluated on its own set of facts and the parties involved, but here are a few things to keep in mind before you sign the next contract with an arbitration provision in it.
Generally speaking, it is less expensive to arbitrate a case rather than litigate a case, although arbitration fees can be exorbitant. There is typically less discovery in arbitration than in litigation. Discovery includes things such as depositions of witnesses, requests for the production of documents, interrogatories (questions directed to the opposing party), and requests that parties admit or deny certain facts in the case. Although in litigation there are some limits to discovery, discovery is liberally allowed by courts, thereby increasing the time and expense an attorney has to devote to pursuing and/or defending a case.
Because arbitration limits the amount of discovery parties can obtain, the cost to arbitrate can be less than the cost to litigate. But, without discovery, it is more likely that a party will be surprised at the arbitration hearing by an undisclosed document or witness. In addition, arbitration often allows a dispute to be resolved in less time than litigation through the court system. Normally, arbitration from start to finish takes a year or less, where litigation rarely is concluded in less than a year and may take several years before the dispute is brought to trial and appeals are concluded.
An advantage of arbitration is that the arbitrator(s) is/are usually knowledgeable in the field relevant to the dispute. For example, if the dispute concerns a construction project, then the arbitrators will generally have some experience in the construction industry as an architect, engineer, developer, construction attorney or general contractor. In the court system, the judge that is assigned to your case and the jury members usually do not have a construction background and may not be familiar with the intricacies of the construction industry.
If you are defending a claim, the benefit of having someone knowledgeable in the construction industry act as an arbitrator for your case also helps to prevent every party’s worst fear - the runaway jury (as in, for example, the $40 million jury award for the spilled McDonald’s coffee). There are certain types of cases such as sick building cases, which, if put in front of a jury, could result in extraordinarily high jury damage awards against the party that is ultimately determined to be responsible for the damage. Arbitrators generally are less likely to render an exorbitant award and are more likely to limit the types of damages that are awarded. In addition, it is much harder to appeal an arbitration award than a trial verdict, which can be either a benefit or a detriment, depending on the outcome.
Technically, arbitrators are not required to follow the law. In litigation, the court uses statutory authority, precedent set forth in case law, and the rules governing evidence and court procedure, among other things, which act as guidelines for attorneys when pursuing or defending a claim. In arbitration, arbitrators are not required to adhere to any law, statute, or rule, other than the procedural rules provided by the arbitration association. In general, arbitrators apply the applicable law, but may not strictly enforce the rules of evidence and court procedure.
Although there is no clear answer to the question of whether litigation or arbitration is the better choice to resolve disputes, a party should consider the type of work, the likelihood of a dispute arising, and the parties involved to determine whether litigation or arbitration is a more appropriate venue for resolving disputes.
Author’s note: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation. Regulations and laws may vary depending on your location. Consult with a licensed attorney in your area if you wish to obtain legal advice and/or counsel for a particular legal issue.