Given a choice, which is the better way to resolve a construction dispute: arbitration or litigation? For many years, arbitration was the default choice of owners and contractors. This preference was reflected in the widely-used standard-form construction contracts, which all specified arbitration as the sole means of dispute resolution. Recently, however, arbitration has begun to fall out of favor, and standard-form contracts have recognized this industry change in attitude. The ConsensusDocs, AIA, and EJCDC standard-form contracts now require their users to make a choice between arbitration and litigation. How are owners and contractors to choose between arbitration and litigation at the outset of a project? Four key factors to consider are cost, competency/complexity, and conclusiveness—the four C’s.
Cost—Arbitration can save money with cooperation or proper planning.
Arbitration is based on a contractual agreement to resolve disputes outside the public court system. Because arbitration is consensual, the parties have more ability to control cost than may be available in either state or federal court. But this requires cooperation. Frequently, by the time a dispute arises, the parties are less inclined to cooperate. While virtually all construction arbitration agreements are enforceable under the Federal Arbitration Act, this does not prevent a party from seeking to avoid arbitration by filing a preemptive lawsuit or by seeking to enjoin a demand for arbitration. A party resisting arbitration is entitled to raise contractual defenses such as fraud, duress, or unconscionability to demonstrate that no such agreement was made. If an agreement is found to exist, there may still be debate over its scope. An ambiguous agreement may be subject to judicial interpretation, which could require an evidentiary hearing. Following any order compelling or denying arbitration, federal courts and certain states will provide for an appeal as of right. If one party is truly obstinate, an agreement to arbitrate in lieu of litigation can result in months or years of just that: costly litigation.
If both parties, or the party controlling the choice, want to select arbitration to reduce and control cost, there are a number of things that can be done at the time of contracting before a dispute arises. First and foremost, use a well-recognized arbitration clause. The American Arbitration Association has recommended language available through its website, adr.org. Second, select the arbitration option in the ConsensusDocs or one of the other nationally-recognized standard-form contracts. This should eliminate, or significantly reduce, arguments about whether there is a binding agreement to arbitrate. Beyond that, consider limiting or eliminating motion practice and discovery other than the exchange of documents, features of litigation that have crept more and more into the arbitration process. How to draft such limitations will be the subject of a forthcoming article in this series on dispute resolution. Even if such limitations are not included in an arbitration clause, the parties to an arbitration always have the ability to reduce cost by agreeing to forego costly procedure.
Competency/Complexity—Arbitration may work better for complex cases requiring construction expertise.
The competency of the fact-finder is of particular import. Juries and even judges may lack the requisite expertise to adjudicate a complex construction dispute, whereas a panel of lawyers, engineers, and/or consultants selected as arbitrators is likely to possess a much higher level of expertise. In the words of Chief Justice Warren Burger, “to find precisely the judge whose talents and experience fit a particular case of great complexity is a fortuitous circumstance. This can be made more likely if two intelligent litigants agree to pick their own private triers of the issues.” Burger, Chief Justice of the U.S. Supreme Court, Remarks Before the American Arbitration Association and the Minnesota State Bar Association: Using Arbitration to Achieve Justice (August 21, 1985), in 40 Arb. J. 3, 6 (1985).
While contract law is not particularly complex, construction disputes on large projects can be factually complex. Resolution of such complex disputes can require knowledge of disciplines ranging from architecture and material sciences to construction management and mechanical engineering. Arbitration allows the parties to select a panel of peers who understand these inherent complexities. As one federal judge observed:
Being trained in this field, you are in a far better position to adjust your differences than those untrained in these related fields. As an illustration, I, who have no training whatsoever in engineering, had to determine whether or not the emergency generator system proposed to be furnished . . . met the specifications, when experts couldn’t agree. This is a strange bit of logic. . . . [The parties] should realize that, in most situations, they are by their particular training better able to accomplish this among themselves.
E. C. Ernst, Inc. v. Manhattan Const. Co. of Texas, 387 F. Supp. 1001, 1006 (S.D. Ala. 1974). Since arbitration is a consensual process, the parties can even specify in advance the types of arbitrators who will be eligible to serve in the event of a dispute.
Conversely, arbitration may not be the best choice for simpler projects. The American Arbitration Association and other private administrative bodies charge case administration fees that are significantly higher than the filing fee for a court case. On top of that, arbitrators, unlike judges and juries, must be paid by the parties. If complexity/competency is not a major consideration, then the choice of arbitration versus litigation may default back to cost. The courts can be cheaper for a relatively simple dispute. The tradeoff for this reduced cost is lost time. A simple arbitration will likely be concluded in less time than a lawsuit.
Conclusiveness: Consider litigation for the preservation of meaningful review.
To arbitrate is to virtually forgo judicial review, and exceptions to this generality are rare: “Because arbitration is an alternative to litigation, judicial review of arbitration decisions is ‘among the narrowest known to the law.’” AIG Baker Sterling Heights, LLC v. Am. Multi–Cinema, Inc., 508 F.3d 995, 1001 (11th Cir. 2007) (quoting Del Casal v. E. Airlines, Inc., 634 F.2d 295, 298 (5th Cir. Unit B Jan. 1981)). Consequently, the desirability of an appeals process can be a deciding factor when choosing between arbitration and litigation.
Most grounds permitting judicial review of an arbitration award do not allow for a review of the award’s accuracy or merits, but instead only the nature of the proceedings. Even reduced to proceedings alone, review can be exceptionally narrow. For example, in Oxford Health Plans v. Sutter, the Supreme Court of the United States was forced to uphold an arbitrator’s interpretation of the parties’ contract, “however good, bad, or ugly,” because the Court’s review of the arbitrator’s venue determination was limited to “whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” Indeed, to overturn or vacate an arbitration award, the Federal Arbitration Act requires that the award be obtained through fraud or corruption or that the arbitrator act corruptly or exceed his allocated power.
To some, the finality of arbitration may be troubling. Others may see value in a process that provides closure and does not ordinarily result in protracted appeals. Most contractors can make more money from new projects than they can from protracted litigation.
Seeking to overturn an arbitration award is an expensive bet with poor odds. Depending on the jurisdiction, an aggrieved party will have to demonstrate that the award was arbitrary and capricious, irrational, or made with a manifest disregard of law. With the bar set so high, prejudicial or even egregious errors may be left undisturbed following costly and prolonged post-award litigation. The Eleventh Circuit—which has appellate jurisdiction over Alabama, Florida, and Georgia—summarized this dilemma aptly, noting in one case that the process “deprived [the appellee] and the judicial system itself of the principal benefits of arbitration. Instead of costing less, the resolution of this dispute has cost more than it would have had there been no arbitration agreement.” B.L. Harbert Int’l, LLC v. Hercules Steel Co., 441 F.3d 905, 913 (11th Cir. 2006).
Arbitration’s lack of formality, evidentiary rules, and binding precedent can produce unexpected and effectively conclusive results. If a party is worried about being stuck with an unexpected result, it can opt for court litigation or the mandatory use of a three-arbitrator panel, with of course the latter option increasing costs. A party faced with this choice at the time of contracting must weigh the finality and closure normally offered by arbitration against the more thoroughly vetted and explained resolution from a trial and subsequent appeals.
In deciding which dispute resolution option to choose, a party should consider the four C’s of dispute resolution: cost, complexity, competency, and conclusiveness. These four concepts are not mutually exclusive; instead, they are inseparably intertwined, and their consideration lends itself on occasion to conflicting direction. Making this decision requires careful, strategic thinking and the understanding that no process will guarantee a successful result.