Nicolas Bohorquez | Freeman Mathis & Gary
An often-overlooked side effect of litigation, particularly in the construction industry, is the impact that it has on day-to-day operations. The more involved and protracted the litigation, the more your company must reallocate its resources (i.e. time and money) to tend to the litigation instead of focusing on projects that generate revenue.
Despite the headache, litigation serves a necessary purpose to protect what owners and their employees have built. However, going to court is not always the best or even the most economical method of litigation; enter arbitration.
What Is Arbitration?
In short, arbitration is a mechanism that allows parties to resolve their dispute outside of the court system through a neutral arbitrator selected by the parties.
Arbitration of disputes will occur only if the parties have agreed to arbitrate in writing. In the construction industry, many contracts include arbitration clauses that predetermine the parties’ arbitration rights prior to any dispute. As such, whether drafting or executing a contract, construction professionals should weigh certain considerations before committing to arbitration of potential disputes.
What are the Benefits of Arbitration?
- Efficiency – Strict, drawn-out procedural timelines and a judge’s need to tend to a vast number of other cases can result in court proceedings going unresolved for years. Arbitration offers a far more streamlined approach and allows the parties to quickly schedule when they will resolve their dispute.
- Choice of Arbitrator – In court, a judge is assigned to a case with an extremely limited ability to object by the parties. However, arbitration allows the parties to mutually select their arbitrator. This is particularly beneficial in the construction context, as the parties can select an arbitrator familiar with the specific type of construction dispute at issue.
- Cost – The speed at which the parties can schedule and conduct an arbitration means they can often bypass some of the costs associated with conducting discovery and exchanging motions synonymous with court proceedings. This typically translates into the attorney billing less time and a significant reduction in overall cost.
- Finality – When a judge decides a case, the non-prevailing party has a right to seek an appeal of that decision. Appeals significantly increase the time and cost of litigation. Decisions of the arbitrator, on the other hand, are final and not appealable. There are very limited grounds for asking a court to vacate an arbitration award. In other words, the arbitrator has the final say in deciding the dispute, period.
- Confidentiality – Construction professionals, like many service-oriented industries, are established and knocked down by their reputation. Disputes can result in damaging allegations that, if filed in court, become public record for anyone to view. Arbitration, however, is confidential and allows the parties to freely explore the dispute without outward scrutiny.
What are the Disadvantages of Arbitration?
- Finality – As mentioned above, the arbitrator’s word on the matter is final. As such, a party that feels aggrieved by the arbitrator’s decision often has no other recourse and must live with it.
- Unpredictable Decisions – Arbitration uses much less stringent rules for evidence. As such, unfavorable evidence that would otherwise be kept out of court may be permitted in arbitration. Also, because arbitration skips many of the fact-finding procedures of litigation, parties may be unable to gather all the evidence needed to support their position before arbitration.
- Cost – Yes, arbitration is generally more cost-effective than litigation. However, there are exceptions. Litigation requires that the parties pay their costs and attorneys’ fees. Arbitration, in addition to those costs, requires that the parties also pay the arbitrator for their services. Arbitrators set their rates, and the cost of highly specialized arbitrators can balloon quickly. As such, the parties should exercise caution in choosing an arbitrator that will fairly judge the case but will also resolve the dispute cost-effectively.
Have More Questions? Consult a Lawyer to Weigh the Options.
When considering whether to litigate or arbitrate a dispute, remember that no two scenarios are identical. What may appear to be a garden variety construction dispute, may involve more nuance better suited for review by a specialized arbitrator. A skilled attorney can assist in navigating that decision with the business’s interests in mind.