Litigate Versus Arbitrate in Construction Contracts

To Bind or Not To Bind, That Is the Question

By Robert Wolf

“I just heard that my favorite baseball player was awarded $15 million in arbitration from his team.  THAT is what I am looking for.”

When clients talk about wanting arbitration, it typically stems from watching a little too much SportsCenter on ESPN.  Unfortunately, most arbitrations are not as simple or exciting as the arbitration proceedings we hear about on sports channels.

In fact, in many situations, arbitration can be a BAD CHOICE FOR CLIENTS.

What’s the Big Difference?

Arbitration

Generally speaking, arbitration (or an arbitration “hearing”) is a procedure where the parties actually have a trial, but instead of being in front of a jury, they are in front of a panel of 1-3 lawyers or former judges.  There is no jury, and the panel of 1-3 individuals decides the outcome of the case based on the evidence presented.

Once a decision is reached, that decision is binding.  While one can appeal an arbitration decision, they are rarely overturned unless the arbitrator is found to have some type of undisclosed conflict of interest or some other unfair bias.

Mediation

Mediation is a different type of dispute-resolution procedure.  Mediation is NOT a trial.  The parties in a lawsuit start the day by sitting around a large conference room table, with each side puffing their legal chest, explaining why their side is the side of truth and justice.  The mediator is the referee, and usually keeps things from getting too out of hand.  This mediator is impartial and has no stake in the outcome, since the mediator receives a pre-set hourly rate or flat rate for his or her services.

After the opening comments/chest-puffing, the parties split into separate rooms, and the mediator goes room to room analyzing the strengths and weaknesses of the case.  The mediator then gives an opinion as to what a judge or jury might decide if the case actually goes to trial.

No one can force you to do anything at a mediation, except to show up in good faith and try to get the case resolved.  If you do not like the offer made by the opposing party or the demand made of you, then at the end of the day of mediation, you can just go home.  Nothing has been decided for you, and your case continues.

What is Right for My Business?

The answer to this question is often issue-specific.  Ask yourself if you would rather have a jury or a panel of lawyers and/or former judges deciding your case.  Jurors are always told to check emotion at the door when they walk into a courtroom, but they are only human.

If your issue is one for which you want to avoid the emotions of twelve people who do not know a lot about you or your company, then arbitration is a potential for you.  Keep in mind, though, that arbitration is still expensive – you still go through the process of taking depositions, exchanging documents, and arguing about evidence before the arbitration hearing itself.

I have seen many companies choose arbitration, as opposed to trial (or requiring a mediation), when handling subcontractor agreements.  Sometimes companies are afraid that a jury might side with the “little guy” when a general contractor tries to enforce certain provisions in the subcontract agreement.  Therefore, arbitration might make more sense in that situation.

Discuss your goals with an attorney before you decide whether to require the other party of the contract to go to arbitration, or before you sign a contract waiving your rights to a jury trial.  Always make sure you understand the advantages and disadvantages of each, and determine what is right for you.

Remember, the question of arbitration or trial (and mediation before trial) is a lot more complicated than whether a sports team or a sports player has the winning salary idea for a baseball player.

Robert Wolf is a senior associate with The Beckham Group in Dallas, Texas.  The Beckham Group has extensive experience with, and specializes in, business litigation both as a Plaintiff and a Defendant.  The firm drafts and prosecutes/defends civil cases involving numerous types of contracts.

Vince Fudzie – The Blogger Reality Bite:

For years I felt that arbitration was the best way to avoid costly litigation; therefore, we included an arbitration clause in our subcontracts.  However, after being a defendant in a couple of frivolous lawsuits, I am not longer a fan of the arbitration process for a few reasons.

1.  There is not much control over how much the arbitrator can charge the parties for his/her services, which can sometimes overshadow the most costly law firms.

2.  The arbitrator often doesn’t have a clue about how our industry works.

3. Arbitrators often try to “split the baby down the middle” instead of making a soundly supported decision.

The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune).  Any and all rights reserved.