This article was published in The Bergen Barrister, Winter 2001.
It is not an unfamiliar scenario: in the middle of a construction project, the owner is presented with one or more change order by its contractor who believes that certain work the contractor has been directed to perform is beyond the scope of its original contract. The owner, who had specifically insisted upon receiving a lump sum bid from its contractor, refuses to sign any change orders because it honestly believes that the dispute represents base contract work, not extra work. As a result, relations between the owner and contractor become contentious and, as a result, the contractor either suspends work until it is assured additional monies will be paid or the contractor performs the disputed work under protest, thereby reserving its right to assert a claim against the owner in the near future.
When situations like this arise in construction, as they all too frequently do, unless the dispute can be settled on-the-spot or by mediation, often the forum in which the parties look to resolve their dispute has a direct, and sometimes conclusive, impact upon ultimately who will prevail. Traditionally, the parties are faced with one of two alternatives: either submit their dispute to arbitration (as required by many construction industry contracts such as those endorsed by the American Institute of Architects and Associated General Contractors) or litigate in the courts. Although it is possible for the parties to agree to submit a dispute to arbitration at any time, typically, after a dispute arises, the parties are at odds and may not be able to agree upon very much. In any event, usually, that decision already has been pre-ordained. Simply put, if the contract the parties executed at the outset of the project contains an arbitration provision, the parties must proceed to arbitration. Without such a provision, the parties (and their attorneys) end up in court.
It is important, therefore, for attorneys and their owner/contractor clients to understand the advantages and disadvantages of these two forums so that they can better protect themselves when negotiating dispute resolution language.
The procedural differences between arbitration and litigation are relatively straightforward and familiar to most litigators. In arbitration, the parties agree to have their dispute decided by either one or three arbitrators who are experienced in construction and who are typically selected by the parties themselves or with the assistance of an organization such as the American Arbitration Association. Generally, there is no pre-trial discovery, although it is not uncommon for the parties to exchange documents, expert reports and witness lists prior to the hearings. Although the strict rules of evidence do not necessarily apply, most arbitrators follow the same general procedure as the courts. For example, each party has the right to present an opening statement and the claimant presents each of its witnesses who are cross-examined by the respondent. At the close of the claimant’s case, the respondent calls its witnesses who are cross-examined by the claimant. The claimant may then call rebuttal witnesses and so on. At the end of the arbitration, the parties present closing statements or, as is more often the case, they submit post-hearing briefs summarizing the testimony, citing the applicable law and suggesting the inferences to be drawn and the conclusions to be reached by the arbitrators. Thereafter, the arbitrators render their award.
A lawsuit, on the other hand, as we all know, is tried before a judge or jury only after the parties have engaged in pre-trial discovery and, possibly, motion practice. This means that counsel will attempt to learn about the strengths and weaknesses of each party’s case by serving document demands, interrogatories, requests to admit and, inevitably, the parties will appear for their depositions and non-party depositions may be scheduled as well. Usually, the majority of what is learned during pre-trial discovery will become irrelevant at trial because much of the information will turn out to be tangential to the key issues or inadmissible hearsay. Unlike arbitration, where the strict rules of evidence are frequently disregarded, in court it is necessary to present your proofs with the requisite evidentiary foundations and a judge’s error in allowing or disallowing certain evidence at trial may constitute reversible error, thereby entitling the aggrieved party to a new trial. In fact, unlike arbitration awards (which are rarely overturned or vacated by the courts), the loser in a lawsuit may very well have an automatic right to appeal the decision to a higher court. In court, the emphasis is on due process of law. In arbitration, the emphasis is on finality.
In deciding which forum to select, certain truisms may come to mind. Many of those in the construction industry contend that arbitration is less expensive and quicker than litigation. While that is generally true due in large part to the tremendous amount of lawsuits in our states when compared to the number of judges presiding over those cases, arbitration may be neither inexpensive nor quick. There are expenses associated with arbitration which simply do not exist in litigation. For example, any party asserting a claim in arbitration is typically required to pay a fee to the association administering the arbitration and that fee is typically based upon a percentage of the monies sought in arbitration. Second, arbitrators do not work pro bono and are paid for by the parties at rates which typically run between $500 to $1,200 a day for each arbitrator. Third, arbitrations are very often scheduled at the convenience of the parties, their counsel and the arbitrators, so it is frequently difficult to schedule consecutive hearing dates and all too often those dates are adjourned. It is not uncommon for a complex arbitration–one involving ten to twenty hearing days–to last six months or more. By contrast, there are no significant fees associated with having a judge or jury hear and decide your case and, typically, once the trial begins, it continues for consecutive days until conclusion.
Many in the construction industry believe that they are better off in arbitration because the persons deciding the dispute are savvy in construction. It is difficult to take issue with that, especially since many judges (and most juries) simply lose interest if the construction dispute involves too many technical issues. If the parties lose the jury altogether, the verdict may largely be based upon a subjective (rather than a rational) analysis. Alternatively, many who used to swear by arbitration have made a complete 180 degree turn after losing an arbitration they believed was a “no-brainer”. When faced with an unfavorable arbitration award, an aggrieved party may begin to resent the fact that the award may not be appealed–typically even if the arbitrators erred in their application of the law–and the unhappy loser longs for a system whereby unjust results can in fact be eradicated.
Another truism is that arbitrators tend to compromise their award or “split the baby”. If this were true and you have an open and shut case, it follows that you are better off in court because there you stand a better chance of achieving a total victory. In reality, however, judges and juries frequently compromise their verdicts too. It is true that if a party has a purely legal or technical case, you are probably better off in court because you may be able to convince the court that a trial is not necessary and that you are entitled to a judgment based solely upon undisputed facts and the applicable law. Arbitrators, however, do tend to proceed with the evidentiary hearings, take most evidence “for what its worth” and are loathe to dismiss anyone’s claims without first allowing that party to first present its entire case through live testimony. Once in arbitration, to counter the concern that the arbitrators may be too “Solomonesque”, it makes sense to put the issue on the table and remind the arbitrators that they were selected by the parties to do the right thing and not to split the baby. As surprising at it may seem, in practice, that strategy frequently works.
Truisms aside, there is an undeniable advantage arbitration has over litigation. If one or both of the parties are very concerned about having third parties learning about the subject matter of their dispute and the testimony of the parties, arbitration is the way to go. Arbitration proceedings are private and unless the parties elect to retain a stenographer to memorialize the proceedings, there is no record of what occurred. Likewise, an award rendered by the arbitrators is frequently just one or two sentences indicating–without any explanation–who won and who lost. Conversely, a trial is open to the public and anyone can walk into a courtroom, sit down and take notes. Additionally, anything that is filed in court (such as pleadings and affidavits submitted as part of any motion) are fair game to anyone who wants to see them–including your client’s competitors, customers and the media.
Conversely, many believe that litigation is preferable over arbitration if you are the party who is better able financially to endure a long battle and you are not as concerned as much about expenses or delays as you are in making the process itself debilitating to the other party. It is no secret that a stronger party may deliberately resort to the courts to delay adjudication of a dispute and to force the other party to incur significant attorney’s fees as part of an overall strategy to effectuate a favorable settlement. Although many judges are well-aware of these strategies, the fact remains that generally it is still true that a party can use extensive pre-trial discovery, motion practice and, if necessary, the right of appeal, to intimidate a weaker opposing party into compromising its claim. For that reason, at least in part, some owners–who frequently have more financial wherewithal than contractors–prefer judges and juries over arbitrators.
Clearly, there are many things for counsel to consider before deciding whether your client is better off in arbitration or the courts and, undoubtedly, the decision is one which should be revisited on a project-by-project basis. It is important, however, that the decision itself be a conscious one made at the time the parties negotiate their contract rather than as an afterthought when it may be too late to place the dispute in a forum which is best for your client.
Neal Eiseman, Esq.