Construction Arbitration Poses Complex Issues

Construction companies that look to arbitration as an alternative to litigation should consider a number of important case-specific factors.

By Lawrence Kushnick

Most, if not all, building and construction contracts today include an "arbitration clause" to be used if disputes arise. The premise behind alternatives such as arbitration or mediation is that they offer a speedier, more cost-effective resolution than litigation.

The arbitration or "hearing" is nevertheless a "mini-trial" in which each side presents its evidence and witnesses before an arbitrator chosen jointly by the opposing parties. The arbitration clause generally sets forth that if a dispute arises, both sides agree to settle the matter under the established rules of groups such as the American Arbitration Association. Each party waives the right to proceed in a court of law on all matters, including mechanic liens.

While I generally favor arbitration over litigation, the arbitration clause can be a time-consuming and expensive trap for the unfamiliar. Construction industry professionals should consider several factors before making a choice.

Generally speaking, bigger and more complex projects and disputes may be better suited for litigation, which can be more cost-effective because of the right to conduct extensive pre-trial discovery and depositions.

Smaller projects and disputes, on the other hand, generally allow parties to benefit from the advantages of arbitration. But an incorrect, widely held belief is that the arbitration process is always less expensive than litigation. The AAA requires a case filing fee from $500 to $13,000 and a case service fee of up to $3,000. Arbitrators charge anywhere from $1,000 a day to $400 an hour.

Attorney fee rates for an arbitration may sometimes be reduced, but are often very similar to those for litigation. The main difference is that in litigation, the pre-trial phase - where attorneys exchange documents, conduct depositions, write briefs and motions, and attend court conferences - can be costly and time consuming, often representing more than 60 percent of overall case costs. Arbitration generally has a much lighter pre-trial phase.

But that difference doesn't always translate into significant savings through arbitration. In reality, the attorney must still review the entire project file, request and review documents and evidence, prepare an "arbitration brief," submit all proposed exhibits in "arbitration binders," and prepare witnesses for the hearing. In addition, the monetary savings may not balance with the lost opportunities, because in arbitration you lose the right to depose your adversary and their witnesses before the trial or hearing. The pre-trial process can be valuable because it allows you to avoid an "ambush" argument by your opponent in the arbitration, and because it can lead to an early resolution.

Another factor to consider is who the arbitrator will be. An arbitration clause should be written to hold the hearing in the locality where the project is based and should be governed by a specific organization, such as AAA or JAMS-Endispute. It is important to watch out for arbitration clauses from out-of-state companies, suppliers, or vendors that place arbitration in other, less familiar venues.

Arbitrators available via AAA generally are experienced in the construction industry. They consist of architects, construction attorneys, contractors, construction managers, and engineers who are knowledgeable about daily operations, work sequencing, and quality, as well as a project's likely obstacles and foreseeable and non-foreseeable problems.

However, these seasoned construction individuals can actually lengthen and complicate the hearing process and make the arbitration dangerously less predictable. For instance, they may not be trained in the law, may disregard legal arguments, do not have to follow the rules of evidence, and may consider evidence that would be inadmissible in court.

Another consideration is the potential time savings, as well as the potential difficulty, from having a faster arbitration schedule. In matters up to $75,000, the AAA utilizes a fast-track procedure, where there is very limited discovery, only 30 days to set a hearing date after selection of an arbitrator, and usually a one-day hearing. While you cannot beat the speed of arbitration, it requires you to construct a strong, well-organized case in a short time.

Construction professionals should also know that they have few options to appeal an arbitrator's decision, which can stand despite errors of law or mistakes of fact. An arbitrator does not even have to give a reason for his or her decision, and if a party obtains new evidence that could impact the result of the decision, there is no requirement to consider the new facts, which is contrary to what is possible in a court of law.

Note that even if your company wins an arbitrator's decision, it still must commence a court action to "confirm" the arbitrator's award and convert it to an enforceable judgment. That can take weeks, if not months. The enforcement procedure is a trap for the unwary. The failure to continue a lien or other security while confirming the award could leave you with a judgment that is no better than wallpaper.

In short, there is no "right" answer to the question whether to arbitrate or litigate. The only right answer is careful analysis of the factors that apply to your case and to your company's needs. <<

Lawrence A. Kushnick heads Kushnick & Associates of Melville, N.Y., a law firm specializing in construction and commercial litigation.