Construction Disputes: Arbitrate or Litigate?

A widely held assumption among project owners and construction contractors is that private arbitration is faster and more cost effective than litigation of a dispute in the courts. The inclusion of mandatory arbitration of disputes in all AIA construction contracts since their inception in 1888 was premised on this assumption. Unfortunately, as many owners and contractors have discovered, arbitration is rarely fast or inexpensive. In complex disputes arbitration often proves as costly and time consuming as resolution through the court system. In addition, many consider arbitration inferior to the court system in maximizing the chances of a just outcome. In response to widespread demand within the construction industry, the AIA revised its 2007 form construction contracts, deleting mandatory arbitration and permitting parties to choose arbitration or litigation through the courts.

Arbitration certainly has some distinct advantages over litigation. For example, there is a very limited right to appeal an arbitrator’s decision, thereby reducing the cost of potential appeals and expediting the process of obtaining an earlier binding decision. In addition, arbitration allows the parties to select a decision-maker with considerable expertise in construction matters, eliminating the need to “educate” a judge or jury about construction issues.

The arbitration process, however, has some significant drawbacks. Unlike most trials, arbitrations are not necessarily held on consecutive days until concluded and may be scheduled over several months, particularly when several parties are involved. This requires the parties and their respective attorneys and experts to spend additional time getting up to speed on the case before each arbitration session. Moreover, previously scheduled arbitration hearings are disregarded by most judges if a judge’s schedule for a trial or hearing requires the attendance of one of the attorneys involved in the arbitration. Many arbitrators also permit extensive document production, depositions and other methods of “discovery” similar to those available in the court system, increasing the cost and duration of the arbitration. The parties are responsible for paying the arbitrators their hourly rate for all time spent in the hearings and related study and communications, a potentially substantial cost especially where multiple arbitrators are mandated. Finally, the legal standards governing arbitration strongly favor an arbitrator’s consideration of all evidence offered by a party, even if it is developed during or after the arbitration hearings. This can result in a set of facts and issues that evolves during the course of an arbitration and extends its duration.

Participants in the construction process should carefully consider the pros and cons of arbitration or litigation of their construction disputes, rather then reflexively choosing arbitration. Consultation with an experienced construction attorney will result in an informed choice.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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