Everyone in the construction industry is familiar with the long running joke, “the final phase of construction is always litigation.” Like many old idioms, there is some truth to it. But in the ever evolving world of complex construction litigation, the landscape is changing. The rising cost of litigation has created a need for more efficient and cost effective ways to handle the ever present disputes that arise in the course of most construction projects.
Everyone in the construction industry is familiar with the long running joke, “the final phase of construction is always litigation.” Like many old idioms, there is some truth to it. But in the ever evolving world of complex construction litigation, the landscape is changing. The rising cost of litigation has created a need for more efficient and cost effective ways to handle the ever present disputes that arise in the course of most construction projects. Owners and contractors alike are loathe to see their hard earned money spent on litigation, rather than the resolution of a dispute. As a result, a more economical dispute resolution process has been incorporated into many construction contracts: arbitration clauses.
Arbitration is one type of “alternative dispute resolution” whereby the parties agree to submit their claims to a neutral arbiter to determine an equitable outcome. A primary benefit of arbitration is that it allows parties the ability to control the process of dispute resolution. From the outset, parties can elect to utilize either binding or nonbinding arbitration. In binding arbitration, the determination of the arbitrator is final and the parties agree they will not challenge or appeal it. In nonbinding arbitration, the determination of the arbitrator is advisory, and the parties agree not to be bound by his decision. That control remains constant through almost all aspects of the arbitration process, thereby allowing the parties to streamline the process of dispute resolution and manage the cost involved in making/defending construction claims. Agreement can be reached on any number of things, including the extent of discovery to be conducted; the deadlines imposed; as well as placing limits around the use of experts and their sometimes exorbitant fees.
The ability to control the process also allows for a faster resolution, saving time and money. Sometimes, the speed of arbitration alone is enough of an incentive to avoid protracted, slow moving litigation before the trial court, which is often backlogged with cases. Arbitration allows greater control over the process than courtroom litigation with difficult judges, rigid court rules, and inflexible case management deadlines. As a result, arbitration almost always involves less time and substantially less cost.
Another meaningful benefit to arbitration is the parties’ ability to choose the arbitrator or arbitrators who will ultimately make a determination. One of the greatest risks in litigation is the unpredictability of a jury. By allowing parties to select the ultimate authority on their issue, the parties can remove the risk of a “runaway” jury or a windfall result. Moreover, the selection of an arbitrator can ensure that the parties have a decision maker familiar with the construction industry. Although judges are qualified to deal with legal issues, construction cases often present technical issues that may be better considered by someone experienced in the industry. However, it is always important to choose an arbitrator(s) qualified to deal with the legal aspects of a dispute in addition to having experience in the industry.
While an attractive alternative to costly litigation, arbitration is far from a perfect solution. Primarily, an arbitrator does not have the same power a judge does to compel witnesses and/or documents to be produced. This may be of particular concern in a binding arbitration where no right of appeal is available. On the other hand, an oft cited problem with nonbinding arbitration is some arbitrators’ penchant for “splitting the baby” so that each party walks away from the dispute with something. This is more prevalent in nonbinding arbitrations because arbitrators attempt to rule in a manner acceptable to both parties in an effort to avoid an appeal. Notwithstanding these concerns, arbitration remains a reliable and favored approach to resolving claims in a cost effective manner.
It is easier to negotiate an arbitration provision in the construction contract before construction commences, which addresses how future disputes will be handled, while the parties are still on good terms. An arbitration clause can take many forms in the contract, ranging from the simple agreement that the parties will refer any dispute arising between them to arbitration; to a detailed clause outlining not only an agreement to arbitrate but the method of arbitrator selection and definition of the guidelines to be used. While the specificity of arbitration clauses vary greatly, at a minimum it is advisable to include the method by which an arbitrator will be appointed, the timeline, and the rules governing the arbitration process. Lack of agreement on the basic parameters of the arbitration may result in the parties being forced to apply to the court for the appointment of the arbitrator and make extensive arguments on procedural issues, which would undoubtedly reduce the cost-saving benefits of a streamlined arbitration process. It is undeniably best to negotiate the boundaries of dispute resolution at the outset of the project.
It is difficult to anticipate disputes that have not yet arisen. But in the construction industry those disputes arise more often than not. With a little planning, the wise contractor’s last phase of construction could be cost-saving arbitration.