If you've entered into a contract with a customer, chances are good that you've approved via your signature some sort of dispute resolution-maybe you agreed that disputes will be heard at a particular location, or maybe you agreed to a specific form of dispute resolution. Did you realize that?
Parties often simply sign the agreement without reviewing or weighing the advantages or disadvantages involved with the chosen dispute resolution method. However, all contractors should have a basic understanding of the potential pros and cons associated with arbitrating a dispute instead of litigating it in court. Let's take a look at both so you have a basic understanding of how they might affect your business.
An arbitration proceeding can be faster than a district court lawsuit. Lawsuits in court often take 12 months to reach a trial. If a court case is appealed to a higher court, this generally adds another year to the process. In contrast, certain arbitration hearings can occur in as little as 45 days.
For example, under the rules of the American Arbitration Association (AAA), a construction arbitration involving claims of $75,000 or less can be handled as a "fast track" proceeding, where the hearing occurs within 45 days after the case is filed, and a decision is rendered no more than 14 days after the hearing is completed.
I had a contractor client with a claim that was surely worth pursuing but was slightly less than $75,000. Because the contract contained an arbitration clause, we could not pursue the claim in court. However, because of the dollar amount, we were able to pursue the claim through the "fast-track" arbitration option, and the case took only 80 days from start to finish. My client was awarded not only the full amount of the claim, but was also awarded attorneys' fees and expenses. It was particularly helpful that the attorneys' fees were very reasonable since the case did not take very long.
2) Potential for Reduced Costs
Since many arbitrations take less time than a court action, it stands to follow that they might be less expensive. The attorneys simply do not have as much time to litigate and charge time. With less ability for the attorneys to take depositions, serve interrogatories and review voluminous amounts of documents, the client's legal bill should be less than that typically associated with a court suit. (But see "Potential for Increased Costs" below.)
3) Experienced Decision Makers
District court judges sometimes know little about construction projects and how they work, which can make it difficult to effectively present a case. In contrast, arbitrators in construction cases are generally selected from a list of attorneys or other industry professionals who are very familiar with construction law and construction projects. This can be of great benefit when complex issues, terminology and industry trade practices are involved.
I litigated an arbitration claim on behalf of a flooring contractor on a very large project where my client was owed significant amounts. The case involved at least 10 parties and very complicated issues, including industry standards, codes and practices within the commercial flooring industry.
We appointed an experienced commercial construction lawyer as the arbitrator, and he immediately understood the law, the facts and the industry standards, and we obtained a very favorable result for my client. Had we pursued that matter in court, I doubt any judge or jury would have had the same level of experience and knowledge of the specific issues at hand.
1) No Right of Appeal
Arbitration decisions generally may not be appealed to a higher authority, because they are not decided as part of the court system. The parties to an arbitration proceeding agree to be bound by the arbitrator's decision, and that decision will be final.
No appeal may be made alleging that the arbitrator made the wrong decision, misunderstood the facts or even made a clear error in applying the law.
In another case, my clients pursued arbitration against a contractor for defective workmanship on their home. The parties could not agree on an arbitrator, and so had one assigned by the American Arbitration Association. The assigned arbitrator was not a lawyer, had little knowledge of the issues or the law, followed none of the normal rules of evidence, and rendered a very bad decision adverse to my clients with virtually no explanation, essentially stating "after hearing all of the evidence, the homeowners lose."
Under limited circumstances, a party may petition a court to review an arbitrator's decision, but generally only if it can be argued that the arbitrator exceeded his or her authority or that the decision was procured by fraud, corruption or other undue means. An allegation must be presented that, if true, would clearly demonstrate the award was rendered under these impermissible circumstances.
In this particular case, there was no evidence of misconduct or other foul play, so the decision was not appealable, and my clients were stuck with it.
2) Lack of Discovery
While limited discovery may help keep costs down, it can also make it more difficult to win your case.
Attorneys are best able to achieve a good result for their clients when they have as much relevant information as possible. Some "fast-track" arbitrations can resemble small claims court hearings, where the parties exchange some documents shortly before the hearing, show up and "shoot from the hip." The inability to analyze claims and information, or even the existence of information, can work to a party's detriment.
3) Potential for Increased Costs
While the attorneys' fees for a shorter arbitration with limited discovery might be less expensive, the filing fees for resolving disputes through the AAA or similar organizations are often much higher than court filing fees.
For example, for claims under $10,000 dollars, AAA would charge fees of nearly $1,000 compared with a small claims court filing fee that would typically be less than $100. Arbitration filing fees for larger claims can range from $1,275 to $18,800 depending on the size of the claim, with claims over $10 million also imposing an additional fee of 1 percent of the claim amount (not to exceed $65,000).
Further, arbitration filing fees generally do not include paying the arbitrator his or her fees to hear the case, which could add many thousands of dollars. In contrast, most court filings fees are less than $500 and include the judge's time to hear the case (although courts do often charge additional fees along the way to file motions, request hearings, etc.).
In addition to increased filing fees and paying the arbitrator, complex arbitration cases often take as long and involve the same amount of discovery as a court case, with multiple depositions, motion hearings before the arbitrator and other time-consuming "lawyer activities." Combine these costs with the additional filing fees, and an arbitration proceeding has the potential to be more expensive than a court action for the same case.
While AAA is not the "only game in town" for pursuing and managing an arbitration proceeding, and other similar organizations exist that might charge lower fees, those organizations might not match AAA's level of service and experience in hearing construction disputes. Parties may also agree to simply hire an arbitrator, set the ground rules, and conduct the case privately. However, many construction contracts (often unwittingly) include a clause specifically requiring that the arbitration actually be administered by AAA.
Note that the sample phrase in the first paragraph above states only that the disputes will be "settled by binding arbitration in accordance with the Construction Industry Rules of the American Arbitration Association," but does not require that the proceeding be administered through AAA. In other words, the parties may conduct a private arbitration proceeding but have agreed to follow and be bound by AAA's Construction Industry Rules.
4) Inability to Process All Claims
Arbitrators have limited jurisdiction and sometimes may not have the authority to decide all claims.
For example, construction or mechanic's lien laws vary from state to state, but in general a lien claim must be adjudicated by a court in the county where the real property in question is located. Therefore, the parties are often forced to participate in both a court action to resolve any mechanic's liens and a separate arbitration action to resolve the other claims.
Procedurally, the lien claimant must first commence a court action to preserve lien rights and prevent any statute of limitations from expiring, and then request that the court put the case on hold while the claimant pursues an arbitration action to decide who wins. If the lien claimant wins, the claimant would then need to revive the court action to pursue lien rights. This often cumbersome process can increase the costs to pursue a dispute.
Arbitration is a standard method of dispute resolution in the construction industry and has a number of merits. However, parties should understand the basic pros and cons of agreeing to arbitrate disputes so they may make an informed decision on what could later prove to be a critical contract clause.
This article originally appeared in Hardwood Floors magazine