If a Construction Dispute Arises, Should You Arbitrate or Litigate?

All parties should weigh the pros and cons of arbitration and litigation before entering into a construction contract.

Disputes arising from construction projects can be highly technical, logistically complex and involve multiple parties with multiple claims. A construction arbitrator – who is typically a construction industry professional, such as a developer, engineer, or construction attorney – might be best suited to resolve such a claim. But there are some downsides to arbitrating a construction dispute which, depending on the specifics of the dispute, might make litigation the preferred forum for resolution.

Construction arbitration is a form of alternative dispute resolution in which an impartial third party, an arbitrator, makes a binding decision to resolve a dispute. While a party cannot be compelled to arbitrate without a prior agreement, parties in a construction dispute often choose arbitration to resolve their disagreements. Unlike the comprehensive procedural rules governing court cases, arbitration affords the parties the flexibility to tailor many aspects of the process, including the choice of arbitrator, the location of the arbitration and the rules governing the proceedings. Arbitrations are confidential and, in most cases, tend to be more cost-effective than traditional litigation. In addition, parties, particularly those who do not have extensive experience with legal disputes, may find arbitration to be a less intimidating process than litigation.

The typical form construction agreements used by the construction industry afford the parties to the agreement the option to choose arbitration or litigation as the dispute resolution process and often direct that arbitration must proceed with a third-party arbitration service like the American Arbitration Association or JAMS. These organizations provide specialized services to facilitate construction arbitration, offering arbitration rules specifically for the construction industry and arbitrators with experience in the industry.

Litigation, on the other hand, tends to be protracted and expensive. Construction disputes, in particular, which often are highly fact intensive and involve large amounts of data, can be more time-consuming and expensive than other commercial disputes. While the parties must compensate the arbitrator and pay fees associated with third-party arbitration services, arbitration usually results in lower out-of-pocket costs for the parties and proceeds to a final award much faster than litigation. Discovery in arbitration is typically limited, and an arbitrator is not obligated to follow the rules of evidence and procedure like a judge. Arbitration’s expedited timeframe has the added benefit of reducing project delays and the associated financial losses.

However, depending on the circumstances, the formal discovery procedures afforded to parties to a litigation may be beneficial. More robust discovery options, including the right to depose witnesses and demand documents, will likely yield additional evidence, allowing for better-informed decision-making and potentially changing the outcome of the case.

One potential downside of arbitration is the finality of the arbitrator’s award. Arbitration awards are final and binding, and parties can only challenge an arbitration award on very limited grounds dealing with fraud or transcription errors. In fact, in most jurisdictions, parties cannot challenge an arbitration award even if there are errors in law or fact. The ability to appeal a court decision offers parties a layer of security in that, presumably, a higher court will review and correct a trial court’s legal errors. The associated legal cost for pursuing and defending an appeal, however, can be significant.

Another benefit of arbitration is that the proceedings are private and not open to the public, and arbitrators are typically required to maintain the confidentiality of proceedings. The confidential nature of arbitration protects the parties’ reputation and, potentially, trade secrets, sensitive business information and business relationships. Court proceedings, on the other hand, are usually open to the public and become part of the public record.

Alternatively, a party might prefer the public forum afforded to litigants. In a case involving the egregious conduct of a party, the aggrieved party might want to hold the wrongdoer publicly accountable.

In sum, arbitration and litigation each have their pros and cons. While arbitration offers speed, confidentiality and industry expertise, it also comes with a finality that may be intimidating to parties wishing to preserve appellate rights. Litigation, on the other hand, provides a formal and comprehensive legal process with the option to appeal, but can be time-consuming, expensive and open to the public.

Whether acting as a contractor, subcontractor, or owner, all parties should weigh the benefits and consequences of arbitration and litigation before entering into a construction contract with a dispute resolution provision. If you need assistance evaluating whether arbitration or litigation is the preferable forum for a future or current dispute, or you require representation for a dispute, please reach out to an experienced Phillips Lytle attorney.