A FEW WORDS ABOUT ARBITRATION

Posted by Larry A. RothsteinJul 11, 20210 Comments

Most construction (and many non-construction) contracts contain a provision requiring disputes to be decided by the American Arbitration Association. 

I'm not sure how or when the AAA managed to persuade the construction industry that this was a good idea.  It is not.  I have advised all my clients – contactors, subs and owners – to get rid of these provisions or otherwise not agree to them.

I have arbitrated many construction disputes, usually with good results, but I am not a fan.  First, they are very expensive.  The AAA, or any other arbitration tribunal is in the business of making money.  The filing fees are very expensive and determined by the amount of the claim.  The cost for the arbitrator (who also is in the business of maximizing his or her fees) is almost always prohibitive.  It is not an expeditious process, even if discovery is limited.  Often the parties stipulate to party and expert depositions, which they have the right to in a judicial proceeding.  Lesson 1:  The arbitration process rarely provides a savings to the client.

Second, by definition, the outcome of an arbitration is arbitrary.  That means outcomes are hard to predict.  In a judicial forum, the court must follow the rules of civil procedure and evidence.  This means that everyone knows what discovery is permitted and what evidence will or will not come in.  Hearsay is unreliable (unless it falls into one of several exceptions).  It almost always comes in in an arbitration.  There is no right to an appeal.  In my experience, the outcome of jury trials are the most predictable.  Then court trials.  (Judgesare notinfallible.)  Arbitrations are the hardest to predict.  Lesson 2: The higher the predictability, the greater the likelihood the case will settle.

Third, if you have, for example, lien rights, which can only be perfected though judicial proceedings, arbitration gives the other side the ability to delay pursuit of that remedy while awaiting the outcome of the arbitration, unless you can convince the judge not to enforce the arbitration provision.  Lesson 3:  Arbitration often interferes with the ability to pursue other remedies.

Now some of my colleagues will argue that if they have an insurmountable legal obstacle (for example, their contractor client was not properly licensed), then arbitration gives them an equitable chance to overcome that infirmity.  That may be true, but you are now gambling that the arbitrator will ignore the law.

What I like.

The California Association of Realtors has a provision in its sales agreements which requires the parties to submit any dispute first to mediation before any party can go to court.  If a party chooses to go to court without first pursuing mediation, it cannot recover its attorney's fees even if it prevails at trial.  I have encouraged all my clients to include a similar provision in their contracts and omit the AAA provision entirely.

An early mediation may result in an expeditious and cost-effective resolution of the dispute.  If not, it may expose weaknesses in one or both sides' cases, which may lead to settlement at a later date.  Sometimes, mediation will narrow the dispute to one or two finite issues which the parties can then agree to arbitrate.  Under this scenario, arbitration may be a good forum for resolution.