Builders and Contractors Exchange
Weekly Bulletin: 26 Jan 2004
Arbitration Revisited:
Good or Bad? - It Depends
By: Neil Lowenstein
Since the inclusion of mandatory arbitration provision in various American Institute of Architect agreements, the construction industry, more than any other, has been at the forefront of the arbitration of disputes. As originally developed, arbitration was intended to be a quick, easy, and inexpensive way to resolve construction disputes, using as the decision maker an arbitrator already familiar with construction and the construction industry. Does arbitration today still meet those goals? It depends upon whom you ask and how their particular last arbitration experience went.
The American Arbitration Association is probably the most well known of the organizations established to provide arbitration services for contractors. Certainly, the AAA has arbitrators with extensive construction knowledge and background. For smaller claims, the AAA can also be very quick, and relatively easy. Numerous other organizations have been established over the years that perform similar functions. And, arbitration affords the parties extensive flexibility to establish the arbitration framework, including selection of the arbitrator, arbitration locale, pre-arbitration disclosures, hearing procedures, etc.
But is arbitration always the best way to resolve a construction dispute? Although generally the answer is yes because of the complexity and technical content of most construction disputes, there are downsides to arbitration that should be considered, including - for example - the following: (1) arbitration today is rarely much cheaper than court litigation, and the fees required by the administrator (e.g. AAA) and arbitrator(s) can often offset any such potential savings; (2) arbitration decisions are rarely able to be appealed in the sense that, while they can be appealed by statute, they are rarely overturned because so much discretion is afforded the arbitrator; (3) arbitrators are not required to strictly follow the rules of evidence, procedure, or even the law, absent agreement to do so in the arbitration agreement or otherwise; and (4) many feel that arbitrators too often "split-the-baby" rather than making the hard decisions for one side or the other.
Depending upon any particular arbitrable issue, however, those "downside factors" may actually be benefits, and thus there is no one answer to the question of whether arbitration is good or bad for all cases; it depends on the facts of the specific project and specific dispute. Accordingly, before you just sign your next agreement including a mandatory arbitration clause, consider both the upsides and the downsides of arbitration before you sign, so that if a dispute arises you will have thought through the important questions and be prepared to act.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.