Construction Law Briefs: The Relative Merits of Arbitration vs. Court
Before 2007, frequently used American Institute of Architects construction contract forms provided for arbitration of contract disputes to be administered by the American Arbitration Association. Because of disappointments of some industry members with arbitration, the 2007 AIA contract forms (and the newly introduced ConsensusDOCS contract forms) allow choices between arbitration, litigation or “other” (arm wrestling?). Check the box.
What are the relative merits of arbitration vs. litigation? Here are a few factors to consider:
Cost. Although in earlier years arbitration costs were thought to be lower because there was only limited discovery (depositions, written interrogatories and the like) and no pre-hearing motions, that is no longer the case in Colorado. Arbitrators and the current Colorado arbitration statute allow depositions and other discovery procedures. The present Colorado statute also allows pre-hearing motions. All that means extra fees and expenses for attorneys and arbitrators.
Arbitration administration expenses may also be costly. For example, the AAA’s administration fees are scaled to the amounts in dispute. They range from $1,050 for disputes involving under $10,000 that actually proceed to hearing to over $20,000 for arbitrated claims involving $10 million (plus one-tenth percent over $10 million to a maximum of $65,000). In addition, there are arbitrator’s fees that are likely to range, in this area, to around $300 an hour for hearing preparation, hearing time and award preparation time.
For example, for a $1-million claim with one arbitrator and a hearing lasting for three days, the cost of the AAA arbitration administration fee would be $12,050. The arbitrator’s fee at $300 per hour for three hearing days and one day for hearing preparation and award drafting would add another $9,600. Then add $250 a day that the AAA charges for its Denver hearing room and the combined arbitration cost would be in excess of $22,000—plus the party’s own attorneys’ fees. To assure payment, the AAA requires payment in advance and deposits in substantial amounts from the party or parties.
In contrast, for $224, a plaintiff may file a court action in any Colorado state district court—for another $190, a six-person jury. All this and a free judge for trials lasting however many days it would take, and the county provides the courtroom at taxpayers’ expense.
In either instance, it is likely that the successful party would recover those costs and should be able to collect them—unless the other party is bankrupt.
In sum, the administrative expense for a $1-million claim would be:
• Court (no jury) $224;
• Arbitration (through AAA) $22,400.
You do the math.Decision Maker(s). Construction industry arbitrators may be selected by mutual agreement of the parties or through the AAA or other arbitration management institutions such as JAMS or the Judicial Arbiter Group. The arbitrators selected are likely to be persons familiar with construction. There is no assurance that the judges or juries would know Tyvek from a fan coil unit.
This expertise is a definite plus for arbitration—unless the dispute involves legal questions such as interpretation of contract language, in which case, a judge may have a leg up.
Speedy Resolution. With crowded court dockets in many Colorado counties, the likelihood of proceeding with an arbitration hearing faster than a court trial is good. Also, in trials by judges, without juries, there is no time limit for judges’ decisions, while arbitrators may, by agreement or rule, be required to render their decisions (awards) within a certain limited amounts of time. For example, the AAA Construction Industry Rules require arbitrator awards to be rendered within 30 days after the hearings are completed (with certain exceptions).
Appeal of Decisions. One of the perceived disadvantages of arbitration is that arbitrators’ decisions are, with only rare exceptions, final, binding and conclusive. In contrast, court judgments are always appealable to higher courts, but those judgments may only be reviewed on appeal for trial court factual or legal errors.
The right to appeals is thought by many to be the principal benefit of court rather than arbitration of dispute proceedings.
Hometown Advantage. If litigation is selected by the parties in their contracts, they may be subjected to what may be considered a hometown advantage, depending upon who the parties are. For example, it is thought that a jury in a trial involving a construction company’s claims against a city in which jurors live and are taxpayers, the city may have an advantage. Similarly, a Denver contractor suing a Ptikin County, Colo., resident-homeowner may be at a disadvantage.
Since the parties do have some involvement in the selection of arbitrators, the likelihood of hometown advantage isles likely.
Conclusions. The choice between court and arbitration that must initially be made when the parties enter into construction contracts is neither easy nor should it be made without careful consideration of above factors. It’s obviously best to avoid disputes.