It is debatable which is the best “binding agent” for your disputes.
By Jeremy P. Brummond
No contractor wants to think about disputes. But chances are, at some point in a contractor’s work history, a dispute will arise. “Dispute resolution” provisions in the contract are often not the subject of heavy negotiation, but these provisions can become very important when the parties get involved in a dispute.
Dispute resolution provisions sometimes include language providing for “non-binding” means to resolve a dispute – ways the parties can resolve a dispute without being bound by anything that is said or occurs during the process. Some contracts require “mediation” or other non-binding settlement discussions to occur before the parties proceed to binding dispute resolution. In a mediation, parties can make settlement offers, concessions or other statements, and not be bound to those statements. A party can later take a different position during trial or arbitration (“binding” dispute resolution) without legal ramification.
Whether or not a contract includes any provisions for non-binding dispute resolution, a contract will most likely include one or more provisions addressing the method for binding dispute resolution. If the contract does not include these provisions, the law will supplement the contract by designating the method of binding dispute resolution (typically litigation). Most construction agreements provide that binding dispute resolution will occur via either arbitration or litigation. Binding dispute resolution involves a decision by one or more third parties (typically a judge, jury or arbitrator) with which the parties are legally obligated to comply (subject only to certain (sometimes limited) rights to appeal).
Many clients defer to their counsel regarding whether they should designate litigation or arbitration for binding dispute resolution. Counsel differ in their opinions on which is best, largely depending on their personal experience with both (or inexperience with one over the other). But there are clear benefits (and problems) with both choices that construction companies and owners should consider before deciding if arbitration or litigation is the best choice for binding dispute resolution.
Contractors likely have some familiarity with litigation, if for no other reason, they have watched television or movies and at some time have seen litigation portrayed on the screen. Not all legal dramas and movies are inaccurate, but many times, television and movies do not give a complete picture of the litigation process.
Litigation is not only a trial, but it also involves many steps leading to the trial (generally referred to by lawyers as “pretrial procedure”), including the drafting of detailed “pleadings” wherein each party states its various claims and defenses, and, at times, “motions,” where one party tries to limit the claims or defenses of the other parties.
Litigation also involves the “discovery” process, where each side, in anticipation of trial, gets to learn about the facts that the other side will use to support its claims or defenses at trial. In the discovery process, attorneys will send the other side written questions asking for information (interrogatories) and documents and will sometimes ask the other side to admit certain matters are true by “requests for admissions.” Attorneys may also request documents from third parties by sending them “subpoenas.” During discovery, attorneys will also schedule “depositions” of key employees, corporate officers, third parties or expert witnesses who have knowledge regarding the dispute, all in an attempt to learn the facts that are either helpful or harmful to their client’s claims.
After discovery but still prior to trial, parties can file more motions or take other actions to limit or define what evidence can be presented at trial. The pretrial procedure referenced above is specifically contemplated in rules and laws enacted by legislatures or adopted by the courts. If litigation is the chosen means of binding dispute resolution in a contract, each party to the contract has the right to demand pleadings and propound the discovery requests. Having a legal right to pretrial procedure is beneficial because a party can force a better understanding of the dispute before trial and can, with this understanding, evaluate if the party wants to enter into an agreement before trial to resolve the matter – which takes the matter out of the hands of the third party (judge or jury) for resolution.
The legal right to pretrial procedure, however, also has its problems. Engaging in pretrial procedure is time consuming. A contractor or owner has to spend hours of its own time responding, for example, to discovery requests and also has to pay its attorneys for the hours spent propounding and responding to discovery. This can lead to significant legal expense. For this reason, many contractors seek to resolve disputes without a pretrial procedure.
In litigation, the third party that will decide the dispute is either a judge (elected or appointed) or a jury. Judges and juries come from varying backgrounds – some are highly educated with significant commercial experience, while others lack significant education and experience with business concerns. Generally, most judges and jurors do not have significant experience with commercial construction matters.
If a commercial construction case proceeds to trial, the judge and jury typically need to be educated regarding the vocabulary used for the technical aspects of the project and the practicalities of work flow and risk allocation that are normal for similar construction. Good lawyers can educate the judge and jury on these issues, but education requires a good teacher and a willing learner. Not all judges and jurors are equal in this regard. The best efforts by lawyers in front of a judge and jury could, potentially, fall on deaf ears, which could then result in an illogical and unfair resolution of the dispute.
In arbitration, unlike litigation, there is no judge or jury deciding the dispute, and there is no courtroom. Instead, the dispute is typically decided in an office conference room, by one or more individuals (arbitrators), who are generally selected by the parties to the dispute. The arbitrators can be former judges (but don’t have to be), or can be lawyers, architects, engineers, construction managers, etc. For construction matters, most clients select construction lawyers or design professionals as arbitrators. Many lawyers like arbitration for construction disputes for the sole reason that the third-party deciding the dispute will most likely be familiar with construction and the law applicable to construction disputes and won’t be a judge with a diverse docket or a jury without construction experience.
In arbitration, there is generally no right to the pretrial procedure that exists in litigation. In arbitration, many times the demand is made in summary form (“owner breached the contract and now owes me a million dollars”) without any detailed explanation regarding the basis for the claim (e.g. how the contract was breached). The parties may file motions asking the arbitrators to issue summary decisions on claims and defenses, but there is typically no obligation on the arbitrator to grant relief before a hearing.
Arbitration rules, instead of spelling out discovery to which the client is entitled, typically give discretion to the arbitrator(s) to decide how much information needs to be exchanged and when that information must be exchanged. In practice, generally, the parties agree on the scope of the amount of discovery either party can conduct after the dispute is filed.
Many construction clients select arbitration for their contracts because they think the process will be quicker and cheaper (because of less pretrial procedure). And sometimes arbitration is cheaper and quicker. The schedule for an arbitration is driven by the clients’, lawyers’ and arbitrators’ schedules, and is not affected by extraneous factors like the volume of cases being filed by others (including criminal cases where the accused has a constitutional right to a speedy trial, which can result in a court prioritizing the criminal cases). But, for complex and sizable disputes, when pretrial procedure is warranted and where more than one arbitrator is generally involved, it can often be difficult for all parties’ schedules to align, and arbitration can be as lengthy and expensive as litigation.
Some lawyers, regardless of any of the benefits of arbitration, advise against arbitration solely because the rights to appeal an arbitration award are much more limited than the rights to appeal a judge or jury’s verdict. Unlike a judgment in litigation, an arbitrator’s award cannot be overturned because of normal errors in applying the law or the failure to have sufficient facts supporting the award. Instead, to overturn an arbitration award, a party must generally show some problem with the process (e.g., that the award was procured by fraud, that the arbitrator showed “evident partiality,” that the arbitrators exceeded their powers, etc.). Other lawyers and clients, however, see the limited rights of appeal (the finality of arbitration) as a benefit. Without broad appellate rights, for those disputes proceeding to binding dispute resolution, there is a better chance for a quicker final resolution.
Choosing arbitration or litigation for construction clients is likely to continue to be a client-specific choice based on the advice of particular counsel. But contractors and owners should consider the differences and discuss with their counsel to pick the best binding agent for any disputes on their next project.
Jeremy P. Brummond practices in the litigation department at Lewis Rice in St. Louis, with a focus on engineering and construction. He can be reached at firstname.lastname@example.org.