Mistake No. 2 of the Top 10 Horrible, No-Good Mistakes Construction Lawyers Make: Not Educating Clients on the Pros and Cons of Arbitration

David K. Taylor | BuildSmart

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I have practiced law for 40 years, with the vast majority of that time spent as a “construction lawyer.” I have seen great… and bad… construction lawyering, both when on the other side of a dispute, as well as when serving well over 300 times as a mediator or arbitrator in construction disputes. To be clear, I have made my share of mistakes. I learned from my mistakes and was lucky enough to have great construction lawyer mentors to lean on and learn from, so I have tried to be a good mentor to young construction lawyers. Becoming a great construction lawyer is challenging, but the rewards are many. The following is mistake No. 2 of the top 10 mistakes I have seen lawyers make in construction disputes, and yes, I have been guilty of making all of them.

Mistake No. 2: Not Educating Clients on the Pros and Cons of Arbitration

There are scores of articles debating the pros and cons of arbitrating versus litigating legal disputes. This article does not discuss mediation (to come later). Find four construction lawyers at a conference, buy them drinks, broach the topic, and then stand back and watch the fun. Many times, there isn’t a choice when the transactional lawyers include an arbitration clause in any kind of construction contract or recommend checking the arbitration “box” in the frequently used AIA series of construction contracts.

When there’s an opportunity to do so or the client requests your input, you should take the time to advise the client on the potential pros and cons of arbitration. Ultimately, the decision of whether to arbitrate or not is a business decision for the client, but you can add value to that decision by providing information on how arbitration or litigation may better suit your client’s needs. If a client decides to utilize arbitration as the dispute resolution mechanism in its contracts, you should work with the client to develop an arbitration clause that is enforceable, functional, and can be practically applied. I often encounter arbitration provisions that are mangled and unworkable.

Even fervent believers in arbitration acknowledge that this method of “alternative dispute resolution” is not a panacea for all that ails the trial system. The role of a lawyer/counselor is to present the pros and cons to the client. And there are two sides of the sword on every single arbitration “pro” and “con.” Never forget arbitration clauses are contract clauses. For most every “con” there can be, if drafted carefully, language to counteract that specific “con.” 

Will your client need to make a claim against another company not a party to the contract or transaction if a dispute arises or obtain vital documents from a third party? There is no third-party practice in arbitration absent another arbitration clause in that other contract. And while the arbitrator has subpoena power and can sign a pre-hearing third-party document subpoena, those subpoenas may not always be enforceable.

In a failed retaining wall dispute years ago, when representing the owner (who nicely told me if we lost, he wouldn’t be able to send his kids to college), the experts said that the failure was a combination of design and construction errors. The problem? There was an arbitration clause with the contractor (which wouldn’t waive arbitration), but not with the engineer (who would not agree to join in any arbitration). The result? We went to arbitration first, the other side pounded “design,” and the panel agreed. Zero recovery. On to the engineer in court, who pounded construction. The settlement with the engineer was not very good. You remember your losses much more than your victories. If I could have advised the client before he entered the relevant contracts with the engineer and contractor, I would have recommended that he utilize the same dispute resolution procedure in both contracts and include a robust consolidation/joinder provision in each contract allowing the owner to litigate against the engineer and the contractor in the same proceeding.

Does your client’s very survival depend on getting to a quick resolution in the event of a dispute? Setting aside mediation, a large and complicated construction dispute may need weeks of testimony. Good luck in getting a quick trial date in court. Years ago, I represented an engineering company that was owed substantial monies from a manufacturer on a chemical plant. No arbitration clause. A month of hearings were needed. After the lawsuit was filed on a motion to establish a scheduling order, the judge (in a rural state county) said he could work us in in three years, which by then my client (and its 100 employees) would have been bankrupt. The good news is that even the manufacturer wanted to get the dispute over with, so we agreed to submit the disputes to private arbitration with hearing dates in a year. The matter was eventually settled, and my client survived.

What about pre-hearing depositions, which can be abused by one side and of course are incredibly expensive? Arbitration rules do not always allow for or contemplate depositions, and many arbitrators rule that they do not have the power to order depositions over objections. Many times, in my scheduling conferences with counsel when I serve as an arbitrator in smaller cases, I get incredulous indignation from one side (many times appointed insurance lawyers) when they learn they cannot take the depositions of every single potential fact witness. The remedy for those parties? Go back to the drafting of the arbitration clause: A company can certainly include in the clause the ability to take full blown pre-hearing discovery.

Should some portions of a claim, or a defense, get resolved quickly, “as a matter of law,” via a pre-hearing motion like a state or federal civic procedure “summary judgment”? But… the rules of “civil procedure” do not apply to arbitrations. Are summary judgment or dispositive motions more difficult to win in arbitrations? The general consensus is yes. Much depends on the arbitrator, but the same can be said for judges. Sometimes success on summary judgment in either forum may depend on the nature of the summary judgment argument. For example, you may have more success pursuing summary judgment on arguments based on waiver or release in a court proceeding.

Finally, what about advising the client about the best of both worlds? There are presently many large developers, owners and contractors that include dispute resolution clauses that give one party the right, once a dispute arises, to choose arbitration or litigation. Although results may vary by jurisdiction, these clauses are often found enforceable.

So, the moral of this mistake is pretty simple: Don’t be swayed by those that hate or love arbitration. Decide what is in the best interest for your client in the specific project considering all of the circumstances. Provide your best advice, and let the client make the final call on whether or not to arbitrate a construction dispute.

The Top 10 Horrible, No-Good Mistakes Construction Lawyers Make: Mistake No. 1: Not Realizing It’s All About the Facts

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

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