James T. Dixon | Construction Executive
With litigation as the default method for the resolution of disputes of all types, the construction industry has long used its contracting terms to fashion alternatives. These include mediation, arbitration, dispute resolution boards, partnering, early neutral evaluation, fact-finding and the use of an initial decision maker. Even with these options, a contractor’s choice is most often between litigation and arbitration, and the debate over which is best has continued for years.
Industry sources have provided data relating to time, cost and other important factors that construction executives can reference to inform their decisions and supplement what they know from their own experience.
ARBITRATED CASES CAN TAKE LESS TIME TO RESOLVE
The American Arbitration Association is the nation’s leading provider of arbitration services. It provides detailed procedural rules, trained case administrators and a panel of trained and experienced arbitrators. Because of its prominence, a web search for reported data on time revealed limited information since that information relating to arbitration proceedings is private.
The AAA compared its construction cases to lawsuits of all types filed in the United States District Courts in 2015 and measured them from filing to a final award.1 The AAA reported that federal cases took nearly 28 months to conclude at trial while arbitrated construction took eight months. Arbitrated cases involving less than $100,000 resolved in less than five months. If the data sample for federal cases had been reduced to construction cases only, it is likely that the resolution time would exceed 28 months since construction cases tend to be more complex.
The use of the federal court information as a bench-mark means that those investigating their options should look to local data to make a more accurate comparison for cases that would be tried in state court. In Ohio, for example, only 721 of 68,735 “other civil” cases, such as construction cases, were pending at the end of 2015 that had exceeded a 24-month duration, meaning that 99% of state-level cases resolved in less than that time.2 Anecdotally, this author does not spend much time discussing the time difference with clients because arbitration is the clear winner in this category. Even so, complications do arise in an arbitration proceeding that extend the date of conclusion and frustrate clients. The cause of those complications is highlighted by another study discussed below.
COST DIFFERENCES ARE CASE SPECIFIC
While the cost of legal assistance is foremost, decision-makers must also consider the cost of expert witnesses, court reporters, document production services, filing fees and the cost of the judge, jury and arbitrator. There are also internal costs such as time that staff members dedicate to the resolution of the dispute. And, there is an emotional toll that can be imposed by the stress of proceedings. All of these costs will vary based upon the nature and complexity of the dispute.
For filing fees, litigation is much less expensive. It may cost $300 to file a complaint in the local trial court, whether the dispute involves $30,000 or $30 million. Courts will also typically charge for other filings, such as motions, but those charges are minimal. The AAA relies upon filing fees to fund its operations. For the initiation of an arbitration proceeding, the filing fee varies based on the dollar amount of the claim. For a claim of between $150,000 and $300,000, the fees are $4,650. For claims between $1 million and $10 million, those fees are $14,700.
Tax-payer funded courthouses do not charge for judges and jury fees are minimal. Arbitrators typically charge by the hour, and those rates will vary based upon the local market and the experience of the arbitrator. The parties share these costs. Under the AAA’s procedures, cases with claims less than $100,000 proceed on a fixed fee basis of $1,750. Cases with claims that exceed that amount will see arbitrator charges that vary with the complexity of the case. Cases involving claims in excess of $1 million are handled by three arbitrators. In a recent case, the initial estimate of arbitrator fees and costs exceeded $300,000 for a three-member panel overseeing a two-party dispute with competing seven-figure claims.
While this figure is eye opening, the control on motion practice and discovery that the arbitrator(s) can impose will reduce the legal fees incurred by the parties when compared to litigation. Only recently have federal and some state courts introduced the idea of discovery “proportionality.” Without a limit based on the nature of the dispute, either party can make the opposing party spend considerable sums on discovery. The idea of discovery proportionality is ingrained in the arbitration process, with the AAA’s rules favoring a more limited approach to discovery. Some cases are limited only to an exchange of records while others depositions are disfavored and, when used, are limited in number.
Motion practice is another key driver of costs. The federal and state courts permit the filing of motions at the outset of a case (such as a motion to dismiss), during discovery (such as motions to compel), after discovery (such as motions for summary judgment), before trial (motions in limine challenging the anticipated evidence), during trial (a motion for directed verdict), or after trial (motions for a new trial). While the AAA does give the arbitrator the discretion to address necessary pre-hearing motions, the focus tends to be on motions that can simplify the hearing process if granted.
Time is money, and postponements, without a doubt, add expense. The culture of the local court, or the culture within a particular judge’s chambers, will determine whether a lawsuit will proceed according to its original schedule. The same can be said of arbitrators, though their training and the rules emphasize the need for a timely resolution of the dispute.
With so many factors in play, the nature of the dispute will dictate whether arbitration or litigation is the least expensive option. Parties should not be completely dissuaded by the filing fees and the cost of the arbitrators since those arbitrators can more than offset those expenses by limiting discovery and motion practice.
COST AND TIME ARE NOT THE ONLY CONSIDERATIONS
Another measure relates to the qualifications of the decision-makers. Trials typically involve jurors that know nothing about construction, the rules of evidence or the rules of procedure. Judges do not often have significant experience with construction disputes. While there can be anxiety based upon the personal experience and propensities of an arbitrator, they are typically chosen from a list of qualified individuals with industry experience. For larger cases, the use of three arbitrators often creates a peer dynamic where each arbitrator is challenged to do his or her best. In most cases, there is a strong argument in favor of arbitration because of this factor.
The litigation process does have its proponents. Some argue that cases of significant complexity benefit from open discovery so the parties can be fully informed. It can be more complicated to collect information from non-parties through arbitration because of the need for subpoenas, the effectiveness of which varies from state to state depending on local law. And others prefer to have the opportunity to appeal an adverse award. Arbitration will only provide for the right of an appeal if the parties agree, while courts provide for an appeal as a matter of right. Awards at trial are quite often followed by an appeal, adding months to the resolution of a dispute.
And, it can be difficult to involve all of the parties to the dispute to an arbitration proceeding if the contracts at issue do not all call for arbitration.
Over a three-year period, the AAA collected survey information from 422 arbitrators of commercial cases with a median of $2.5 million in dispute.3 Those survey results indicated that combative counsel and parties were the most likely factor to increase costs, discovery the second most, motion practice the third and postponements the fourth. That survey concluded that, to keep costs to a minimum, parties should set limits on discovery and motion practice in their arbitration agreements and use a set of rules to govern the process.
That recommendation highlights the key to managing the costs of dispute resolution—thoughtful drafting of the dispute resolution terms within the construction agreement. One party can maintain a right to choose between litigation and arbitration of a dispute as it sees fit. Or, both parties can agree to use arbitration for some cases and litigation for others depending on the size and nature of the claims and the number of parties involved.