An often-overlooked side effect of litigation, particularly in the construction industry, is the impact that it has on day-to-day operations. The more involved and protracted the litigation, the more your company must reallocate its resources (i.e. time and money) to tend to the litigation instead of focusing on projects that generate revenue.
Despite the headache, litigation serves a necessary purpose to protect what owners and their employees have built. However, going to court is not always the best or even the most economical method of litigation; enter arbitration.
What Is Arbitration?
In short, arbitration is a mechanism that allows parties to resolve their dispute outside of the court system through a neutral arbitrator selected by the parties.
Arbitration of disputes will occur only if the parties have agreed to arbitrate in writing. In the construction industry, many contracts include arbitration clauses that predetermine the parties’ arbitration rights prior to any dispute. As such, whether drafting or executing a contract, construction professionals should weigh certain considerations before committing to arbitration of potential disputes.
What are the Benefits of Arbitration?
Efficiency – Strict, drawn-out procedural timelines and a judge’s need to tend to a vast number of other cases can result in court proceedings going unresolved for years. Arbitration offers a far more streamlined approach and allows the parties to quickly schedule when they will resolve their dispute.
Choice of Arbitrator – In court, a judge is assigned to a case with an extremely limited ability to object by the parties. However, arbitration allows the parties to mutually select their arbitrator. This is particularly beneficial in the construction context, as the parties can select an arbitrator familiar with the specific type of construction dispute at issue.
Cost – The speed at which the parties can schedule and conduct an arbitration means they can often bypass some of the costs associated with conducting discovery and exchanging motions synonymous with court proceedings. This typically translates into the attorney billing less time and a significant reduction in overall cost.
Finality – When a judge decides a case, the non-prevailing party has a right to seek an appeal of that decision. Appeals significantly increase the time and cost of litigation. Decisions of the arbitrator, on the other hand, are final and not appealable. There are very limited grounds for asking a court to vacate an arbitration award. In other words, the arbitrator has the final say in deciding the dispute, period.
Confidentiality – Construction professionals, like many service-oriented industries, are established and knocked down by their reputation. Disputes can result in damaging allegations that, if filed in court, become public record for anyone to view. Arbitration, however, is confidential and allows the parties to freely explore the dispute without outward scrutiny.
What are the Disadvantages of Arbitration?
Finality – As mentioned above, the arbitrator’s word on the matter is final. As such, a party that feels aggrieved by the arbitrator’s decision often has no other recourse and must live with it.
Unpredictable Decisions – Arbitration uses much less stringent rules for evidence. As such, unfavorable evidence that would otherwise be kept out of court may be permitted in arbitration. Also, because arbitration skips many of the fact-finding procedures of litigation, parties may be unable to gather all the evidence needed to support their position before arbitration.
Cost – Yes, arbitration is generally more cost-effective than litigation. However, there are exceptions. Litigation requires that the parties pay their costs and attorneys’ fees. Arbitration, in addition to those costs, requires that the parties also pay the arbitrator for their services. Arbitrators set their rates, and the cost of highly specialized arbitrators can balloon quickly. As such, the parties should exercise caution in choosing an arbitrator that will fairly judge the case but will also resolve the dispute cost-effectively.
Have More Questions? Consult a Lawyer to Weigh the Options.
When considering whether to litigate or arbitrate a dispute, remember that no two scenarios are identical. What may appear to be a garden variety construction dispute, may involve more nuance better suited for review by a specialized arbitrator. A skilled attorney can assist in navigating that decision with the business’s interests in mind.
Litigation can get personal. But when you’re an attorney as well as the litigant, things can get both personal as well as nasty, and this can come back to bite you as was the case in Karton v. Ari Design & Construction, Inc., Case No. B298003 (March 9, 2021), 2nd District Court of Appeals.
The Karton Case
It started out, as many a case does, pretty straightforwardly. Attorney David Karton and his wife hired a contractor, Ari Design & Construction, Inc., to do some work on their house. After the Kartons had paid Ari $92,651 a dispute arose. Actually, two disputes arose. The Kartons believed that Ari was performing work without workers’ compensation insurance although it had it had two to four people working on the project. The Kartons also believed that Ari had overbilled for work completed, which they contended was to the tune of $35,096, and while Ari didn’t disagree, contended that it was only $13,000, a difference of $22,096. And it was over this, that the parties litigated the matter, resulting in attorneys’ fees and sanction requests of $543,307.
In the lawsuit filed by the Kartons they sued Ari, three of its principals, Shahar Toledano, Jonathan Guttman and Ilan Messika, and Ari’s license bond surety Wesco Insurance Company, alleging five causes of action for breach of contract, money had and received, violation of Business and Professions Code section 7031, claim against license bond, and unfair competition.
After a three-and-a-half-day bench trial the Kartons prevailed, with the trial court finding that Ari overbilled the Kartons the amount they claimed of $35,096, but awarding the Kartons all of the $92,651 they had paid to Ari, because the court found that Ari was subject to Business and Professions Code section 7031 by failing to have workers’ compensation insurance although it had employees. The trial court also awarded the Kartons an additional $10,000 under Code of Civil Procedure section 1029.8 which provides for treble damages, capped at $10,000, and attorneys’ fees against “[a]ny unlicensed person” whose work injures another person. And, finally, the trial court awarded the Kartons $2,850 for storage fees, for a total award of $109,501. The trial court also awarded the Kartons $12,500 against Ari’s license bond surety Wesco.
Following the trial, the Kartons filed a post-trial motion for attorneys’ fees. At the time of the motion the trial court judge had been reassigned and a new judge assigned to the case. In their motion, the Kartons requested $271,530 in attorneys’ fees, $52,021 in discovery sanctions, and $203,646 for proving matters at trial that had been denied in discovery for a total amount sought of $543,307. In its tentative ruling, the trial court determined that $450 per hour was a reasonable rate for the Kartons’ attorney but noted that Kartons’ motion lacked a breakdown of hours spent by counsel beyond a “bare-bones declaration” asserting that a total of 603.4 hours was spent on the case and an estimate of percentages devoted to different tasks. The trial court proposed to continue the hearing to allow the Kartons to supply the missing evidence to justify their request.
At the hearing, David Karton and his attorney appeared although Karton did most of the talking. Karton asked for 30 days to submit supplemental papers, which the court granted, and set a 10-page limit on the filing excluding exhibits. Thereafter, the Kartons filed 11 pages of text and 400 pages of supplemental briefing and updated their demand to add $16,110 to their fee request.
At the hearing, in which only David Karton appeared, the trial court expressed surprise that Karton had increased his fee request “beyond what had previously been requested.” The trial court also commenced on Karton’s lack of civility in his briefing, stating that it was “replete with attacks on defense counsel such as that defense counsel filed ‘knowingly false claims of witness tampering,’ ‘her comments were frivolous’ [and that] something was ‘typical of the improper tactics employed by defendant and their counsel’” “It was really offensive to me,” stated the trial court, “the attacks made in the case.”
While acknowledging that among the documents filed by the Kartons were billing records, although block billing records, the trial court noted that 300 of the 400 pages of supplemental briefing was “extraneous documentation . . . that I did not need and did not want in ruling on this motion.” “If this is reflective of the litigation that went on in this relatively simple-sounding case,” stated the court, “I understand how you may and your counsel may have spent the number of hours that you claim to have spent,” noting that the Kartons had gone “so far beyond what was necessary on this matter.”
Before taking the matter under submission, the trial court observed that Karton was “agitated about this case. This is your personal matter, and I understand that. I see that you have strong feelings about this case and strong feelings about the course of this litigation and how it has proceeded.” At one point, the court also told Karton, “can you not interrupt me. I would appreciate your letter me finish my sentence,” to which Karton apologized.
The following day, the trial court issued a minute order approving 200 hours at $450 per hour for a total fee award of $90,000. The minute order noted that the trial court had given Karton leave to file supplemental briefing of 10 pages but that Karton had filed hundreds of pages with 20 or more additional exhibits as well as Karton’s “inflammatory language.” The minute order also reviewed the law surrounding the lodestar method of determining reasonable attorneys’ fees and noted its broad discretion to adjust an award downward or to deny it completely if it determined a fee request was excessive. The trial court also ruled that there was no statutory or contractual basis to award attorneys’ fees against Wesco.
The Kartons appealed.
On appeal, the 2nd District Court of Appeal noted that “[c]ourts have developed two ways to define a reasonable fee”:
The first method is the lodestar approach. This method traces back at least to the famous Lindy case: Lindy Bros. Builders, Inc. of Philadelphia v. American Radiator & Standard Sanitary Corp. (3d Cir. 1973) 487 F.2d 161, 168. The lodestar is the multiplicand of a reasonable hourly rate and a reasonable number of hours. The court then may adjust the lodestar based on a variety of factors. Germane factors include the nature, difficulty, and extent of the litigation, the skill it required, the attention given, and the success or failure of the enterprise, as well as other factors. Whether the attorney worked on a contingency is relevant. A trial court is not required to state each charge it finds reasonable or unreasonable. A reduced award might be fully justified by a general observation that an attorney over-litigated a case.
The second method is the percentage-of-recovery approach. The percentage approach arose in the class action context and predated the lodestar method, but has always shared the lodestar method’s fundamental goal of defining “reasonableness” in a given case.
Over the decades, there has been a nationwide tug-of-war about which method is superior: lodestar versus percentage. Each approach has advantages and disadvantages. The lodestar method better accounts for the amount of work done, while the percentage approach more accurately reflects the results achieved.
In 2010, the American Law Institute concluded “`most courts and commentators now believe that the percentage method is superior. Critics of the lodestar method note, for example, the difficulty in applying the method and cite the undesirable incentives created by that approach—i.e., a financial incentive to extend the litigation so that the attorneys can accrue additional hours (and thus, additional fees).’”
The Court of Appeal then went on to state, in a number of must-quote passages, why it was “reject[ing] the Karton’s complaint that the $90,000 attorney fee award is too small”:
On the Difficulty of the Case: “Difficult issues require more attorney hours. Simpler questions require fewer. Here the issues were pedestrian: whether a contractor had insurance and a license.”
On the Equities: “[T]he Kartons over-litigated this matter. They had about a $23,000 dispute with their contractor . . . but it does not justify lounging a disproportionate litigation offensive. The Kartons’ strategy netted them windfall gains: the harshness of contractor licensing laws allowed them to recoup all their construction monies, plus $10,000, and to retain the benefit of months of free construction work.”
On Proportionality: “Weighing cost and benefit, this trial court concluded a fee three times the judgment was not reasonable. This was logical: rational investors or buyers would not spend $3 to get something worth $1.”
On Civility: “Excellent lawyers deserve higher fees, and excellent lawyers are civil. . . . [T]he Kartons [came] out swinging, apparently believing the best defense is a good offense. This approach demonstrates the trial court was within its discretion to conclude the Kartons conducted litigation that was less than civil.”
The Kartons didn’t lose on every count, however. The Court of Appeals held that, contrary to the ruling of the trial court, the license bond surety Wesco was liable for the Kartons’ attorneys’ fee award despite the bond being capped at $12,500:
Wesco says it cannot be liable for more than the $12,500 sum of its bond. Yet it voluntarily wrote the Kartons a check for $38,768.49, which was the sum of the $12,500, plus post judgment interest, and plus costs. When a surety decides to fight a lawsuit, it can make itself liable for the costs of the litigation in excess of the face of its bond, as Weco’s own actions demonstrate. . . . Instead, Wesco decided to gamble that it and Ari could avoid liability altogether on the merits. ‘Having lost that gamble, [Wesco] is not in a position to complain about liability for court costs.’
Whew. Do. Not. Trifle. With. This. Court.
While Karton is primarily a case about about over-litigating a case there’s a couple of construction gems in there as well. First, in a disgorgement action against an unlicensed contractor you may be able to recover your attorneys’ fees, as well as treble damages up to $10,000, under Code of Civil Procedure section 1029.8. Second, if attorneys’ fees are recoverable under contract or statue, they are also recoverable as costs against a license bond surety even through the current cap on liability against a license bond surety is $12,500, because a surety’s liability is commensurate with its principal.
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.
While most of the country has been at a standstill since March, you might be wondering, what about my lawsuit or my administrative charge? For the past couple of months, most litigation cases have largely been put on pause in the courts and at administrative agencies. However, as we adjust to what is clearly a new normal in both our lives and the legal landscape as we know it, cases will begin to pick up speed again, albeit with new strategies and challenges to keep in mind.
As courts begin to reopen, judges are emphasizing in many jurisdictions that criminal cases will take priority in an effort to attend to constitutionally required timelines. Nevertheless, it will remain just as important as before the pause button was hit to keep cases moving forward. This ramp up period presents a unique opportunity for clients and attorneys to invest meaningful time into investigating and developing defenses to claims while the court system and related case pace remains slowed.
While many court systems have stayed deadlines for pleadings, discovery, and the like, once litigation ramps back up, it will likely do so at an accelerated pace and on a compressed schedule. Days once devoid of court hearings and depositions will soon be packed with them. For this reason, clients should speak with counsel about some of the following socially-distanced opportunities for moving cases forward:
Deep-diving into a case’s records to develop initial defenses and assist in the development of case strategy.
Drafting written discovery, such as interrogatories, requests for documents, and requests for admissions.
Scheduling and participating in Zoom depositions, mediations, and arbitrations.
Preparing for a case that will inevitably go to trial by (1) drafting jury instructions, (2) brainstorming and conducting research regarding potential motions in limine, and (3) identifying potential exhibits.
Contacting expert witnesses about potential assignments or working with retained experts to develop and sharpen defenses.
Calling witnesses and conducting phone interviews, and developing comprehensive litigation strategies.
Additionally, plaintiffs (and plaintiffs’ attorneys) may be more willing to discuss settlement or other avenues to resolve a case. Specifically, in cases where plaintiffs and plaintiffs’ attorneys hoped to cash in at now-cancelled mediations and trials, there may be opportunity to resolve cases for short money or in an expedited fashion where the timeline of a case in the court system is now tenuous at best.
With regard to local administrative agencies, many, including the Connecticut Commission on Human Rights and the Massachusetts Commission Against Discrimination, were temporarily closed as a result of the pandemic, and many investigators continue to work from home. Additionally, for the last three months, investigative conferences and conciliations at the Equal Employment Opportunity Commission have largely been cancelled, with the exception of a few telephonic events.
Now that administrative agencies are reopening, they are starting to hold telephonic conferences, but the pace of scheduling for such administrative conferences and the delivering of decisions is much slower than before. For example, whereas one could have expected a preliminary ruling in six months in New England prior to COVID-19, parties are now looking at closer to a full year. In short, many, if not all, administrative agencies will be working to dig out from a backlog of charges.
While we must confront many unknowns as we adjust to the new normal, one thing remains clear – when the legal world turns back on, it will do so at great speed, as courts and attorneys try to make up for lost time. Accordingly, steps should be taken now so that cases and clients are well-prepared for what lies ahead, whatever that may be.
Back in 2006, when Rule 34 of the Federal Rules of Civil Procedure (FRCP) was amended to create a new category of discoverable information – Electronically Stored Information or ESI – eDiscovery was legitimized, and eDiscovery software was created to move ESI through the litigation process.
Fast forward to 2020, and ESI has grown in both size and complexity – terabytes (or even petabytes) of data from multiple sources like social media, email, chat, the Internet of Things (IoT) – and the goal of collecting, processing, and analyzing data for litigation has proven even more challenging.
But focusing on this challenge creates tunnel vision and overshadows other ways this powerful eDiscovery technology can be used. Anytime an organization needs to quickly ingest, organize, analyze, and report on large datasets, eDiscovery software offers an immediate solution and can be applied in various ways. One example is how government agencies are finding eDiscovery software is the perfect tool for responding to Freedom of Information Act (FOIA) requests.
Another example of thinking outside the eDiscovery box comes from J.S. Held, a company providing services for commercial contractors, allowing them to better understand where issues arise in their construction projects. In a recent conversation with Tim Martin, Technical Project Manager at J.S. Held, he shared, “We use the Ipro eDiscovery solution internally to handle the large volume of data created and generated during a construction project. When we receive hard drives of files from clients, Ipro enables us to quickly search, tag, code, and sort those documents, allowing us to review them with a streamlined approach and within a quicker timeframe.”
Previously, the team at J.S. Held would load files from clients, which in some cases had over a million documents, onto a file server, then have to manually open each one of those files and move them into a folder to classify them by type. “But by using Ipro analytics, we can do that on ingestion. As soon as the documents come in, we gain a clear picture of the data, and it can be quickly coded and classified, enabling us to cut sorting and coding times down to measurable hours, as opposed to the days it would have taken with our old process.”
In the end, that’s what eDiscovery software does: ingests a large volume of data, giving the user deep insight into what’s there with the ability to easily track and report those findings. It has so many applications across multiple industries, like commercial construction. It doesn’t matter if that data is a part of litigation or not. And as enterprise data continues to grow exponentially, this insight becomes more and more vital. As Tim from J.S. Held puts it, “By finding that needle in the haystack sooner, we can quickly and accurately communicate any issues to clients, which they greatly appreciate.”