Is Arbitration Right For You?

Arbitration may historically be the favorite method of construction pros, but it comes with some troubling issues

April 04, 2019
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What does a 25% chance of recession mean for a remodeling business? If there were the same odds of bad weather, a car accident, or cancer, what would you do differently?  

How does your contract address dispute resolution? It probably says arbitration is the preferred method. And why not? It’s been favored by construction professionals for years. But that popularity may be fading. In fact, the American Institute of Architects contract forms now state that if the parties don’t specifically select arbitration as the way to deal with a dispute, then the choice automatically defaults to litigation. 

Problems with Arbitration

Most people don’t realize that arbitration can actually be just as time-consuming and expensive as litigation. Discovery may be limited, but it isn’t eliminated. Document production and depositions remain integral in moving a construction case forward. And arbitrators’ fees—which aren’t cheap—are paid by the parties, whereas judges and juries are paid by the taxpayers. 

What may be the most important distinction between arbitration and litigation is the little-known fact that arbitration decisions are rarely able to be appealed

But what may be the most important distinction between arbitration and litigation is the little-known fact that arbitration decisions are rarely able to be appealed. Short of a showing of bias or fraud perpetuated by the arbitrator, it is unlikely you can have a bad outcome overturned, even a decision based on an incorrect interpretation of the law. That is not true in litigation. You have the absolute right to appeal a judge’s ruling or jury’s verdict if you don’t agree. 

So, What Should You Do? 

For starters, put a requirement for mediation into your contracts. Many mistake mediation for arbitration. That would be wrong. In an arbitration, an arbitrator hears evidence and renders a decision that is enforceable in a court of law. In mediation, a neutral third party negotiates with the people involved and looks to find a middle ground which might settle the dispute. The mediator makes no decisions and his or her recommendation does not have to be accepted. An arbitration continues to a decision while a mediation can reach an impasse when the sides simply do not agree. 

Set a time frame for a mediation to occur before any next steps take place. Courts in most jurisdictions now require mediation before a trial can proceed. If mediation is futile, then litigation, preferably before a judge, should be pursued. 

To be clear, none of these options is pleasant. But having no stated path to resolving a dispute is worse. 

Finally, make sure to have a prevailing party attorney’s fee provision. You wouldn’t want to go through all this, win your case, and then have no way of recovering some of the legal expenses you have incurred.

About the Author


About the Author


Patrick Barthet, founded The Barthet Firm, an 11-lawyer construction law firm in Miami, and regularly contributes to TheLienZone.com construction law blog. pbarthet@barthet.com

Comments

Comments

Hi,

As The House Inspector, LLC, I have been performing expert witness for remodeling projects gone badly for about 20 years. I have been involved in at least thirty cases; some were arbitrations and some were litigation in courts. I agree with all that you have written and I would like to add a few things.

Firstly, most arbitrators are expensive commercial attorneys all of whom so far seem to be fair. Unfortunately, being commercial attorneys, they know very little about residential remodeling. Their residential construction knowledge appears to me to be based solely upon experience from their own homes. One of several examples: The first level floors were to be saved in a pop-up addition where the contractor allowed enough water to enter a house that children were skating on ice on the floors. All witnesses stated that the original old growth hardwood floors had been beautiful. Of course, when the hardwood finally dried out the floors were a mess. The arbitrator, who lived in a 200 year old home in Georgetown, DC., did not see anything wrong with floor boards that were gapped, cupped and creaking, so they became a non-factor. Also, with arbitration, too often it seems the final result is “splitting the baby” rather than making decisions upon anything related to law.

There are unknowns with judges in courts also. One judge seemed to not know the difference between a toothpick and a nail, but another correctly finished my sentences describing the poor workmanship of a contractor who ripped off an elderly gentleman.

For some reason, many of the arbitrations in which I have been involved have been multiple day affairs, but few court cases have taken more than a day.

Overall, I believe that if mediation does not resolve the case and if all of your legal ducks are in a row, litigation in court is best for projects involving major repair/completion cost. Whatever you do, choose attorneys experienced in residential construction even if they cost more. Much of my time is spent educating attorneys which means more hours billable hours for both the attorney and me and that ain’t cheap.

Last words from me: even if the outcome is in your favor, I have not seen anyone really win in court or with arbitration, except me and the attorneys. The financial cost is too high. Settle, rack it up to experience, and go on with your life.

Does this apply in NJ

Hi,

As The House Inspector, LLC, I have been performing expert witness for remodeling projects gone badly for about 20 years. I have been involved in at least thirty cases; some were arbitrations and some were litigation in courts. I agree with all that you have written and I would like to add a few things.

Firstly, most arbitrators are expensive commercial attorneys all of whom so far seem to be fair. Unfortunately, being commercial attorneys, they know very little about residential remodeling. Their residential construction knowledge appears to me to be based solely upon experience from their own homes. One of several examples: The first level floors were to be saved in a pop-up addition where the contractor allowed enough water to enter a house that children were skating on ice on the floors. All witnesses stated that the original old growth hardwood floors had been beautiful. Of course, when the hardwood finally dried out the floors were a mess. The arbitrator, who lived in a 200 year old home in Georgetown, DC., did not see anything wrong with floor boards that were gapped, cupped and creaking, so they became a non-factor. Also, with arbitration, too often it seems the final result is “splitting the baby” rather than making decisions upon anything related to law.

There are unknowns with judges in courts also. One judge seemed to not know the difference between a toothpick and a nail, but another correctly finished my sentences describing the poor workmanship of a contractor who ripped off an elderly gentleman.

For some reason, many of the arbitrations in which I have been involved have been multiple day affairs, but few court cases have taken more than a day.

Overall, I believe that if mediation does not resolve the case and if all of your legal ducks are in a row, litigation in court is best for projects involving major repair/completion cost. Whatever you do, choose attorneys experienced in residential construction even if they cost more. Much of my time is spent educating attorneys which means more hours billable hours for both the attorney and me and that ain’t cheap.

Last words from me: even if the outcome is in your favor, I have not seen anyone really win in court or with arbitration, except me and the attorneys. The financial cost is too high. Settle, rack it up to experience, and go on with your life.

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