Arbitration takes on trappings of litigation

December 01, 2004 |

Arbitration has become the darling of those seeking a way to streamline dispute resolution procedures. During its evolutionary process, arbitration has taken on many of the unfavorable characteristics of litigation. Once touted as faster and less expensive than litigation, arbitration all too often suffers from delays, high costs, inefficiency, and arbitrariness. It is past time to reexamine the functionality and wisdom of mandatory arbitration.

The American Institute of Architects, the source of a widely recognized and respected family of contract documents, is reported to be considering deleting its mandatory arbitration clause from some of its future contract documents in favor of forms allowing parties to choose whether to arbitrate.

The goal of arbitration

Those favoring arbitration tout it as being superior to litigation in that it is supposed to be faster, cheaper, and better suited for resolution of complex and technical construction issues. In theory, the parties are able to cherry pick arbitrators who will understand the technicalities of construction, such as concrete failure and slurry walls, and also be able to read and understand specifications and drawings. However, these assumptions are being challenged.

While the arbitration process is being legitimately criticized, few professionals will argue against the wisdom of including a contract clause requiring the principal decision makers for each party to a dispute to engage in nonbinding mediation as a condition precedent to either arbitration or litigation. Nationally, experienced mediators will typically be able to achieve settlement at the rate of about 80%.

Arbitration's warts

The arbitration process has become a victim of its own successes. As the process has grown in popularity, so have the resultant problems. It is being blindly over used and abused.

Litigation is justifiably criticized because of its high costs. But, consider the ever-growing high cost of arbitration. There is a body of emerging California case law ruling that the filing fees imposed by the American Arbitration Association are so "extraordinary," "burdensome," and "inordinately high" that a homeowner would not be required to pay filing fees totaling $26,000 to assert two claims — one against the builder and the other against the architect. The court ruled that if the builder and architect want to arbitrate they will have to either pay the filing fee or find an arbitration provider charging reasonable fees similar to fees charged by courts [Francis, et al. v. Westlan Construction Inc., et al., Court of Appeals of California, 2nd Dist. No. B168316 (2004)].

Most large construction disputes are not heard by a single arbitrator, but rather by a panel of three. Each arbitrator sets his or her own hourly fee. It is not uncommon for a single arbitrator to charge $300–$400 per hour. If the losing party has to pay the fee for all three arbitrators, the cost may be exorbitant. Even if the fees are divided among multiple parties, any cost savings may be greatly reduced or even obliterated.

Large cases can drag on

The amount of time it takes to reach a final resolution is another key component of the formula to decide whether to arbitrate or litigate. As a general rule, small cases will probably be decided faster in arbitration than litigation. But in large, complex multi-party cases, count on arbitration and litigation being slow. Judges, whether in metropolitan or rural areas, typically do not have large blocks of time for long trials and are more apt to force parties to try their case at a time that is inconvenient for all parties. Arbitrators, on the other hand, are more likely to slow the process by trying to schedule the arbitration hearing for a time that is convenient for all parties.

Arbitration is supposed to be user friendly and efficient, but the degree to which this is the case may depend on the administrator. For example, some administrators have refused to allow parties by unanimous agreement to expand the names on the panel from whom the final arbitrators are selected.

Parties are well advised to recognize that at the time of contract signing, when the parties do not know the size or nature of the dispute, arbitration is not necessarily the best vehicle for resolution of all disputes. If when a dispute develops it is believed arbitration is the preferred vehicle, there will be ample time to enter into an arbitration agreement.

Before that time, parties should carefully consider keeping all of their options open and certainly not agree in advance to one particular arbitration association. There are many associations from which to choose whose fees are competitive and services efficient. A growing number of parties choose to avoid use of an expensive arbitration service in favor of jointly hiring the arbitrator.

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