Should You Include An Arbitration Clause In Your Construction Contracts?
It’s time to finalize the contract with your client. Do you include an arbitration clause? That might, or might not be, a good idea. Before you decide, consider the advantages and disadvantages. Don’t assume arbitration is the best way to minimize legal fees. Does Arbitration Really Cost Less? The short answer – it depends. A plaintiff filing fee can cost as little as $150, and defendant’s fee even less, if any at all. But, when it comes to commercial arbitration, the filing fee can hinge entirely on the value of the claim. The higher the claim, the higher the filing fee for the administration of the arbitration. Compare that to state or federal courts, where filing a claim is usually a fixed fee. An arbitration filing fee can actually be much higher, dramatically higher in fact, should the claim involve substantial monetary damages. Commercial arbitration requires at least one arbitrator, and sometimes a panel of arbitrators. Hourly rates for arbitrators can be as high as $500 per hour, regardless whether the arbitrator is conducting pre-hearing meetings, reviewing documents, or conducting the arbitration hearing. It varies by contract terms, but often both parties are responsible to pay these fees. Not so with court proceedings – judges and juries are not compensated for pretrial or courtroom time. Knowledge & Expertise While an arbitrator has been trained in construction law, you have no assurance that he or she would be more knowledgeable than a judge. And, while a jury is comprised of laymen who have to weigh a case on its merits, a panel of arbitrators could decide a case with equally confusing or unreasonable outcomes. Discovery – Good News & Bad News Arbitration purposefully limits the discovery phase. After all, the whole reason for arbitration is to reduce legal expenses and speed up the process of getting to a ruling. Court proceedings allow a much broader exploration of discovery, which allow both sides to gather evidence. Unfortunately, this phase can be like trench warfare, where both sides try to outspend, or outlast the other. Costs dramatically escalate. That said, while arbitration almost always puts tight limits on discovery, an arbitrator still has the authority to allow more. This depends on the case and its monetary claims. If the arbitrator allows a more expansive discovery phase, then costs will escalate. Save Time Arbitration can and should be faster than the court process. State courts are often backlogged for up to a year before a case goes to trial, and in federal court it may be two years. By contrast, an arbitration proceeding can be resolved in less than a year. What Happens After An Arbitration Judgment? Once a judgment is obtained, the parties are allowed to file the judgment with the state court to execute upon it. The court is obliged to confirm the arbitration award, and there are only very limited means to appeal an arbitration decision. The courts give great deference to the arbitrator, and unless the arbitrator grossly applied facts or the law, the arbitration decision will not be overturned. One clear advantage to a court proceeding over an arbitration proceeding is the court’s judgment is appealable. Summary There are compelling advantages to include an arbitration clause in construction contracts. If properly managed, the arbitration process can be advantageous in that the arbitrator may be someone with a background in construction, the timing of the case may be quicker, and discovery costs may be less. Note the use of the word “may” applies here, because all too often the case is not managed efficiently by the arbitrator, and in the end the costs to arbitrate may be as much, if not more than if the cse were tried in court. Obviously, one size does not fit all. Each contract needs careful analysis based on its unique context. It’s important to weigh the consequences. If it’s a complex, high value construction deal, you need to consult with counsel before finalizing it. Please contact us if you have questions. There’s a lot at stake. We look forward to assisting you.
