Recently, I posted a quick primer on two types of alternative dispute resolution at my Construction Law Musings blog. The two forms of ADR that I discussed were mediation (something that I truly believe in) and arbitration (the subject of this article). Based on the way I phrased things above, you may think that I do not like arbitration as much as mediation. If so, you would be correct. This is as much a function of my strong belief in mediation as my issues with arbitration (more about this below).
Arbitration (or "private court") is an alternative to litigation that results in a decision from a private party (or parties) who determine the outcome of a dispute is much the same way as a court would. Arbitration and its procedures in a particular case are determined by contract, either directly or indirectly (by reference to a set of rule set forth by another organization or group; for example, the American Arbitration Association).
The cited advantages for this process are the streamlined discovery which is usually limited to the exchange of documents and the faster resolution of the dispute. Additionally, some will say that arbitration allows a more informed "judge" to make the decision. This last advantage when properly employed can allow the parties to streamline any hearing because the arbitrator won't need to be educated on the industry and some of the nuances of the claim (for instance engineering or other standards) in the way a judge that tries a wide variety of cases will need to be.
Sounds great doesn't it? Of course, there are "cons" to every "pro" with anything, including arbitration. Depending on the type and value of the claim, arbitration can end up being as, if not more, expensive than litigation. This is particularly true when the arbitration provisions require third party administration and where the case is relatively small. In such cases, the filing fees are likely to be higher than those in your local courthouse. Also, remember that the arbitrator(s) is not doing this for free. The parties will have to pay his, her or their fees where taxes already pay a judge. Add in the fact that without strict rules about the type and you can see why some commentators think that arbitration may be more burdensome than litigation in some instances.
All of this said, arbitration can be helpful in some (in my opinion limited) circumstances. One is where there are carefully drafted contractual provisions relating to the details of procedure, timing, size of panel, etc. in the construction contract. In most, if not all instances, such provisions will be enforced should a Court need to intervene. Another is the generally limited situation where specific expertise is necessary for a full understanding of the issues in the case. Remember, judges hear "He owes me money" on a daily basis in all sorts of different contexts. Most construction cases are just this type of claim and, while sometimes large dollar, are not generally outside of the ability of a judge to understand.
Given the pros and cons, you need to be sure if you (or if you're an attorney, your client) truly want a contract clause requiring arbitration. If such a clause is in your construction contract, either party will be able to have any litigation dismissed or stayed so that the case can be arbitrated. Consider if avoiding a courthouse is worth risking spending a huge filing fee over a small amount of money. Will it be worth paying for a judge if the other side wants to use arbitration as a club to force settlement? Do you perform work in such a specialized area of construction that you think an arbitrator steeped in that area of construction will help? Are you the party that will likely be the one with the money such that having this "club" is a good thing?
Remember the title of this post? My question was do you want mandatory arbitration. Personally, I do not like mandatory arbitration. I believe that the questions surrounding whether arbitration is the best mechanism for dispute resolution (only a few of which are listed above) are enough to make it a bad idea. That is not to say that arbitration cannot be an option should the parties later decide to use it. I am just saying that keeping the option for going to court over a $25,000.00 claim is likely more efficient and cost effective than going through the AAA process. If you disagree, and there is no arbitration clause in your construction contract, you can still opt to go through arbitration.
In sum, be sure to consider carefully all of the consequences of including a mandatory arbitration clause in your contract prior to inserting it, you'll be glad you did.
Do you agree? What are your thoughts on the subject? I’d love to hear your comments below.