Private arbitration is often lauded as a speedy and less expensive remedy to litigation in the public court system. Arbitrators replace both the judge and the jury who would otherwise oversee a formal dispute between litigants. Courts and public policy broadly support the use of arbitration. And in the last decade or so, adding an arbitration obligation as the dispute resolution device has become increasingly popular in construction contracts. But, as a practical matter, for parties involved in construction in California, is the use of an arbitration provision actually helpful? To answer this, more about the arbitration process needs to be discussed.
The process is typically overseen by retired judges or lawyers who are believed to move faster than judges and are expected to be more sophisticated and analytical than an average jury pool. And, in arbitration, the discovery process, often derided in the public court system as inefficient and expensive, is supposed to streamlined and limited. For example, cases in arbitration may, by agreement of the parties, be limited to a single exchange of documents and a single deposition whereas, in the court system, back-and-forth over document exchanges can take years and involve, in some cases, millions of documents. Arbitration awards – the actual decision rendered by the arbitrator, typically provide greater finality to a dispute, because the right to appeal from an arbitrator’s award can be limited, depending on the nature of the challenge to the award. By contrast, in the court system, after years of litigation, the result of a jury trial could trigger even longer appellate proceedings, with more uncertainly and additional cost.
Thus, it is easily seen why, in some instances, the upsides of arbitration are seen as benefits to the parties, which make the selection of arbitration as the dispute resolution device in a contract very attractive. But the devil is always in the details. it is worth considering the potential downsides to arbitration, too.
First, arbitration is not free. And, in fact, it can be extremely expensive. Arbitrators can charge anything they like for their services. An arbitrator’s hourly rate can easily reach or surpass $500 per hour. A superior court judge, on the other hand, is free.
Second, once an arbitrator is selected by the parties, that arbitrator typically controls every aspect of the process, unless the parties’ agreement provides for limitations. Typically, their power is broad and not easily subject to challenge. If the arbitrator decides that the type of discovery typically conducted in public court cases (numerous interrogatories, requests for admissions, and depositions) is reasonable, then it’s possible that such broad discovery will be permitted even a reason that arbitration was made part of the contract was to avoid such sweeping discovery processes. It’s also possible the parties won’t have their “day in court.” If the arbitrator decides the dispute can be decided by law-and-motion practice – in other words, that the whole dispute can be resolved by written briefing rather than with any live witnesses at all – then the dispute may very well be resolved that way. And there is not much that can be done to challenge those sorts of decisions, because, the thinking goes, the parties made a decision, in their contract, to arbitrate. The point here is that the big picture aims of arbitration – such as the streamlining of discovery to achieve cost savings – may in actuality not be realized at all, depending on the nature of the dispute and the decisions of the arbitrator.
Third, the nature of discovery in arbitration proceedings can put one party at an extreme disadvantage over another – without a remedy. Consider a typical dispute between an owner and a general contractor: the general contractor is typically in possession and control of nearly every aspect of a project, including information about the project itself. Years after a project is over, the owner, on the other hand, may have limited information, and limited access to information, regarding the project. But the general contractor still has it all in their own files. A streamlined discovery process in arbitration can result in the owner being unable to obtain all the information in the general contractor’s files, even though it might help the defense or prosecution of the claims. By contrast, in a court proceeding, everything comes out.
Fourth, arbitrations in complex construction cases – construction defect cases, for example – that involve numerous parties, including the owner, general contractor, and subcontractors, can, surprisingly, proceed at an even slower pace than proceedings in public court. Again, it all depends on the arbitrator. (And to be fair, lawyers often play a role in the slow pace of proceedings as well.) While the public court system is often overburdened and underfunded, there are many deadlines in place that necessarily push cases forward. For example, there are deadlines by which a matter must go to trial, or the claims are lost. Such deadlines do in fact have effect in the court system. In arbitration, however, such deadlines may or may not apply, and are less often enforced.
Fifth, the vast majority of cases in the public court system are settled before a trial takes place. The unpredictable nature of jury trials has a profound effect on parties’ willingness to roll the dice, so to speak, at trial. And while matters in arbitration settle, too, the timing and risk considerations are different. The Consider, also, that a settlement achieved after a year of litigation in the public court system likely does not carry the same transaction costs as a settlement achieved after a year of arbitration because of the unique costs incurred from the arbitration process itself. Again: the public court system case is essentially free aside from relatively inexpensive administrative and filing fees.
Sixth, judges and arbitrators make mistakes just like everyone else. The difference though can mean all the difference in the world. When a public court judge makes a mistake, there is an appeal process. An appellate court can fix many errors. But when an arbitrator makes a mistake, it is unlikely the mistake can be fixed by anyone.
So is there a way to get the benefits of arbitration and limit the potential downsides? In short, yes, to some degree. Consider limiting the arbitration clause in a contract to disputes involving a relatively small amount of money (for construction cases), perhaps disputes up to $150,000. Disputes in that range typically involve a limited number of factual and legal issues, and pose less risk of existential threat to a business. Therefore, conducting limited discovery does not provide either party with a massive advantage and likely keeps the costs of discovery under control. Additionally, and depending on where your business stands in terms of information necessary to prosecute the claims and/or defenses most likely to be advanced in a dispute, consider including a clause providing for the specific discovery necessary to assist with litigating the claim or defense. It is also important to consult with an attorney about the drafting of an arbitration clause – your attorney should offer useful insight into the type of information necessary to assist with litigating the claim or defense. Also consider including a term requiring that the fees of the arbitrator will be split equally among the parties regardless of the outcome. This keeps the parties on an even playing field in terms of transaction cost of proceeding with the arbitration, and can foster settlement discussions once the arbitrator requests an advance deposit of his or her potential fees to conduct the arbitration. In sum, arbitration has its upsides. And it can be a very useful tool. But it is not necessarily a tool for every dispute, and knowing when and how to agree to arbitration on one project versus another can meal all the difference later, when real money is on the line.
Zachariah H. Rowland is a partner in the law firm of Dunn DeSantis Walt & Kendrick. He advises clients on all types of commercial litigation and construction matters in state and federal courts throughout California. He can be reached at firstname.lastname@example.org.
Dunn DeSantis Walt & Kendrick provides a broad spectrum of legal services to businesses of all sizes, from small, local start-ups and non-profits to large, national companies. DDWK’s real estate development and construction practice includes representing all segments of the development and construction industries on both private and public projects.
You can find additional information and resources related to helping business owners and their businesses through COVID-19 challenges on the DDWK website.