Although it is typical for AIA form contracts to contain arbitration clauses, as a contractor you should consider whether you should have an arbitration clause in your construction agreement. As discussed below, there are numerous factors to consider in determining whether mandatory arbitration is the preferred dispute resolution mechanism, or whether the state court system is preferred. Although arbitration may have some advantages, there are also disadvantages which must be considered rather than simply adopting the AIA form.
Costs of the Arbitration Proceeding
If an action is filed in either state or federal court, there is a filing fee for the complaint which is typically not more than $250 if you are the plaintiff. If you are the defendant, the filing fee is somewhat less. In a commercial arbitration matter, however, the amount of the filing fee paid by the claimant depends upon the monetary value of the claim being filed. In general, the higher the dollar value of the claim, the higher the filing fee for the claimant. If you are the respondent in an arbitration proceeding, no filing fee is charged unless you intend to pursue a counterclaim. As such, compared to a state court matter, the filing fee in an arbitration proceeding is substantially higher, and perhaps exponentially higher, if it involves a substantial claim. Thus, the initial filing fees in an arbitration proceeding are more costly than a state court action.
Judge or Jury vs. Arbitrator(s)
When an action is filed in a commercial arbitration matter, the parties must select an arbitrator, or a panel of arbitrators, to decide their matter – depending upon the size or complexity of the claim. In a state court proceeding, either a judge or jury will decide the matter on the merits. In the context of an arbitration proceeding, arbitrators are compensated their normal hourly rates throughout the course of the arbitration proceeding. In general, these rates are commensurate with the level of experience of the arbitrator and can surpass $500 to $800 per hour. This billable time includes all prehearing time, which can be extensive, if the value of the claims are substantial. Thus, the fees which are payable to an arbitrator are substantial and must be paid by both the claimant and the respondent. In a typical state court proceeding, the parties are not required to compensate the judge or jury for any pre-trial time or trial time. Therefore, the costs associated with an arbitration proceeding, both during the prehearing stage and during the hearing stage, are substantially greater.
Furthermore, if a party to an arbitration proceeding wishes to obtain a transcript of the proceeding, he or she is required to pay a court reporter to be present to record the proceedings. In either forum, a claimant or plaintiff will need to decide whether they feel comfortable with a judge or jury deciding the case, or an arbitrator or a panel of arbitrators. While arbitrators may be trained legal professionals, there is no guarantee that they possess superior knowledge to a judge, who may also possess extensive experience in construction litigation. Obviously, a jury is an entirely different matter and requires laymen to decide the merits of the case. With that being said, however, at times the decisions of an arbitrator or a panel of arbitrators can seem equally confusing or unreasonable.
Discovery During an Arbitration Process vs. State Court Process
In arbitration matters, interrogatories, document requests, and depositions are generally limited. In fact, in some proceedings, other than exchanging documents, no additional discovery is permitted. The extent of discovery which is permitted, however, is entirely within the discretion of the arbitrator.
On the other hand, in a state court proceeding the parties are free to serve interrogatories, document requests, requests for admissions and other discovery vehicles. They are also able to take as many depositions as are reasonably necessary. As such, the discovery process in a state court proceeding is generally more extensive and costly than would occur in a typical arbitration proceeding. This conclusion, however, assumes that the arbitrator does not permit the same amount of discovery that would be permitted in a state court action. As a caveat, at times an arbitrator may permit extensive discovery, and thus, the cost savings would be lost. In general, an arbitration proceeding does save the parties money in the discovery process, however, less extensive discovery can leave a party feeling somewhat ambushed as they may not be fully aware of the merits of their adversary’s claims prior to the hearing.
Timeliness of the Proceeding
In general, arbitration proceedings are resolved faster than state court actions. It is not unusual for a state court case to take a minimum of two to four years before a trial is heard. On the other hand, it is unusual for an arbitration proceeding to go on beyond one year, unless the claim is extensive or complex. Depending upon whether you are the claimant or the respondent, the timeliness of the resolution may or may not benefit you. Nonetheless, an arbitration proceeding tends to move significantly faster to a hearing on the merits than a state court action.
Once a judgment is obtained in an arbitration proceeding, an action still must be filed with the state court to confirm the judgment. The judgment will be confirmed by the state court unless a party can demonstrate that there was a miscalculation made by the arbitrator, or that the arbitrator rendered an award on an issue not before him which was outside the scope of the demand for arbitration. Also, if an award is so poorly written and unclear that its terms require further verification, the state court may ask the arbitrator to correct or modify the award. On the other hand, once a judgment is entered in a state court proceeding, that judgment is immediately valid. In either matter, once a judgment is confirmed or entered by a state court, the parties may commence executing upon the judgment.
Appeals from an Arbitration Proceeding or a State Court Proceeding
Appealing the decision of an arbitrator is much more than difficult than appealing the decision of a state court matter. In general, in order to obtain a reversal of a decision rendered by an arbitrator, the party would have to demonstrate fraud or undue means by either a party to the arbitration, or partiality by the arbitrator, or a patent excuse of discretion by the arbitrator which prejudices one side. As such, the grounds to appeal an arbitrator’s decision are narrow. On the other hand, while a state court proceeding is simpler to appeal, the party must nonetheless demonstrate that a reversible error was made by the trial court in order to succeed on an appeal. In the absence of a clear error of the law, or other prejudicial error by the state court, the judgement entered by the state court will be affirmed by the Appellate Division.
Although an arbitration clause appears in most AIA form contracts, contractors should consider whether they should the strike this clause and simply allow parties to proceed in state court. Whether a contractor should include an arbitration clause is an issue the contractor should discuss with their counsel, or an attorney from a reputable firm who has knowledge in this area. In my experience, at times an arbitration clause is not preferred. Furthermore, depending on the nature of the case, an arbitration proceeding may be too abbreviated or more costly. For the foregoing reasons, a contractor should consult with an attorney as to whether to include an arbitration clause in their construction agreement because once the clause is included in the agreement, it is binding unless both parties elect to void the provision.