RE and Construction Contract Disputes--To arbitrate or go to court, that is the question

It used to be the AIA and other form contracts contained a mandatory arbitration clause. A few years ago, the AIA removed its arbitration clause and the default is now litigation unless the parties specifically select arbitration. However, when negotiating a contract, whether for construction or other real estate matters, the question arises, how to handle disputes.

There are pros and cons to both.  It depends on what's important to the parties.  Here are some factors to consider--

  • Privacy - If privacy is important to you, arbitration is the better option. Litigation in court is very public. However, if privacy matters more to one party than the other, then being able to threaten a public court battle can be strategically useful to the other party.
  • Costs - Arbitration requires higher filing fees and the parties pay for the arbitrator(s) time.  If the dispute is small, arbitration is less desirable. 
  • Speed  - Some say arbitration is faster. Other litigators have told me that arbitration is no longer quicker and cheaper than litigation. Know how quickly arbitration can proceed versus your local court system before agreeing to one approach over the other. One advantage to arbitration in a large, complex case is the ability of an arbitrator to structure the procedures to the specific needs of a case and otherwise move the case efficiently. That may help contain costs in the long run; 'may'--no guarantee.
  • Expertise - In arbitration, you can select arbitrator(s) that have some expertise in the subject matter of your contract. Having an arbitrator with the appropriate expertise can help in obtaining a well-informed decision. In litigation, you are randomly assigned a judge whose biggest skill may be in winning elections. Some jurisdictions are moving to create specialized business/commercial courts to help improve the court system on handling these cases.
  • Procedural - In litigation, there are rules of civil procedure that address the process and rules of discovery that address how you obtain discover information to be used in trial.  Depending on how you set the parameters for arbitration, you don't automatically have a right to use discovery rules to obtain information. If you have access to all the information and evidence that you need for the hearing, then it may not matters. However, if in order to prove your side you need information that is in the possession of the other side, then you may not have a way to discover that information in the arbitration process unless your agreement provides for it.
  • Inclusion of necessary parties - Arbitration is by agreement only. If there is some likelihood that dispute resolution would require the involvement of several parties subject to different contracts, then the dispute resolution provision in each agreement would need to be essentially the same or you would need their agreement to participate. 
There is no one-size-fits-all answer. It depends on what makes sense in a given situation. As a transactional lawyer (i.e., I 'do deals' and never set foot in a court room,) I often find that the best solution is frequently to just work out a reasonable business solution and avoid both.

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