A construction project without a dispute is nearly inconceivable.
Indeed, a full 98% of construction projects result in cost overruns or delays, according to McKinsey. Likewise, design, engineering and management consultant Arcadis found that 70% of construction projects end up with claims.
In the post pandemic world, construction projects end up in litigation with greater frequency than ever before — and at higher dollar values. Indeed, the construction industry had the third-highest count and cost of legal filings among all U.S. business sectors, according to a recent report from business credit scoring agency Creditsafe.
All litigation is costly and time consuming. But construction cases often take longer and are more expensive to litigate than other commercial cases due to building’s fact-sensitive nature and the sheer volume of documents involved.
As an alternative, arbitration offers both time and cost savings. Benefits include:
Time: It is much easier to schedule construction arbitration than litigation, which is dependent on the court’s docket, the availability of judges (and sometimes juries) and requires many months of discovery to get to a trial. On the other hand, arbitration parties have the flexibility to schedule the hearing as they choose, and indeed, can also select an arbitrator who has soonest availability.
Arbitration agreements also often require certain milestones in the dispute process within specified time frames, which litigation does not. They generally require a written decision within a certain timeframe after the hearing, thereby providing a prompt result. Just try taking that concept to court.
The truncated schedule of arbitration can also allow a project to continue while it’s pending, which reduces project delays.
Expense: Most arbitrations involve limited discovery, such as sharing of key documents, and negotiations over whether more document exchanges are necessary. Litigation on the other hand requires extensive discovery. In particular, the complex nature of the construction process leads to time-consuming and costly document exchanges, depositions and pretrial motions. Discovery also delays the resolution of a dispute.
Because time is money, achieving a quick resolution leads to cost savings while keeping construction work on track, and saves litigation expenses.
Finality: Arbitration awards are generally final (absent an arbitrator’s mistake or wrongdoing) and are enforceable by courts in all 50 states and the District of Columbia. In general, a reviewing court will uphold the award as long as the arbitrator acts within their authority. Thus, parties to arbitration can generally be confident that the process will result in a resolution and conclusion to the dispute.
Confidentiality: Arbitration is a private process, and unlike litigation, the parties can prevent the proverbial airing of their dirty laundry in public. Proprietary and sensitive project information is preserved. Lastly, the confidential nature of the proceedings prevents reputational damage, thereby preserving relationships among project participants that might be impacted by a public dispute.
Flexibility: Because arbitration is a contract-based proceeding, the parties are free to tailor anything and everything about it. From the locale to the rules, selection of arbitrators, procedures and timelines, the parties can choose how they want to work together toward a resolution. Indeed, the process can even be modified to conform to the complexity of the dispute – leading to greater efficiency and satisfaction with the outcomes.
Know the downsides
To be sure, arbitration is not a panacea, and there can be good reason for choosing the litigation route. For example, some of the advantages of arbitration could be viewed as drawbacks, including the limited ability to appeal a decision to a court, and the narrower discovery process, which means less information to assist in resolving the dispute.
At the end of the day, the choice between arbitration and litigation depends on the project, the parties and the dispute. Evaluating the above factors for each individual construction project is the best method for selecting the correct dispute resolution method.
While arbitration isn’t always perfect, it could be the right fit for your project.
Jacqueline Greenberg Vogt is chair of the Construction Law Group at Mandelbaum Barrett PC, a law firm based in Roseland, NJ.