Arbitration Pros and Cons for Home Builders

Home builders that have been through arbitration or litigation have war stories to tell about the merits or shortcomings of one over the other.

Ray Truelsen, CEO of Breckenridge Homes, in Prairie Grove, Ill., has gone through mediation and arbitration only once in his 40-plus years building more than 600 homes. After that experience, he says, he would take his chances with a judge or a jury. “The arbitrator wants to make things right for everybody,” Truelsen says. “So if you know you’re in the right and have a good case, [it ends up being unfair] because you’re being pushed to settle.”

Truelsen initially didn’t have an alternative dispute resolution clause in his contract when he took on a client who suggested he insert that language in the agreement. She balked at paying his final bill, so both sides tried mediation. When that failed, builder, client, and their respective attorneys spent five 8-hour days before an arbitrator. Truelsen won the case but lost money on that project because he had to split the cost for the mediator and arbitrator and pay his attorney.

Arbitration generally is assumed to cost less than litigating through the courts, but perception doesn’t always match reality. “It’s not necessarily less expensive,” says Brett Schouest, construction practice attorney with the San Antonio office of the Dykema Litigation Institute. “You do have arbitration filing fees, arbitrator fees, etc. But it can be worth it if it’s quicker and you can get a knowledgeable arbitrator or arbitrator panel.”

Builders or contractors considering whether to add an alternative dispute resolution (ADR) clause to their contracts should weigh the pros and cons of those methods versus going to court before deciding which path to take.

How Much Will Arbitration Cost?

For example, is arbitration faster? A report by Micronomics for the nonprofit American Arbitration Association (AAA) found that U.S. district court cases on average took 24.2 months to resolve compared with 11.6 months for cases adjudicated by arbitration. A study by the Federal Mediation and Conciliation Service, an independent agency of the U.S

So, does quicker resolution mean arbitration is cheaper? Not initially. Nonprofit consumer advocacy organization Public Citizen, which has long lobbied against forced arbitration, has, over the years, released reports documenting that administrative fees for arbitration in multiple jurisdictions cost thousands of dollars compared with fees in the low hundreds for filing a lawsuit in court. Not only do the initial fees add up, but paying a mediator, arbitrator, or a panel of arbitrators to show up at the hearing, and for study time, can be exorbitant, particularly if the case drags on.

“Some attorneys tell stories about arbitration going on forever because they have a retired attorney as arbitrator who is getting paid by the hour, so he has no plans to streamline things,” says Scott D. Cessar, an occasional AAA arbitrator and mediator and chair for construction and alternate dispute resolution in the Pittsburgh office of national law firm Eckert Seamans Cherin & Mellott.

There’s give and take between saving money or saving time when picking ADR or court and deciding which of their attributes are more important to your company.

What else should builders weigh? With court as the venue for disputes, the defendant can opt for a jury trial or have a judge decide the case. How that works out depends on whether the judge is knowledgeable about construction matters or if you think your attorney will be able to select astute jurors. But if you’re considering the courtroom route, look at the docket load in your jurisdiction, as the number of cases on deck can lengthen the wait before your case goes to trial.

“Judges don’t like construction cases because they take a lot of time to present, there are a lot of documents, and there are a lot of issues that the jury doesn’t understand. Construction contract disputes tie up the courtroom for a while,” Cessar says.

Expertise, the Lack Thereof, and Bias

With alternative dispute resolution, the parties can select from the arbitration provider an arbitrator with expertise or experience hearing construction contract litigation. Getting an arbitrator with experience reviewing issues about this sector may increase the chances of the dispute being resolved fairly. However, Public Citizen contends that arbitration clauses are biased against the consumer because the company provides the list of possible arbitrators or arbitration providers from which the consumer must select. The advocacy group contends that when companies establish long-term relationships with arbitration organizations to handle their continuing business, arbitrators have an interest in favoring the company in their decisions in order to attract repeat business.

“There is some perception of biased arbitrators, where in their practice they typically represent owners or contractors. I’m talking in terms of perceptions, not reality, but that’s something to keep in mind when you’re doing your study of the arbitrator or arbitrator panel and what the nature of their practice is,” Schouest says.. government and the nation’s largest public agency for dispute resolution, found the average time from filing to decision was about 475 days for an arbitrated case compared with 18 months to three years for similar court cases.

Pretrial motions in court litigation can pare down the case to the essential issues for deliberation at trial. The same privilege is, in theory, available during arbitration, but it isn’t often used or granted, Schouest says. However, an ADR clause can have language that limits the number of sessions and prohibits any party from taking depositions, since that’s where the process can become costly and inefficient, says Robert Miletsky, a construction practice attorney in White Plains, N.Y.

Put It in the Contract

“Depending on the contract amount in the agreement, I may say that no more than four sessions will be permitted, or perhaps no more than 10 sessions will be allowed for larger projects. You can also set the location for arbitration and specify how many arbitrators you will use for the dispute,” Miletsky wrote in a white paper for the International Risk Management Institute, an organization that provides information, continuing education, and certifications for insurance and risk management professionals. Miletsky prefers to have one arbitrator hear a case rather than a panel where each party picks an arbitrator and then the two arbitrators select the third. “You may as well go with one arbitrator,” he says, “since each party’s selected arbitrator will rule in favor of that party.”

The construction contract can carve out issues subject to arbitration. Schouest suggests that a contractor may not want payment issues subject to arbitration, instead preferring to file in court to get a payment award. “But a defect construction claim,” he says, “... you would want that in arbitration because those are difficult, complicated, and expert-intensive, and you would want someone knowledgeable as your arbitrator.”

Another consequence to consider is that court proceedings become part of the public record—unless there is a seal order—so your dirty laundry gets aired, while arbitrated cases remain private. Also, the disputing parties can appeal the court decision, but that option isn’t available if you don’t like the outcome of arbitration.