Arbitration or Litigation: What’s the Difference — Which Should I Use?

LEGAL MATTERS

Arbitration or Litigation: What’s the Difference — Which Should I Use?

Jeffrey W. King Outside General Counsel for the WFCA

It is common for a contract to include a “Dispute Resolution” clause. The clause may require that all disputes arising under the contract be arbitrated. In another contract, the Dispute Resolution clause may require all claims be resolved in court, even specifying where a case can be filed. Still in other contracts, such as the standard AIA forms, the parties have the option of court litigation or arbitration to address disputes, while other agreements may not address the issue at all.

Should you include in contracts that disputes be arbitrated or litigated? Ask two lawyers and you may get two different answers, as many lawyers disagree on the merits of arbitration versus litigation. There are key differences between litigation and arbitration. You will need to balance the pros and cons of these differences to decide which process is best for you.

Arbitration

Arbitration is a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute. While the procedures vary by agreement, generally each party picks an arbitrator and the two arbitrators pick a third arbitrator. The parties can also agree on a single arbitrator or allow one of the arbitration services, such as The American Arbitration Association (“AAA”) or the Judicial Arbitration and Mediation Services (“JAM”), to select the arbitrator or arbitrators. The parties share the costs of paying the arbitrator for their time and expenses. Like litigation, both sides have a lawyer in arbitration, file a claim and response, and both make arguments and present evidence at a hearing to support their claims.

Litigation

Litigation means taking a dispute to court. Both sides file pleadings, request discovery of the other sides information, and present their case before a judge or jury, who will then render a decision. The rules of the court and evidence apply and the schedule is controlled by the court.

Mediation

To avoid confusion, it is important to understand what mediation is since a party may request that a dispute be mediated. Mediation is an alternative to litigation and arbitration. Mediation, however is merely a negotiation. There is no guarantee that the parties will come to a resolution and there is no final decision. The mediator does not issue an opinion. Rather, the mediator facilitates settlement negotiations, and can work as a go between. Mediation often takes place while the parties await a court or

Parties can always agree to mediate a dispute even if the contract requires arbitration or court litigation. The courts can also require the parties to mediate a claim, and, in construction disputes, often do mandate the parties try to mediate a resolution.

arbitration date with the goal of reaching a solution to the dispute rather than allowing a court or arbitrators to decide. Parties can always agree to mediate a dispute even if the contract requires arbitration or court litigation. The courts can also require the parties to mediate a claim, and, in construction disputes, often do mandate the parties try to mediate a resolution.

The Pros and Cons

Costs: Litigation can be more expensive than arbitration. There can be extensive discovery in litigation, with multiple depositions, the production of pages and pages of documents, and disputes over discovery. The parties may also file motions to dismiss and for summary judgment. Litigants must conform to their judges’ procedures and rules, as well as their jurisdictions’ rules of civil procedure and evidence. Arbitration, on the other hand, is generally not as expensive. Discovery can be limited in arbitration, and depositions are generally limited or not allowed at all. Recently, however, the discovery process that is prevalent in litigation has become a regular part of arbitration as well, thus increasing costs of arbitration.

These savings in arbitration come at a cost. With limited discovery in arbitration, parties will not be as prepared for the hearing. They may not have depositions to use to prevent a witness from changing their testimony, may not find that “smoking gun” that can prove their case, and may not have a full picture of the matter.

Speed: Litigation typically takes longer due to the formal Rules of Procedure and the backlog of the courts. This backlog and delay have been exacerbated by COVID19. Arbitration tends to move faster. The parties may be able to schedule a hearing within months after commencing the process. Because there is typically less formalized procedure throughout an arbitration, there is less potential to slow down the process. The price of that speed is the claims may not be fully developed.

Rules of Law and Evidence: A court’s decisions are constrained by statutory and case law and the trial is governed by established rules of evidence. For example, hearsay, which is a statement claiming what an individual not court said, is not allowed. Similarly, to introduce documents, a witness is needed who can authenticate that the documents are valid.

In contrast, arbitration often does not follow these rules and can allow hearsay and easier introduction of documents. An arbitrator has considerable flexibility to consider any evidence they deem relevant and may issue an award based upon perceptions of fairness or equity and not necessarily on the evidence or rules of law.

The cost of this flexibility, however, can be significant. While this can result in cost savings, it also limits the ability to cross exam and challenge certain facts. Allowing hearsay, for example, limits the ability to cross exam and challenge certain facts. Similarly, a clear contract provision may be ignored in an arbitration because the arbitrators find it unfair to enforce.

Fees: In arbitration, the parties agree to share the costs of the arbitrator, including any of the arbitrators’ travel costs and the facility costs where the hearing is held. While the contract can require the losing party to pay all the cost, even the prevailing parties attorney fees, these clauses are not often enforced in arbitration. It is common for the arbitrators to find that some portion of both parties’ claim are valid, and therefore rule there was no prevailing party.

In most jurisdictions, unless the contract contains a provision for attorneys’ fees, such costs are not recoverable even by the victorious party. If the contract contains a provision for attorney fees, these fee clauses are often enforced based on the extent that a party prevailed on their claims.

Motions: Litigation often includes filing motions to dismiss, motions to compel discovery, and motions for summary judgement. Arbitration usually limits or precludes such motions. While this can save substantial costs, it can also allow a claim to go to a hearing that would have been dismissed in court on a motion.

Appeals: Most arbitration is binding and non-appealable, unless the losing party can show there was bias or fraud by one or more arbitrators. This means that the arbitration decision will be the final word on the legal dispute even if there is an error or the arbitrators ignored certain facts or specific contract language. In a litigation, there is an absolute right to appeal a court decision to correct any such errors.

Arbitrator and Judge: Litigants cannot choose their judge. Litigants also must conform to their judges’ procedures and rules, as well as their jurisdictions’ rules of civil procedure and evidence. Arbitrations, by contrast, the arbitrators can be chosen by the parties. This allows the selection of arbitrators that have a background in the field at issue, such as someone familiar with construction disputes or flooring installation defects. Such persons should have a greater capability to comprehend project issues, and to scrutinize liability and damages claims common to the construction industry. While this will save the parties from the need to “educate” the judge or jury of the basic principles of the industry, it also comes with the arbitrator having pre-conceived ideas and opinions.

Flexibility: Court litigation is controlled by statutory and procedural rules. In arbitration, the parties can agree on rules and procedures. These can restrict pre-hearing exchange of documents or interrogation of witnesses, how an arbitration hearing will be conducted, and the level of detail to be included in an arbitration award. These limits can reduce the cost of arbitration.

Injunctions: In some situations, a party may want to stop the opposing side from undertaking certain actions or order them to take certain action. For example, if an owner or the general contractor locks out a flooring subcontractor, the subcontractor may need to seek an order allowing access to the job site. Similarly, if a subcontractor will not sign a needed final release so you can get paid, you will need an order requiring the subcontractor to issue the release or ruling that the subcontractor has no right under the contract. Arbitrators cannot issue such orders; only a court can.

Joinder of Parties: In construction disputes, an owner or general contractor may file a claim against a flooring dealer for work done by the flooring contractor’s independent installers. If the claim is submitted to arbitration, such an additional parties must either have agreements requiring them to participate in the arbitration or consent to their joinder in the proceedings. In contrast, in court proceedings, all persons and entities involved in a dispute typically can be joined as parties.

Public or Private: Most of the time, court filings in lawsuits are public. This means that members of the public, particularly reporters and bloggers, can view the substance of the filings and provide them to the public. As a result, there may be publicity or social media buzz around a lawsuit. By contrast, arbitration is almost always private. There is no public arbitration docket, so there is no public record of an arbitration taking place. As a result, the arbitration and the parties’ papers and other filings regarding the arbitration can be kept confidential.

Should I Require Arbitration in My Contracts?

It is key to note, that the parties can agree to arbitrate a dispute without it being mandated in a contract. Both parties, however, would have to agree to arbitration. If arbitration is mandated in the contract, the parties can only avoid arbitration by mutual agreement. It is possible to require arbitration, but identify exceptions. For example, a contract can provide:

Any dispute arising under or related to this Agreement (except for [i] actions seeking temporary, preliminary, or permanent injunctive relief or any other form of equitable relief; and [ii] disputes related to [insert exceptions]), shall be resolved by binding arbitration in accordance with the arbitration rules as set forth in this Agreement.

Before a flooring dealer includes or agrees to a mandatory arbitration clause in a contract, they should evaluate the circumstances and the likely issues that will arise. If, for example, the issue is a strict interpretation of the contract, the flooring dealer needs to consider whether they want arbitration, where the arbitrators can consider any evidence they deem relevant, may issue an award based upon perceptions of fairness or equity, and not necessarily rule on a strict reading of the contract provisions at issue.

Conclusion

Whether to include mandatory arbitration in a contract or agree to arbitrate a claim is a complex issue. Given the potential benefits and risk, every flooring retailer, contractor, and installer should review this decision with competent legal counsel BEFORE signing a contract with a mandatory arbitration clause, or agreeing to arbitrate a claim. ■

Notice: The information contained in this article is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion and is not a substitute for the advice of counsel. Whether to include mandatory arbitration in a contract or agree to arbitrate a claim is a complex issue. Given the potential benefits and risk, every flooring retailer, contractor, and installer should review this decision with competent legal counsel BEFORE signing a contract with a mandatory arbitration clause, or agreeing to arbitrate a claim.