Arbitration versus litigation in construction contracts: Considerations to take into account - by Andrew Richards

May 07, 2019 - Long Island
Andrew Richards,
Kaufman Dolowich & Voluck

One of the many important choices a developer or contractor faces when it prepares its construction contracts is whether to include an arbitration provision to resolve disputes or litigate any disputes in a court of law.  There are a few major considerations to take into account in making the choice. The main factors in choosing litigation or arbitration are: (i) Whether the construction contracts contain “notice” clauses for extra work claims and time extension requests; (ii) the cost and time involved in arbitration or litigation, and (iii) the qualifications of the person deciding the issues.    

A properly drafted construction contract for the developer (as payor) to a contractor (as payee) or the contractor (as payor) to a trade contractor (as payee) will contain language making notice provisions conditions precedent to bringing claims for extra costs incurred due to the payee’s performance of disputed work, or for an extension of time to complete the work. The notice provisions require the payee to notify the payor of the performance of extra work or the need for the time extension within a few days after the occurrence of the event. The contract should further provide that if the payee fails to comply with the notice provisions, it will be deemed to have waived its claims. In many cases the payee has a valid claim for extra work, but does not advise the payor of its claim until the work has already been performed.

Where such notice provisions are contained in the contract, the payor should choose not to include an arbitration clause in the contract.  A judge will more likely dismiss a claim for which the contractual notice was not given while an arbitrator may very well overlook the notice provision and base his/her decision on the equities of the dispute. In addition, by dismissing the claim at an early stage, the payor can avoid spending tens of thousands of dollars on legal fees to go through discovery and a trial. An arbitrator will most likely not dismiss the claims on a motion, and will most likely decide in favor of the payee and award the costs of the extra work (assuming that the work was extra to the contract) even though the payee has not technically abided by the contract’s notice requirements.

Another factor that should be considered by the payor is the costs involved in litigation or arbitration.  Historically, arbitration proceedings have resolved disputes sooner than litigation.  While court litigation can take a year to two years to bring a resolution to a dispute, arbitration proceedings can generally be concluded within a few months. The reason for this is that the litigation process generally enables the parties to conduct much more pretrial discovery (i.e., interrogatories, document requests, depositions, etc.) than an arbitrator will allow.  It is quite clear that the more discovery procedures are used by the parties, the longer it takes to resolve the disputes and the higher the legal fees. This factor would favor an arbitration clause.

The qualification of the trier of fact should also be taken into account in choosing arbitration or litigation.  While a judge may have some experience adjudicating construction disputes, an arbitrator will no doubt have experience in construction disputes since the parties will mutually agree upon an arbitrator or the organization with whom the arbitration demand was filed will provide a list of potential arbitrators who are either contractors, architects, engineers or attorneys who concentrate their practice in construction law.  If the resolution of a dispute requires construction knowledge, many clients become frustrated with court proceedings where the judge has little familiarity with construction or the construction process.  

Most importantly, judges within the last couple of years in both state and federal courts have dismissed delay claims not only on motions for summary judgment, but also on motions to dismiss. Judges in both federal and state courts have shown over the last few years that they have no interest in adjudicating complex construction and delay claims, and will “hang their hat” on any contractual provisions that give them “cover” to dismiss the claims. Thus, a payor should choose litigation if the contract has the aforementioned condition precedent clauses as well as a “no damage for delay” clause in the contract.

In deciding whether to include an arbitration provision in a contract, the payor should take into account all of the factors discussed above.  It is beyond prudent for any party to a construction contract to consult with an attorney who concentrates in construction law and litigation to discuss the terms of a construction contract, as well as the pros and cons of arbitration and litigation.

Andrew Richards is a co-managing partner – Long Island office, chairman of construction practice group, at Kaufman Dolowich & Voluck, LLP, Woodbury, N.Y.

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