Legal Insights

Arbitration vs. Litigation: Choosing the Right Strategy for Complex Construction Claims and Disputes

May 27, 2014
By: Gary A. Wilson

Complex construction claims and disputes bring with them a variety of factors from a legal standpoint; multiple parties, a web of legal and technical facts and information, related insurance issues, and millions of dollars for the parties involved, particularly general contractors.

These same factors make it a pivotal strategic decision to arbitrate or litigate, and in some cases mediate, complex construction claims. Importantly, the direction one chooses in these matters must be considered throughout the contract lifecycle. Doing so ensures that the cost impact can be minimized through careful management of the process, from contract formation through project completion. 

For parties in complex construction claims looking to make a decision in terms of choosing arbitration, litigation or mediation, some of the key factors to consider from the beginning:

• Contract Formation:  When the contract is being negotiated, it should be decided whether arbitration will be mandatory. Hybrid approaches can also include whether the general contractor will have the right to select whether to arbitrate or litigate after the dispute would arise. It should be considered whether or not to require mediation prior to arbitration or litigation.
• Time For a Determination:  The contract should also address, if arbitration is mandatory, whether to require that the arbitration be completed within a set period of time. Acceleration of the process can be both cost effective and can provide a definitive determination of the dispute. Arbitration tends to be less time consuming.
• Complexity of Project & Required Discovery:  Arbitration normally results in limited discovery. Depending upon the complexity of the construction project, there may be advantages to litigation where more extensive discovery is usually undertaken. The trade-off is cost and what is reasonable for the project.
• Cost Savings:  Arbitration tends to be less costly due to limited discovery. If arbitration can adequately address the issues in the dispute with limited discovery, it may be preferable. However, if it is assumed that substantial discovery will be necessary to develop the facts then, litigation may be preferable.
• Expertise of Decision Maker:  Arbitration can allow for selection of arbitrators with a high level of expertise to address a construction dispute. Panels can be composed of lawyers and engineers/consultants. This specialized expertise can be very beneficial in a construction case. On the other hand, a specialized court may also be very beneficial. If litigation is preferred, a decision should be made at the contract formation stage to require a jury or a bench trial.
• Appeal:  Arbitration is normally binding with limited right to appeal. Litigation allows for an appeal, but the process can be very expensive and time consuming.
• Choice of Law and Venue:  These selections are extremely important and should be carefully considered at the time of contract formation.
• Rules of Evidence:  Litigation will require that the rules of evidence apply. In contrast, arbitration is less formal and the arbitrators can consider whatever evidence they require, and will generally allow evidence to be introduced without the restraints followed by the courts.

To be sure, the inherent complexity of construction claims requires a thoughtful and strategic approach to construction contracts. General contractors should consider all of the factors listed above when choosing their preferred approach, however they should also not reach any legal conclusions based on the information contained above without first seeking the advice of qualified counsel.

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