By M. Colleen Weule, Esq.
Weule & Ballard, APC
A Professional Corporation

Most construction contracts today contain some form of Alternative Dispute Resolution (ADR) clause. The reason is simple litigation is an extremely costly and time-consuming method for resolving most contract disputes. There are essentially two very different types of ADR mediation and arbitration. Such clauses are enforced enthusiastically by the courts, in no small measure because it reduces the caseload for an already overburdened judiciary.

There are numerous reasons to choose ADR as a method of resolving your construction disputes, but there are many serious pitfalls as well. Before you commit to any form of ADR, you need to understand the differences between mediation and arbitration, as well as their relative advantages and disadvantages as compared with litigation. A surprisingly large number of experienced contractors do not understand these very different proceedings.

Mediation is a settlement conference facilitated by a neutral third party, and by its nature is non-binding. It is the preferred method of ADR, for reasons described briefly below, but its success depends on the talent of the mediator and the willingness of the parties to comprise. It is informal in nature, the parties do not introduce evidence as such, and the mediator does not act as a judge or make findings of fact. If successful, the mediation results in a settlement agreement signed by all the parties.

Arbitration, on the other hand, is a more formal proceeding where the parties introduce evidence and a neutral arbitrator issues a decision after hearing the evidence. Although arbitration can be either binding or non-binding, most contractual ADR clauses provide for binding arbitration. The outcome of a binding arbitration proceeding is an arbitration award, which can then be entered as a judgment by the court if necessary in order to enforce its terms.

There are essentially two reasons to choose ADR over conventional litigation as a method of resolving construction contract disputes -- time and money. A conventional lawsuit, on the one hand, progresses through several distinct phases (pleading, discovery, pre-trial and trial), and the costs and legal fees escalate as you proceed. These costs vary, depending on the number of parties, the complexity of the issues, and the amount in dispute. However, even a relatively small dispute can result in many thousands of dollars in attorneys fees, in some cases even more than the amount in dispute! Although cases are now moving more quickly through the judicial system than ever before, most cases still take in excess of a year to get to trial, sometimes far longer than that.

Mediation, on the other hand, can be initiated at any stage. As an ADR tool, it is extremely effective to require that mediation take place as a condition to instituting either arbitration or litigation. Mediation generally takes only a few hours, and involves far less extensive preparation, and (other than the mediator=s fee) you pay only for the time spent preparing for and attending the mediation.

Arbitration, regardless of the arbitration forum selected (and there are many), all involve some form of pleading by all parties. Some discovery is also permitted in most arbitration proceedings, although the discovery is generally more limited than in litigation. Exchange of documents is almost always required, and a limited number of depositions may be permitted where authorized by the arbitrator. Unlike litigation, however, there are no mandatory court appearances at various pre-trial conferences, and there is very little law and motion activity (i.e., where the lawyers seek early rulings from the arbitrator/judge on various evidentiary and other legal issues as a method of narrowing the scope of the dispute). As a result, arbitration generally is less expensive in terms of costs and attorneys fees than litigation, and typically takes far less time to complete the process (although that is not always the case).

Although the advantages of mediation are quite clear, after considering the above factors you might wonder why anyone would want to litigate a dispute rather than arbitrate it. The answer depends on whether you are willing to live with the outcome of the arbitration, for better or worse, because there is almost nothing you can do about a bad arbitration decision. If the judge makes a mistake you have the right to appeal. If the arbitrator makes a mistake, there is almost never a remedy. The California Supreme Court has recently reaffirmed a line of cases holding that an arbitrator's award, even where the decision is erroneous as a matter of law, cannot be corrected by the court. James W. Moore v. First Bank of San Luis Obispo (1999) 83 Cal.Rptr. 2d 274. [Although this article deals only with binding arbitration, it is worth noting that although a non-binding arbitration award can be disregarded if it is challenged by one of the parties, the result is that the matter must be tried twice, resulting in more costs and fees.]

The following chart summarizes the more significant differences between these proceedings:

If you can't live with a bad decision, either because of the amount in dispute or the importance of the issues involved, you should think long and hard before agreeing to binding arbitration.