Quick Notes on Considerations when Choosing Arbitration or Litigation at the Time of Contracting

December 2022

Current AIA standard form agreements allow for a choice between binding arbitration or litigation, with a further option to enforce mediation as a condition precedent to proceeding with the selected dispute resolution method. Each option has its advantages and disadvantages - and one option does not fit all cases. This article aims to illustrate the key advantages and disadvantages of pursuing arbitration, litigation, and/or mediation as a condition precedent.

First, it is important to consider the complexity of the construction project throughout the contract life cycle. A client would benefit from analyzing the number of contractors, subcontractors, and other entities, the size of the project, the difficulty of site location, regulatory requirements, and the proposed schedule, among other factors to determine the complexity of the project. In general terms, the more complex the project the better suited for litigation.

Litigation allows an arena for traditional discovery, predictability, and the opportunity to appeal. Whereas arbitration is often (but not always) more cost-effective, but less predictable and rarely allows an opportunity to pursue comprehensive discovery or appeal.

Litigation allows for written discovery, depositions, and other discovery as may be needed or suited for a particular case. On the other hand, arbitration usually will only allow for limited discovery at the discretion of the parties and the arbitrator. In a complex matter where discovery is necessary to assess the viability of a claim litigation is the preferred path. However, if the claims are easily assessed without discovery arbitration (with limitations on discovery) allows the matter to be resolved in a more cost-effective way.

Litigation is fairly predictable, in that it is governed by the rules of civil procedure. In contrast, arbitration decisions concerning procedure are largely left to the discretion of the arbitrator. Both options have areas of unpredictability - but litigation has a set of governing laws and rules, whereas arbitration does not. If the parties do not expect a need to conduct discovery, there will be a diminished need for predictability in procedural decisions regarding discovery, and arbitration may be the better and more cost-effective path.

Further, if the stakes are high and the claim is complex, litigation allows for the opportunity to appeal a decision, whereas arbitration rarely if ever allows for appellate review.

Deciding whether to agree to binding arbitration or litigation at the outset of a project – at the time of contracting -- should be a decision made with careful consideration and a bit of strategy as to what potential claims would call for in terms of complexity and discovery needs. A great option for those deciding between arbitration and litigation is to also agree to mediation as a condition precedent to the initiation of the selected dispute resolution method. Mediation allows for early intervention into a claim, allowing the parties to potentially resolve a matter that would otherwise become costly, whether set in arbitration or litigation. Mediation is a great tool to gauge upcoming arguments that will be made in a forthcoming arbitration or litigation, and to gauge the potential for future settlement if it is not reached at mediation. Of course, mediation is not a fail-safe, particularly if the parties are particularly contentious or headstrong.

The inherent complexity of construction claims and the contractual dispute resolution avenue a party chooses to resolve the matter requires a thoughtful and strategic approach, including consideration of what may be important both to the resolution of the claim and to your client.