Risk Performance Strategies
November 2018

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Reasons to Avoid Binding Arbitration


I suggest firms use the following dispute resolution process:


1. First, good faith negotiation

2. Followed by non-binding mediation

3. And litigation if needed


Some project owners have responded, “ Why do you want to use litigation instead of arbitration - does your firm like to litigate?" Answer - absolutely not. This dispute resolution approach allows the parties to resolve the issues through negotiation and mediation before litigation as the final option if needed. No one wants litigation - it too painful and costly. Also, even though arbitration was originally intended to offer benefits over litigation, this has proven not to be the case.


In a recent 2017 survey of 388 design firms, they identified how disputes were resolved.

Negotiation: 60%

Mediation: 24%

Arbitration: 2%

Litigation: 4%


The Problems with Binding Arbitration


Binding arbitration - a formal dispute resolution technique in which the opposing parties present their cases before one or more neutral individuals who are empowered to render a binding and court-enforceable decision. Although this process was originally intended to offer significant benefits over litigation by providing a forum in which disputes could be resolved without the spending of large amounts of time and money, this has proven not to be the case. It has shown to be an unsatisfactory, and sometimes disastrous remedy.


1. What, no discovery? While there is generally some level of discovery allowed in arbitration, arbitrators are not required to follow basic legal processes. This means you may not be able to obtain documents and other information that could be vital to your case. You cannot subpoena documents, and you cannot require sworn testimony (depositions) from witnesses.


2. How about the facts? Arbitration does not follow the rules of evidence found in civil litigation, and this can result in proceedings that may or may not be focused on relevant issues. Arbitrators can refuse to accept documentary evidence, for example, and even permit hearsay testimony.


3. Doesn't my contract matter? Arbitrators are not required to apply even simple legal principles or the terms of your contract in reaching their decisions. In fact, they are generally not required to state the grounds or reasons for their decisions. You might even say they can act "arbitrarily."


4. Found not negligent - but I still pay? In some jurisdictions, it can be difficult to obtain arbitrators who are knowledgeable about construction disputes or the law. In addition, there is the sense that a few arbitrators operate from a "split-the-baby" mindset which compels them to spread the responsibility for a dispute among all the parties, regardless of liability.


5. I thought arbitration was a less expensive, shorter resolution process? Arbitration can be costly and isn't necessarily cheaper than litigation. Unlike litigation, the parties must pay for the time of the arbitrators and other associated fees. The arbitrator's fees can be high, and some attorneys complain that there's no incentive for a speedy resolution. Moreover, to the extent that the hearings are spread out over a considerable period of time, the required remobilization adds costs to the process. (One recent claim took almost two years' worth of arbitration sessions to conclude. Even though the A/E prevailed on technical issues, defense costs amounted to several hundred thousand dollars—in addition to substantial "soft," or indirect, costs.)


6. Sorry - that award is final. Your chances of having an arbitration award set aside on appeal are extremely low, even if the arbitrator's decision appears to be entirely erroneous. Courts tend to give great deference to the ADR process and, unless the arbitrator has committed fraud or certain very limited exceptions apply, it is very difficult to overturn the award. What's more, appealing—or even seeking reconsideration—can be costly and rarely succeeds.

The information in this newsletter should not be construed as legal advice, nor intended to replace legal advice specific for your firm or circumstances. Comments, advice and suggestions are for informational purposes only.


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Thank you. 

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Risk Performance Strategies

SmartRisk is a leading risk and performance management consultancy for design and construction professionals. Through firm specific risk assessments, training and consulting, services focus on improving overall performance, profitability and reducing insurance costs through tailored risk management solutions.

If you have any questions about our services, or would like dicusss how we could assist your efforts, please contact us.

Thank you,

Timothy J. Corbett, BSRM, MSM, CERG, LEED GA
Founder & President

Copyright and Information Only. This newsletter is for information purposes only and should not be construed nor relied upon as guidance, regulatory or legal advice. Readers should consult with appropriate counsel regarding their specific situations and circumstances. SmartRisk shall not be liable for any errors in content, or for any actions taken in reliance thereon.

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