The Construction Advantage
Resolution of Disputes: The Pros and Cons of Arbitration and Litigation
Disputes are a common, if not inevitable, byproduct of construction projects. Most commercial construction contracts anticipate that disputes may arise by providing a mechanism for resolving them. There is great variety in these “dispute resolution provisions,” but they typically provide for litigation or arbitration, with or without mediation as another step in the process.
To define these terms, “litigation” refers to the process of resolving disputes in court. Contract provisions calling for litigation of disputes may also dictate the jurisdiction or forum where such litigation is to occur. These terms are generally enforceable, and they have a significant impact on the expense and the outcome of litigation. Such provisions may also include “choice of law” terms which dictate the state or jurisdiction – often the state where the project is located – whose law will apply to the contract and to any dispute arising out of it.
“Arbitration” is an alternative to litigation which bypasses the court system in favor of a process where a private, independent arbitrator, rather than a judge or jury, is the decision-maker. This process may but need not be administered or managed by an organization such as the American Arbitration Association. As in the case of litigation, arbitration provisions may contain forum selection clauses and/or choice of law terms.
“Mediation” is not an alternative to litigation or arbitration, but rather an adjunct to one of these processes which involves a third party acting as an intermediary and facilitating settlement discussions between the parties to the dispute. Dispute resolution provisions often provide for mediation followed, if mediation is unsuccessful, by either litigation or arbitration.
Participants in construction projects often find themselves faced with a choice of dispute resolution mechanisms as they draft contract documents or review those prepared by others. These provisions tend to be overlooked by contractors and other parties more concerned with the business terms of the deal, but failing to focus on them, understand them and consider them carefully is a mistake.
Mediation should be a part of most dispute resolution provisions. It offers the prospect of an early resolution of disputes before much of the expense of either litigation or arbitration is incurred. I recommend the inclusion of mediation provisions in nearly all of the construction contracts that I draft or review.
The choice between litigation and arbitration, however, is more interesting, as each of these processes has its advantages and disadvantages.
The principal advantages of litigation are that, (i) it is a structured process governed by strict rules, (ii) it offers a full range of remedies, including not only an award of damages but injunctive relief, (iii) it is presided over by a judge paid by the taxpayers, (iv) it may offer the alternative of a jury trial, (v) it gives the parties rights of appeal, and (vi) it leads to a final court judgment. These are not insignificant considerations and contracting parties must weigh their importance in each case.
These advantages come with other features, however, that may be less attractive. The judge hearing the case in court is likely to be a generalist without any particular expertise or experience in construction. Arbitrators, by contrast, are generally chosen for their expertise in this area, which means that the decision-maker in arbitration is likely to have seen these issues before. On the other hand, unlike the judge who is compensated out of public funds, the arbitrator is paid by the parties, who often split the arbitrator’s fees in the first instance. In large construction disputes, these fees are often substantial and may make arbitration a less attractive option.
It is also important to understand that litigation is a public process, with court filings and hearings open to the public. Depending on the nature of the disputes and the evidence likely to be presented, this may be an important downside to litigation, as opposed to the private and confidential nature of arbitration.
Depending on the jurisdiction, litigation may be a prolonged and inefficient process, which inevitably leads to greater expense. Arbitration, by contrast, is designed to be more streamlined and efficient, often leading to an earlier resolution than litigation would offer. But of course, this efficiency comes with a cost in terms of less of an opportunity for discovery and foregoing some of the rights (e.g., a jury trial) and remedies (e.g., injunctive relief) available in court. In arbitration, rights of appeal typically are extremely limited, and a final arbitration award does not result immediately in a final court judgment. In other words, a quicker resolution is not always a better or fairer one.
These pros and cons, among others, must be weighed in considering what dispute resolution mechanism is best suited for a particular project or a particular party. There is no single right answer, which means that the right answer “depends.” Fortunately, experienced construction counsel are well versed in these issues and situated to help contractors, owners and other project participants make the right choice for them.
Addressing The Economic Loss Doctrine in ME
The Economic Loss Doctrine is alive and well in ME. In a ruling from late February of this year, the United States Federal Court for the District of ME issued a ruling on the Economic Loss Doctrine favorable to design professionals. This ruling continues to expand the reach of the Economic Loss Doctrine in ME, and although the ME Supreme Court has not ruled yet on this Doctrine, this Federal Court decision may become important in the future for ME law.
The case involves a dispute at the Portsmouth Naval Shipyard regarding the second-tier subcontractor involving improvements to removable fireproofing installed on removable submarine covers. The first-tier subcontractors sued the design professional for the Navy who performed the design engineering and supervision for the project. The subcontractor, obviously, however, did not have any privity of contract with that design professional. The subcontractor alleged that the design professional was negligent in its design and that, as a result the fireproofing, product began to blister, bubble and fade, i.e., it failed as a result of the allegedly poor design. As a result, the subcontractor alleged, it incurred additional expenses by rendering additional services including substantial time and expense to determine the cause of the fireproofing failure. The design professional moved to dismiss the complaint relying on ME’s Economic Loss Doctrine.
The Federal Court noted that the Economic Loss Doctrine was first recognized in ME in 1995 in the case of Oceanside at Pine Point Condominium v. Peachtree Doors. In that case, the condominium owners sued the manufacturer of the windows that were failing instead of suing the condominium sellers or the general contractor who constructed the condominium units. ME’s Supreme Court held that where the damage was to the product itself i.e. the windows, the unit owners could not sue a party with whom it did not have contractual privity, namely, the window manufacturer.
The Federal District Court concluded that Peachtree applied to the facts of this case. First, there was no privity between the design professional and the subcontractor, but the subcontractor did have the ability to negotiate the terms of its subcontract with the prime contractor that governed its risks of liabilities on the construction project. Likewise, the design professional had a contract with the Navy which established the design professional’s risks and liabilities with respect to its engineering and design services. Instead of allowing a tort-based claim to govern a disagreement between the subcontractor and the design professional, the court concluded that the Economic Loss Doctrine applied and the parties would be left to their contractual remedies, namely, the subcontractors claims against the prime contractor, and any claims that the Navy would have or not have against its design professional that it hired by contract.
This ruling is the establishment of the Economic Loss Doctrine for design professionals in ME. Whether it is recognized by a ME state court in the next several years will remain to be seen.