Dispute resolution: litigation, arbitration or mediation?

Disputes and lawsuits are some of the last things a contractor wants to experience. They are expensive, time consuming, and distracting to the individuals involved and the company. And they rarely end in a way that makes either side happy. Unfortunately, disputes are sometimes unavoidable — part of doing business in an industry fraught with risk and increasingly thin profit margins. So despite your best intentions, you may find yourself entangled in a dispute and you should know something about the three most common formal mechanisms for resolving disputes.

I used the word formal because the most common dispute resolution method is probably plain old negotiations. This method can be used at any point in a dispute — before or after lawsuits are filed — and is limited only by the imagination and commitment of the parties. Sometimes negotiations are handled directly by the parties, and other times they are handled by lawyers. But regardless of how or when you try to negotiate a resolution to a dispute, it is almost always best to at least attempt a negotiated settlement before spending money on litigation.

A more formal form of negotiation is mediation. I like to call mediation facilitated negotiations because it is conducted by an independent third party who helps the parties negotiate a settlement to their dispute. Mediation is almost always non binding — no one can force you to accept what the other side offers — and confidential. More important, most states have laws that prevent the parties from using information they acquire during mediation in subsequent court proceedings. This rule, along with a good confidentiality agreement, can make foster settlement by encouraging candid discussions.

Mediation can take place at any time the parties agree to mediate. It’s not unusual for the parties in a dispute to attempt mediation early in the case (many contracts require mediation before filing a lawsuit) and, if unsuccessful, later in the litigation after the parties have had a chance to learn more about the adversary's case. In my experience mediation is an effective way to resolve disputes if you have a good mediator and both parties are interested in a settlement.

If the parties can't resolve their differences through negotiations or mediation, then the next step is either arbitration or litigation. Both are binding forms of dispute resolution and require presentation of evidence to a fact finder — an arbitrator in the case of arbitration and a judge or jury in the case of litigation. They each have advantages and disadvantages.

Arbitration is a private alternative to litigation. Instead of filing a lawsuit with a court, the parties prepare and present their case in a private proceeding before one or three agreed upon arbitrators. Besides the private nature of the proceeding, one of my favorite advantages of arbitration is the opportunity to present my client's case not to a judge or jury, but to one or three individuals who are knowledgeable about the construction industry. Typically this might be a lawyer who specializes in construction law, or an industry participant like a contractor or architect or engineer. The arbitration hearing is similar to a court trial, but less formal and without some of the procedural rules that can make trials very expensive. But remember, arbitration is binding. The arbitrator's decision is final and not subject to appeal except under very limited and unusual circumstances.

Finally, if the parties don't agree to arbitrate, then their remaining option is to litigate. This means filing formal court documents to initiate the lawsuit, answering the allegations, filing and responding to motions, and engaging in the formal fact finding process that lawyers call discovery. And while it's true that discovery is often available in arbitration, it is typically more limited than in litigation as the parties attempt to minimize costs. Litigation is also a public process. Most court documents are public record except under rare circumstances. So if privacy is a concern, arbitration might be a better option.

Most of us have seen courtroom scenes on television. With few exceptions, real trials are usually not so carefully choreographed. But they are expensive. It's generally more expensive to try a case than to arbitrate because of the additional work necessary to deal with motions, jury instructions, and other procedural matters that can be avoided in arbitration. Even if you win, the other side often finds grounds to appeal. And while appeals are only infrequently successful, they can delay a final resolution for months or years.

These and other differences between arbitration and litigation should be considered when contracting, as it is generally a good idea to reach agreement on the particular dispute resolution method before signing the contract. This way if there is a dispute, you will have a better idea about what to expect in terms of procedures, timing, and costs. And regardless of which method is selected, don't forget about mediation. You can mediate whenever the parties choose, even if there is no mediation provision in the contract.

Michael Callahan is a partner at Stinson Morrison Hecker LLP (the same firm as long-time columnist Susan McGreevy) where he assists clients with all aspects of their construction law needs, including litigation.