Arbitration is an alternate dispute resolution (ADR) mechanism that allows parties to resolve legal issues outside the traditional court system. It's consensual, meaning all parties must agree to resolve the dispute through that process.
Arbitration is less formal and adversarial than litigation. In most cases, parties can resolve disputes much faster without spending as much time and money as they would in court. The decisions, called arbitral awards, are legally binding and enforceable, providing confidence in the system. These characteristics make arbitration attractive to small business owners, especially those in the construction industry.
Benefits of Arbitration for Contractors
Arbitration has gained popularity in the construction industry for many reasons. Small business owners find the mechanism helpful, as it expedites the dispute resolution process in a less adversarial manner. The process is confidential, flexible and relatively affordable. Additionally, you can appoint experts to adjudicate the disputes and make binding decisions.
Here are the main advantages of arbitration for contractors:
1. More Efficient Dispute Resolution
Arguably, the most important reason for choosing arbitration is saving time. Compared to the traditional dispute resolution mechanism — litigation — arbitration is much faster, allowing contractors to resume operations in relatively shorter periods. Unlike litigation, where judges usually have numerous cases to handle, parties in arbitration can choose their preferred arbitrator or panel of arbitrators and schedule hearings on favorable dates.
Arbitration agreements sometimes set milestones to be accomplished within specified time frames. This incentive encourages the parties and arbitrators to accelerate dispute resolution. Considering time is of the essence in the construction industry, arbitration is ideal for businesses that need swift dispute resolution.
2. Flexibility of Procedures
Litigation is effective but follows strict procedures. Violating a procedural rule that goes to the root of the matter can have detrimental consequences. Additionally, these long-standing procedures make litigation complex and cumbersome.
Arbitration, on the other hand, is a contract-based proceeding that allows parties to tailor the proceedings to their needs. From choosing the applicable law to selecting the arbitrators, language location, timelines and procedural rules, the parties can decide how to work together to resolve the dispute. Of course, this arrangement is consensual and could be influenced by the case's demands and complexity, making arbitration unique.
3. Cost Savings
Arbitration can save parties significant amounts of money. Depending on the circumstances, arbitration could attract lower legal fees by reducing prolonged legal battles. Expedited dispute resolution can also relieve parties of administrative costs and other indirect expenses.
Arbitration procedures are usually streamlined and efficient, allowing parties to resume their core operations faster. Contractors can invest the resources into other business areas to drive growth. Plus, fewer delays mean you can take on new projects and build a solid reputation for your brand.
4. Confidentiality of Proceedings
Arbitration is best suited for contractors who value privacy. Unlike litigation, which is generally public, arbitration is usually a private dispute resolution process, which is preferred when dealing with sensitive issues.
This strategy is crucial for protecting proprietary or business information and preserving the organization's reputation. Considering the construction industry is tight-knit, discretion can go a long way toward maintaining relations. Regardless of your company's size — big or small — you can leverage arbitration to limit the publicity of disputes.
5. Neutral Persona of the Arbitrator
Like litigation, one vital tenet of arbitration is helping parties resolve legal issues fairly and justly. The arbitrator or panel of arbitrators the parties choose serves as the judge and is required to be impartial and objective. Parties can select individuals with an excellent track record and reputation. This flexibility can promote neutrality and encourage parties to accept the arbitral award.
Considering bias, prejudice and lack of neutrality constitute a basis for challenging an arbitral award, arbitrators are minded to treat parties equally and examine the facts and law closely before making a decision. Moreover, most arbitrators value integrity, which is reflected in how they conduct cases.
6. Arbitrator Expertise
Construction contractual arrangements can be technical and complex. Therefore, choosing an arbitrator who understands the industry and emerging trends could be beneficial. Arbitrators with expertise in the field can navigate the intricacies, resulting in fair and sound outcomes.
Some arbitrators have gained years of experience through their service as judges or lawyers in construction-related matters. Others undergo specialized training to equip themselves with the relevant knowledge and insight. You can identify and select these seasoned professionals to adjudicate your disputes.
7. Cross-Border Disputes
One challenge contractors face as they expand is navigating laws in different jurisdictions. Instead of being discouraged by this phenomenon, inserting an arbitration clause in the construction agreement could provide some confidence. That's because arbitration allows parties to choose the preferred applicable law, language and location. There is no home advantage.
There are widely known institutional arbitration rules to choose from, including:
- The London Court of International Arbitration (LCIA)
- The International Chamber of Commerce (ICC)
- The Permanent Court of Arbitration (PCA)
Parties can also select the preferred governing law or choice of law, which determines the subject matter in disputes. This flexibility enables contractors to thrive in international settings.
8. Finality of the Decision
Arbitral awards are final and binding, subject to legal exceptions. This feature can give the parties confidence, as they know the dispute has been ultimately resolved. Courts will generally uphold the decisions unless in very limited instances. Plus, since there is no option for appeal, parties can quickly move on and focus on business growth. Arbitration can eliminate delays and prolonged litigation.
Finally, arbitration awards are enforceable, like court judgments. Thanks to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and similar international treaties, parties can enforce awards in different jurisdictions. This characteristic streamlines the enforcement process and promotes the predictability of outcomes.
How Do You Know if Arbitration Is Right for Your Dispute?
You should consider several factors when choosing arbitration for your contractor dispute:
- Nature of the dispute: Arbitration can be used in almost any type of commercial dispute, including construction-related matters. The mechanism is ideal for contractors who want to avoid deficiencies in litigation.
- Preservation of relationships: Arbitration is generally less adversarial, which can help maintain business relationships. Contractors looking for a more collaborative environment for resolving disputes can take advantage of the process.
- Enforceability: A crucial aspect of dispute resolution is the ability to enforce decisions. Arbitral awards are relatively easier to enforce internationally, making it attractive to contractors with a multi-jurisdictional reach.
- Control over the process: Arbitration involves parties in the dispute resolution process. You can choose your own arbitrators, procedural rules and timing of hearing. If you value control over how you resolve legal issues, arbitration might be useful.
Contact Business Consumer Alliance for Your Arbitration Needs
BCA is a nonprofit with over 25 years of experience helping contractors in California resolve disputes through arbitration. We provide a wide range of services, including legal and business advice and support. Our business membership program offers arbitration assistance to small businesses, including free drafting of arbitration clauses in your contracts.
We will leverage our resources to help you find personalized legal solutions. Want to learn more about our offerings? Contact us now!