Mandatory arbitration clauses are increasingly common in construction contracts. Arbitration, sometimes referred to as “trial-light,” is a judicial process where an arbitrator (usually a lawyer or a former judge) receives evidence, hears from witnesses, and makes a binding decision resolving the dispute.

Before signing a contract with a mandatory arbitration clause, consider the big picture.

What are the pros?

Confidentiality

Court filings and proceedings are, with limited exceptions, public record. That means if you wind up in court, you risk information about your dispute becoming public, which may include financial information, employee information, and other business information. Arbitration, unlike court, is a private proceeding, and its results can be kept outside of the public eye. This can be an important consideration if you are dealing with high-stakes contracts, proprietary or sensitive business information, or have concerns about publicity or media attention.

Shorter time frames

A traditional trial proceeding can take years to reach the courthouse. Arbitration typically moves quicker and can result in resolution in a matter of months, not years.

Fewer rules

Arbitration has rules, but they are more simplified and streamlined. This can mean less time (and money) spent hammering out procedural and evidentiary issues, and more time focusing on getting the case resolved.

Finality

Most arbitration decisions are binding and very difficult to appeal. That’s a pro if you want closure and want to avoid years of appeals.

What are the cons?

Limited appeal right

While finality may be good if the case goes your way (see above), the opposite is also true. If you get a bad result, your appeal options are limited.

An arbitrator versus a jury

By signing a mandatory arbitration clause, you are sacrificing your right to present your case in front of a jury. Instead, your case will be presented to a single arbitrator or a panel of arbitrators. These arbitrators are paid for their time, and some are hired consistently by those companies that use arbitration regularly. As a result, some parties perceive arbitration as potentially biased. In any event, your case in arbitration will depend on the arbitrator, not a jury.

It can be just as expensive

Arbitration is generally considered to be less expensive, but not all arbitrations are equal. Mandatory arbitration clauses do not necessarily mean that the arbitration will be binding, meaning that you can go through costly arbitration and still be dragged into court. Pay close attention to the terms of the clause to ensure that you are not setting yourself up to litigate issues twice. Further, remember that arbitration services charge fees for participation in arbitration, and the arbitrator is a paid professional, too.

Limited discovery

Discovery — the process of gathering evidence — is typically more limited in arbitration. While that makes things faster and less expensive, it can also mean you don’t get access to every document or witness you might need to make your best case. That can be a problem if the other side holds all the cards.

What are your other options?

If you are uncomfortable with an arbitration clause, consider requesting a mandatory mediation clause instead. Mediation is less costly and allows parties to negotiate settlements in a neutral setting without incurring as many pre-trial costs. If mediation does not work, you do not sacrifice your right to voluntarily consent to arbitration or file a claim in court, but it can resolve some disputes quickly and cheaply.

When should you think twice?

Arbitration clauses are often pitched as ways to avoid costly litigation when problems arise in the middle of a job or after work wraps up. However, arbitration is not always less costly and can limit the rights you may have in a traditional court proceeding. Every contract you enter is different, and it is important to understand how an arbitration clause may affect your rights, defenses, and ability to make claims before readily agreeing to include one.

Arbitration language in contracts has become close to boilerplate for many businesses, especially in the real estate and construction fields. If you are a contractor, subcontractor, developer, or customer with concerns about an arbitration clause in a contract, please reach out to an attorney for help. You’ll be able to discuss your options and navigate possible negotiations.

Tab Wood is a Schwabe, Williamson & Wyatt shareholder. Contact him at 503-796-2882 or [email protected].

Amanda Kohls is a Schwabe, Williamson & Wyatt associate. Contact her at 503-796-2922 or [email protected].