This article appeared in the January 2025 issue of Contract Management magazine, published by the National Contract Management Association. Used with permission.
Ask anyone with experience on construction projects, particularly large, complex “mega-projects,” and they will tell you that disputes are an expected part of doing business. It is rare that these projects come in on schedule and on budget; when they do not, the contractor and owner often vigorously disagree on what caused, and who should be responsible for, the delay and cost overruns.
Traditionally, such disputes are adjudicated through either litigation or arbitration. The twist is that the decision to litigate or arbitrate is typically made at the outset of the project during contract formation, long before disputes arise.
Handling disputes and negotiating contract terms goes beyond construction contracts. Every organization needs to understand the role of a dispute clause in determining how two parties will handle any disagreements or conflict during the performance of the contract.
This could include an internal escalation process that specifies methods such as negotiations, mediation, or arbitration to settle disputes instead of proceeding straight to litigation. A dispute clause serves as a pathway to resolve issues in a systematic way and have agreement on what should happen if things get a little wonky.
When negotiating a construction contract, I am often asked whether arbitration or litigation is a better resolution mechanism for a construction dispute. The accurate but non-helpful answer is, “It depends.”
The conventional wisdom is that arbitration is a better forum because it is less expensive and more efficient than litigation. That may have been true 15 to 20 years ago but is less true now. Information disclosure in modern construction arbitration (at least domestic arbitration) has evolved to something that rivals discovery in litigation in terms of number of documents produced and depositions taken.
While arbitration is sometimes faster than litigation, the speed at which an arbitration moves varies wildly by case and by arbitration panel. Does that mean litigation is the better choice? Not necessarily.
The simple answer is that there is no simple answer. Instead, parties must weigh several often-countervailing factors when deciding whether arbitration or litigation is better for that party on that particular project.
Further complicating the calculus is that the factors sometimes weigh in favor of one forum for the contractor and the opposite forum for the owner – meaning the forum selection can be a knotty sticking point in the negotiations.
This article does not aim to prescribe a one-size-fits-all answer to litigation versus arbitration but instead provides a brief overview of four factors that each party should consider and weigh when making that decision. These factors will require the parties to look into their crystal ball and predict what type of disputes are likely to bubble up on their project.
Factor 1: Are you more likely to be the claimant or defendant?
Arbitration of complex construction disputes tends to be more claimant- friendly than litigation. This is not because of any inherent bias against defendants but because arbitrators are generally inclined to give more weight than courts to equitable considerations.
As a result, arbitrators will often try to mitigate against perceived overly harsh results arising from strict enforcement of a contract. For example, arbitrators are more likely to interpret clauses that require notice of a claim within a certain period to only cut off the claim to the extent the defendant is prejudiced by the late notice; many courts, on the other hand, would interpret such a provision to release or waive the entire claim if the notice is late.
It is also difficult to obtain summary disposition of all or even portions of claims in arbitration. Although there are exceptions that prove the rule, arbitrators rarely decide matters at the pleading stage based solely on the law as federal courts regularly do when presented with motions to dismiss. Similarly, most arbitrators shy away from disposing (or awarding) a claim “on the papers” before an evidentiary hearing, even where the material facts are not in dispute.
Stated differently, claims are rarely decided on summary judgment in arbitration, in contrast to litigation where it is a key procedural tool to dispose, or at least narrow, disputed claims before trial. Arbitrators avoid summary disposition of claims to allow each party to fully present its claims and defenses, which typically means the opportunity to call witnesses and present evidence at an evidentiary hearing.
It also must be noted (perhaps cynically) that while courts have an incentive to resolve cases quickly to clear up their docket, arbitrators, who are being paid hourly by the parties, have the opposite incentive.
So how does this factor cut when deciding whether to choose arbitration or litigation? Although categorical conclusions should be avoided, contractors are typically claimants and owners are defendants in construction disputes. That is to be expected because it is contractors who are incurring the costs for (alleged) additional work and delay and seeking to recover those costs from the owner who is disputing entitlement to them.
While it is true that owners typically have counterclaims for defective work and delays (including liquidated damages for delay), those damages are normally less than the contractor’s claimed damages and are often seen (or misinterpreted) as mere setoffs. Because arbitration tends to be more claimant-friendly than litigation, contractors weigh this factor in favor of arbitration, owners in favor of litigation.
Factor 2: If litigation is selected, will the forum be a state or federal court?
A defining characteristic of construction disputes, particularly on mega- projects, is that they are very fact-intensive and frequently turn on highly technical engineering issues. Moreover, because time is money on construction projects, delay results in both the owner and contractor incurring additional time-related costs, including, most notably, extended overhead costs. Consequently, causing delay is a critical issue in construction disputes which, like technical engineering issues, normally requires detailed and conflicting expert testimony.
Under these circumstances, well-reasoned resolution of construction disputes often takes considerable “soak time” by the adjudicator. Neither state nor federal courts are blessed with sufficient time to really dig into a complex construction dispute, but the problem is particularly acute in state courts. In many state courts, pre-trial motions are heard by different judges which precludes any one judge from soaking up the institutional knowledge of the construction dispute.
In contrast, although no one would claim that federal court judges/magistrates are blessed with copious amounts of free time to devote to a construction dispute, a single judge/magistrate is typically assigned to hear and decide all pre-trial motions for a case, which helps the adjudicator build up a better understanding of the applicable law and facts as the case progresses.
For this reason, complex construction disputes are better situated in federal rather than state courts. Of course, the parties cannot simply choose to be in federal court; they need subject matter jurisdiction over the dispute. Because construction disputes typically do not implicate federal question jurisdiction, the way most construction cases get into federal court is through diversity jurisdiction.
So, at the risk of vastly oversimplifying the issue, if the owner and contractor are from different states, it is likely that there is diversity jurisdiction and disputes between the parties can be heard in federal court. And, because construction disputes are better situated in federal court, having an owner and contractor from different states weighs in favor of selecting litigation over arbitration because the litigation will be in federal court.
Factor 3: How complex are potential disputes likely to be?
The single biggest advantage of arbitration over litigation is that the parties get to select who decides their dispute. Although this advantage is important in many cases, the ability to select arbitrators who are familiar with the industry and the types of disputes that typically arise can be invaluable on a construction case.
Construction cases, while incredibly fact specific, also tend to have the same types of disputes come up repeatedly, such as differing site conditions, disagreements over the scope of work, causes and responsibility for delay, loss of productivity claims, and total impact claims, to name but a few.
Having arbitrators who are experienced in addressing these types of disputes and understand the type of factual and expert evidence needed to prosecute or defend them results in more efficient proceedings and more predictable decisions.
Judges, on the other hand, by the very nature of their job need to be generalists. Many judges have a background trying criminal cases, and few have significant experience with construction disputes.
That is not always a bad thing, but on technically complex construction projects with tight deadlines, potential disputes will likely involve highly technical scope and scheduling issues that will be more familiar to arbitrators who have not only adjudicated those issues but likely at one point earlier in their careers tried those disputes as advocates.
Although no one can ever predict with 100% accuracy what disputes will arise at the time the contract is negotiated (which is the time when the decision on arbitration or litigation is made), a rule of thumb is that the more complex the project, the more complex the disputes will be, and the more beneficial arbitration will be over litigation.
Characteristics of a complex project include the application of new or untested technology, an incomplete design at the start of construction, projects scheduled to take months or even years, and schedule sequencing that involves numerous subcontractors in different trades working simultaneously and in close proximity. When your project has one or more of these characteristics, arbitration should be strongly considered.
Factor 4: Is the project in a foreign country?
This is the simplest factor to grasp and apply. When a project is being built in a jurisdiction that is foreign to either the owner, the contractor, or both, arbitration is generally the better option.
Many countries do not have a well-developed body of construction law and/or have a reputation of not enforcing contractual rights evenly. There is also the concern being in the “home” courts of a foreign party.
These concerns can be alleviated, if not eliminated, in international arbitration because the parties can pick the seat of the arbitration, the law governing the dispute and the arbitrators who will decide the dispute. To sum it up, if the project is in a foreign country or one or more of the parties is from a foreign country, both of which could result in a construction dispute being litigated in non-U.S. courts, arbitration is almost always the better option.
Conclusion
The choice between arbitration and litigation, which is almost always made at contract inception well before any disputes arise, is neither simple nor straightforward. It involves balancing several factors that will sometimes point in opposite directions.
While these factors cannot be calculated with precision as to whether litigation or arbitration should be selected, they provide a careful contractor or owner with a framework for balancing and selecting the best possible dispute resolution forum for a project.
At times the balancing will result in the same entity selecting different forums depending on the unique characteristics of the project. Once a party determines which forum it prefers based on the factors described in this article, it is then a matter of negotiation as to which forum the parties jointly select. But that is a subject for another article.
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