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‘To Arbitrate or Not to Arbitrate’: That is the Question

‘To Arbitrate or Not to Arbitrate’: That is the Question
May 29, 2019 dominick

     Arbitration of construction disputes has been around for a long time.  It was a preferred method to resolve disputes when I first started practicing law in 1994.  It was in every construction contract and subcontract. But before you continue including arbitration as your preferred method of dispute resolution, it bears some scrutiny.  

     What is arbitration and how is it different than a lawsuit?  Arbitration is often confused with mediation and, sometimes, with a lawsuit.  Each involves different forms of dispute resolution.

     Mediation is a settlement conference in which the parties meet and use a third-party neutral to act as a facilitator to resolve the dispute.  Although the mediator has authority to conduct and administer the mediation, the mediator has no power to force or compel settlement. The parties submit their dispute to the mediator either because a court or a contract provision requires that they do so, or because they feel the mediator will be able to facilitate a settlement that might not otherwise be achieved without a mediator’s assistance.  However, ultimately, the parties can refuse to settle.

     A lawsuit is conducted in a court of law and is initiated by a plaintiff filing a complaint, in which the plaintiff will ask for some form of relief from the defendant.  The right for the parties to have their dispute adjudicated in a court is provided in state or national constitutions, or statutes passed by legislatures.

     Arbitration is essentially a lawsuit but without court involvement.  The parties agree (either in a contract before a dispute arises or, through a subsequent agreement to avoid a lawsuit) to submit their dispute to arbitration rather than to pursue a lawsuit in court.  The parties’ agreement gives the arbitrator(s) – typically one or three – the power to issue a decision as to the parties’ rights and obligations, and such decision will be legally binding on all parties.  Thus, arbitration is very different from mediation because the third-party neutral provides a legally binding decision, which is similar to litigation in court.

     What are the arguments for arbitration?  The arguments for arbitration are primarily that it is (1) cheaper, (2) faster, (3) you can select a person or panel of three persons knowledgeable in construction law deciding your case, and (4) you obtain finality in your decision, since there is virtually no right of appeal.  

     We have long since taken arbitration out of our subcontracts that we provide to our clients.  Our reasons for doing so are many:

     Arbitration is not necessarily cheaper.  The effort a lawyer goes through to take a case through arbitration or litigation is the same – the goal is to win, and you cannot cut corners in either venue.  In an arbitration, you pay for things you do not pay for in court. For example, in an arbitration, you have to pay the American Arbitration Association’s filing fee which is based on the amount of your claim ($3,000 for a claim between $75,000 and $150,000 and it goes up from there).  You also have to pay the arbitrator or sometimes a panel of three arbitrators their hourly rate. You can expect to pay a minimum of $16,000 for a five-day arbitration, and that does not include any pre-hearing arbitrator time. Triple that if you have a three person panel. In court, your taxes pay the judge, and the filing fee is $240 in Washington.  

     Arbitration is not necessarily faster.  In an arbitration, before a hearing can be set, the arbitrator has to consider his or her schedule as well as the attorneys’ schedules.  This is no different than the process a judge goes through. Additionally, continuances can happen in arbitration, just as they do in court proceedings.  While there is an emphasis in arbitration for a speedy resolution, this is always tempered by the complexity of the case and the need to properly conduct discovery and prepare for the hearing.  The only exception here is for AAA fast-track arbitrations if the combined amount in dispute is under $100,000. In cases where the fast-track rules apply, the hearing must be held within 45 days of the filing date for the demand for arbitration.  However, considering the fact that it is far more likely to get a case summarily dismissed in court than in arbitration, the speediness factor evens out in my opinion.

     Discovery in arbitration may hamper your efforts to prove your case, especially if the party from whom you are seeking discovery is not cooperative.  It is an extremely frustrating process in arbitration to get non-party witnesses to comply with subpoenas, even more so if they are out of state.  This really ties the hands of the lawyer trying to gain information to assist in the prosecution or defense of a case since arbitration subpoenas have no bite to them – failure to comply means nothing and are extremely difficult to enforce.  This means that out of state witnesses rarely, in my experience, provide documents and do not attend depositions unless the party pays for the arbitrator to appear at the deposition.

     The relaxed procedural and evidentiary rules of arbitration favor the lazy lawyer. In arbitration, pretty much everything comes into evidence.  The lack of court rules and discovery rules mean that it is hard to out lawyer your opponent by using the court rules or evidentiary rules to your advantage.  

     There is rarely, if ever, any right to appeal or vacate an arbitration award – even if the arbitrator makes a mistake. This feeds into the maxim that arbitration is great – if you win!  You can be stuck with an off the wall decision by an arbitrator. Most clients I represent can accept losing if the decision is rational.  But that is not always the case – even with knowledgeable construction lawyers acting as arbitrators. Now, I will admit, having a decision maker that is knowledgeable in construction law can be handy.  You do not have to explain what a differing site condition is, or an RFI, or any construction means or methods. However, I contrast that with a judge that is provided with clear definitions and thoughtful testimony, that is used to making judicial decisions on a daily basis rather than a lawyer that took an AAA arbitration course and acts as an arbitrator maybe 30 days out of the year.  This part time arbitrator status can lead to some odd results and leave the parties without the right of appeal to overturn a decision despite the best intentions of the arbitrator. Calculational mistakes can be corrected, but not mistakes which stem from the arbitrator exercising his or her discretion. In general, even if you have a clause which commands the arbitrator to follow the law, you still have little practical recourse if he or she doesn’t.  This is a big risk since if you feel that a decision is out and out wrong, there is pretty much nothing you can do about it.

     Take for example, the recent Court of Appeals (Div. III) case of Mainline Rock & Ballast v. Barnes, Inc., 439 P.3d 676 (Wn. Ct. App. 2019).  In that case, Barnes, a blasting contractor, asked the superior court to vacate an arbitration award issued in its contract dispute with Mainline, which develops and operates rock quarries to extract, crush, and sell ballast, rock material used as the footing or base for railroad tracks.  Instead of vacating the award, the superior court affirmed it and Barnes appealed. The salient facts are as follows:

     Through what the court called a “cryptic letter of understanding”, Mainline retained Barnes to drill and blast rock at a quarry site in New Mexico starting in 2004.  The LOU stated prices for which Barnes would be paid. The parties operated under the LOU until 2008, when they executed a three-year master blasting agreement. The MBA provided that specific terms and conditions would be provided for by specific work orders.  The parties entered into a specific work order for the New Mexico site which had different payment terms than the 2004 LOU. The MBA did not reference the earlier LOU but did contain an integration clause which has the legal effect of stating that MBA was the complete and exclusive agreement between the parties.  It also contained an arbitration provision. In 2017, Mainline informed Barnes that it sold its New Mexico operation site. Barnes, based on its calculation of material blasted and waste material located on site from the payment terms in the MBA, demanded payment of $7,062,500. Mainline paid it $908,506.

     Pursuant to the MBA, the parties submitted their dispute to arbitration before a three-member panel of arbitrators (two engineers and one lawyer).  A majority of the panel calculated that Barnes was entitled to an additional payment of $354,839.50 beyond the $354,839.50 already tendered. One engineer/arbitrator wrote a dissenting opinion in which he calculated Barnes was owed an additional $3,499,670.25.  

     Barnes filed a motion with the superior court seeking vacation of the arbitration award. RCW 7.04A.230(1) allows an arbitration award to be vacated on six possible grounds:

  1. The award was procured by corruption, fraud or other undue means,
  2. There was evident partiality, corruption, or misconduct by an arbitrator,
  3. An arbitrator refused to postpone the hearing upon sufficient cause,
  4. An arbitrator exceeded the arbitrator’s powers,
  5. There was no agreement to arbitrate, or
  6. The arbitration was conducted without proper notice of the initiation of arbitration.  

     Barnes argued that the only way that the majority of the arbitration panel could have reached the decision it did, was that it erroneously considered evidence as to the parties’ contracting intent beyond the 2008 MBA and the specific work authorization for the New Mexico site.  In other words, Barnes the panel exceeded its powers by considering the 2004 LOU when the merger clause barred doing so as a matter of law.

     On appeal, the appellate court questioned whether the “exceeding powers” language should extend to the substance of arbitral rulings.  In common and legal parlance, committing factual or legal error does not equate to the decisionmaker exceeding its powers. The court opined that exceeding power goes more to jurisdiction of an arbitration panel rendering a decision on a dispute or issue never submitted to it.  While the court maintained that vacating an award on legal error is possible, the legal error must be evident on the face of the written decision – in other words, an arbitration award will not be vacated if the court has to second guess the arbitrator. The “facial legal error” standard is a very narrow ground for vacating an arbitral award, and the court in this decision instructed that courts may not search the arbitral proceedings for any legal error, including examining contract language, which is what Barnes was requesting it do.  In this case, the court determined that since the integration clause was not mentioned in the decision, it could not determine whether legal error was committed.

     While this decision would be frustrating to a party to an arbitration which felt the arbitrators “got it wrong”, part of the reason for the rule is that there is no “record” in arbitration for a court to review.  In court proceedings, there is a record of proceedings in which all exhibits are marked and catalogued and all witness testimony, counsel arguments, and oral rulings from the trial judge are recorded. This provides solid foundation for an appellate court to review for an error.  Arbitrations, in the vast majority of cases, do not have such a record. The court also cited to policy reasons for limiting appeal on arbitration awards: they avoid formalities, expense, and vexation of litigation in court, and it provides finality; all of which would be diluted if vacation of arbitral awards were easy to do.  

     The bottom line is that arbitration can be an expensive gamble, and unlike court proceedings, you have virtually no ability to roll the dice on appeal to come out on top.  Contrary to the court’s policy arguments, the myth that arbitration is a fast and inexpensive alternative to court proceedings is just that. Think twice before including arbitration in your contract.

by Richard D. Campbell  

rcampbell@campbell-bissell.com

(509)455-7100