June 18, 2014

Recognizing the Hidden Costs of Arbitration


Today, most construction contracts and subcontracts contain clauses providing for the binding arbitration of disputes. These private arbitration clauses are generally enforceable under Oregon and federal law and give either party the power to force the other into an arbitration proceeding.

Private arbitration is a process by which a dispute is brought before a person or panel, selected by the parties, for a final and binding determination. In construction industry disputes, arbitration can offer advantages of speed, lower cost, and finality over litigation before a judge or jury in state or federal court. Arbitration also has hidden costs that can outweigh these advantages if they are not managed.

Scope of Arbitration

First, a person can be compelled to submit a matter to private arbitration only if he or she has agreed, in writing, to do so. This agreement is usually contained in the construction contract's arbitration clause. The clause determines what matters will be submitted to arbitration. If the subject of the dispute is not covered by the clause, it will not be subject to mandatory arbitration.

Most construction contracts contain broad arbitration provisions that include all disputes, claims, and other matters arising out of or related to the contract or the work performed under the contract. Under such a provision, it is easy to get a question into arbitration. When the clause sets out a narrower scope, reserves questions from its ambit, or gives a party the power to withdraw, the clause itself can become the subject of dispute. Disputes about the scope of an arbitration agreement are tried to a court, and the result may be subject to appeal. Expense and delay associated with trial and appeal of threshold questions can quickly overwhelm the time and cost advantage arbitration may have offered.

Multiple Proceedings

Only the parties to the written agreement to arbitrate can be compelled to participate in the arbitration proceeding. Unlike court rules on consolidation, related disputes, which could be joined in litigation, cannot be consolidated in arbitration without the consent of all the participants. This consent is often found in construction contract arbitration clauses that provide for consolidation of related arbitration proceedings, or in agreements to join arbitration proceedings in progress. Without consolidation, a disputant may find himself or herself engaged in multiple proceedings and bound by multiple determinations, arrived at by different arbitration panels, each of which is equally enforceable and final.

Arbitration Fees

Arbitration hearings generally cost less and consume less time than court proceedings. Scheduling is more flexible, discovery is eliminated or limited, and the rules of evidence are more relaxed. If the arbitrator has special expertise, the parties can avoid lengthy background evidence necessary to give a judge or a jury an understanding of the issues in dispute. These advantages can be lost. Arbitration administrative fees are often substantially higher than court filing fees. Parties do not have to pay for a judge's time, and jury fees are nominal. The parties will be responsible to compensate the arbitrator or arbitrators for their time, in hearing, in deliberation, and while preparing an award. For a panel of qualified arbitrators, this can come to many thousands of dollars per day.


The parties will have the power to conduct discovery as provided by the arbitration clause, or by the rules under which the arbitration is conducted. In the absence of discovery provisions, neither party has the power to compel the other to deliver documents or to provide deposition testimony before the hearing. This reduces costs dramatically, but can lead to trial by ambush if the parties have unequal access to evidence or other pertinent information. Some arbitration agreements provide for full discovery under federal or state court rules. The time and cost for such a proceeding can match the time and cost of litigation.


Finally, the site of an arbitration can have profound impact on the cost of a dispute resolution proceeding. The agreement to arbitrate establishes where the hearing will occur, either by its terms or by the arbitration rules adopted. If the venue provision requires transporting or housing for parties, witnesses, arbitrators, or legal counsel, the cost advantage of arbitration is quickly lost.

Managing the Costs

Arbitration should be faster, less expensive, and as good as or better than litigation in court. A well-run arbitration produces speedy and reliable results. Though arbitrator and administrative fees will usually exceed court-filing fees, the savings in party attorney fees should more than offset the difference. To preserve these advantages, the parties to any arbitration agreement should consider the hidden costs of arbitration early — when the contract is negotiated. Once a dispute has arisen, when the parties are jockeying for advantage, it is hard to come to agreement about the rules of engagement.

When drafting or reviewing an arbitration clause, consider its complexity. Look for a simple delineation of scope. Avoid vague or complex initiation procedures including consolidation provisions. Also, consider the costs of administration and of the arbitration panel. Who will have to pay the administrative fees, and how much will it be? Avoid establishing large expensive panels to hear small disputes. Specify a hearing venue that allows for a fair and efficient proceeding, considering the travel time and expense for parties, witnesses, the arbitrators, and legal counsel. Finally weigh the risk of surprise against the efficiency of a streamlined proceeding and agree to discovery provisions appropriate to the kind of disputes most likely to arise.

Private arbitration of construction disputes can have significant advantages over litigation in state and federal courts. Through arbitration, the parties can reach a final resolution of their disputes privately, in less time, and thus at less cost. These advantages can be preserved by attending to the details of the arbitration agreement early, when it is being drafted or negotiated, and not after a dispute has arisen.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations. For more information on this topic, please contact marketing@jordanramis.com or call (888) 598-7070.

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