Housing Counsel: Arbitration can sometimes be as expensive as litigation

Say you have a problem with your contractor who claims you still owe him money. Or maybe the people who signed a contract to buy your house did not go to settlement and now want their earnest money returned. How can such disputes be resolved?

Obviously, litigation is one answer, but that is time-consuming, expensive and always uncertain. Often the cost of litigation may exceed the amount of money at the heart of the controversy. But there are alternatives, including arbitration and mediation.

In mediation, a neutral person listens to both sides and makes a nonbinding recommendation (putting you back at square one if either party rejects the proposed solution). In arbitration, the decision is binding and is likely to be upheld by a court of law. If two parties have voluntarily signed a contract that requires arbitration, the courts will generally not allow the dispute to be litigated.

For a long time, I was a strong advocate of the arbitration process. Over the years, however, I have changed my mind. Sometimes arbitration can be as expensive as litigation. And in court, there are a number of due process protections afforded both sides, which may not be available with arbitration.

The leading organization in the field of arbitration is the American Arbitration Association, although you are not required to use its services if the two parties can agree on a neutral party to hear the matter. While most proceedings usually involve just one arbitrator, sometimes — especially if it becomes difficult to select one neutral party — three arbitrators can be used. Each side selects one arbitrator, and those two select a third.

The AAA charges an upfront fee (based on the amount in dispute), and the arbitrators will charge a daily fee for their participation.

One key difference between litigation and arbitration deals with the information available to each party.

In court, both parties are entitled to discovery. That means you can submit written questions (called interrogatories) of the other side, require production of all documents that will be used in trial and take depositions. A deposition is where the plaintiff or the defendant (or a potential witness) will be required to answer questions, under oath, before a court-authorized stenographer who will prepare a transcript that can be used at the trial. In arbitration, however, discovery is at the discretion of the arbitrator.

Unlike court proceedings, which are very formal, arbitration is relatively informal. The parties and the arbitrator sit around a conference table. Sometimes, the arbitrator will have been provided background information by both parties. The complainant presents her case, the respondent follows with his position, and the arbitrator issues an opinion. If the case is complex or requires legal research the decision may not be immediately provided.

Once the decision is made, the losing party must comply with it. If this does not happen, the winner has the right to go to court to enforce the decision.

In litigation, the rules of evidence — no matter how archaic they may seem — will exclude certain evidence that has no place in a courtroom. For example, hearsay evidence, where one person testifies what another has told him, is generally not admissible in court.

In an arbitration proceeding, however, the arbitrator has the discretion to admit all evidence submitted by both sides. The rules are lax, and the arbitrator makes the call.

Another drawback to arbitration is that the arbitrator (or panel of arbitrators) is not required to file a written opinion. Often, the arbitrator hands down a one-paragraph decision, awarding a sum to one side.

In court, all of the parties in the litigation usually understand the rationale behind the judge’s opinion — regardless whether they agree with the final order. The judge will give an opinion from the bench with a lengthy explanation or write a comprehensive decision accompanying the court order. Should you opt for arbitration, insist on receiving a written decision at the end of the proceeding.

Finally, one of the hallmarks of our legal system is the right to appeal a lower court’s decision. Judges are human, and they can (and do) make mistakes. The appellate process gives the losing party another bite at the apple. The appellate court will not overrule the trial court’s determination of facts but will carefully analyze the facts as they relate to legal principles.

As indicated earlier, the arbitrator’s decision generally can’t be appealed. Unless the losing party can show that the arbitrator was not impartial and did not disclose facts that would otherwise have disqualified him, or can prove that the award was procured by corruption, fraud or other undue means, a court will not overrule the arbitration decision.

Clearly, there is merit to arbitration in many instances. If a dispute is in the $5,000 to $20,000 range, it may not pay to spend the same amount of money for legal fees in litigation. Often, however, small claims courts are the best means to resolve small disputes.

In Maryland, Virginia and the District, if your claim is for $5,000 or less, you can use the services of the small claims court. (In Maryland, it is known as the district court; in Virginia, it’s the small claims division.)

Say your claim is for $9,000. If you are willing to reduce your claim to $5,000, you do not need a lawyer to file in the small claims court where your property is located. Often, the mere filing of a lawsuit will spur the other side to try to reach an amicable settlement.

Remember, when faced with a dispute, that sometimes it does not pay to fight. You could choose to simply pay the contractor or release the deposit and move on with the rest of your life.

Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. For a free copy of the booklet “A Guide to Settlement on Your New Home,” send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036.

 
Read what others are saying