QWe plan to hire a home improvement contractor to do major renovations to our house. The contractor has given us for review a standard form contract published by the American Institute of Architects; it contains an arbitration clause. In your opinion, is arbitration a better way to resolve disputes than litigation?
AArbitration is a hotly debated topic nowadays. More and more corporations, such as credit card companies and automobile rental firms, are imposing arbitration in the event of a consumer dispute.
As we all know, litigation is time-consuming and expensive. Courts are loaded down with cases. Despite the sincere efforts of judges and court administrators, litigation can drag on for years.
Arbitration is an alternative to resolving a dispute in court. If both parties to a dispute agree to take their case to binding arbitration, under most circumstances an arbitration proceeding can be completed within less than a year and often in less than six months.
We used to think that arbitration was less expensive than taking your dispute to the courts. However, this month, Public Citizen -- a nonprofit advocacy organization -- issued a report that indicated that arbitration may be more expensive for consumers and employees than using the courts.
According to the report, "Remarkably, although the claim is frequently made that arbitration costs less than litigation, no research has ever been undertaken to substantiate it. No interest group has commissioned a study. No member of Congress has asked for a General Accounting Office report."
Public Citizen then summarized its conclusions:
* The cost to a plaintiff of initiating an arbitration is almost always higher than the cost of instituting a lawsuit.
* Arbitration costs are high under a pre-dispute arbitration clause because there is no price competition among providers.
* Arbitration costs will probably always be higher than court costs because the expenses of a private legal system are so substantial.
* Arbitration saddles claimants with a plethora of extra fees that they would not be charged if they went to court.
The full report is on the group's Web site, www.publiccitizen.org.
Here's how arbitration works. If you are using the services of the American Arbitration Association -- the leading organization in this field -- you file your complaint with the local AAA. A fee is charged; the amount depends on the amount you are claiming against your opponent.
The arbitration association will assign a caseworker, who will coordinate the proceedings. Both parties will receive a list of approximately 20 potential arbitrators. Each listing will contain a brief biographical statement on each individual. Both sides can, for whatever reason (or no reason) cross off as many names on the list as is desired.
Once the association receives the lists back from both parties, an arbitrator will be selected from among the individuals whose names were not deleted. The arbitrator will then be assigned the case. A calendar will be submitted to both sides, who will be asked to cross off dates that are inconvenient for them to attend a hearing.
Once the arbitrator receives the list of available dates and determines approximately how many hours or days the arbitration proceeding will take, a date will be selected.
Under some circumstances, the rules of the arbitration association permit the parties to engage in a form of discovery proceeding, whereby either side may pose questions that must be responded to in writing, promptly, by the other side. Discovery is at the discretion of the individual arbitrator.
Incidentally, you can have one arbitrator, or you can request a panel of three arbitrators.
On the day of the hearing, the arbitrator will conduct a relatively informal process. People often sit around a conference table at the local office of the arbitration association or in the arbitrator's office, and it clearly is much more informal than the court system.
Once the opinion is handed down by the arbitrator, it generally is binding on all sides.
The case law throughout the country is very clear that mandatory, binding arbitration will rarely be overruled by the courts. Courts will overturn the arbitrator only if he or she was arbitrary or capricious in rendering a decision.
Many years ago, I was a strong advocate of the arbitration process. Over the years, however, I have changed my mind. I used to think that arbitration was less expensive than having to find a lawyer to take your case to court, but the recent Public Citizen study is of concern to me.
Also, the court system offers certain protections that may not be available with arbitration. 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 to what another has told him, is generally not admissible in court. In an arbitration proceeding, however, the arbitrator will usually 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 of money to one side or the other. After months of frustration and uncertainty, the arbitrator's opinion often continues to confuse people, since no rationale is given.
In a court, all of the parties in the litigation usually understand the rationale behind the judge's opinion, whether or not they agree with the final order. The judge will either give an opinion from the bench with a lengthy explanation or write a comprehensive decision accompanying the court order.
Finally, one of the hallmarks of our legal system is the right to appeal a lower court decision. Judges are human and can (and do) make mistakes. The appeals 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 is generally not appealable.
And often, it has been my experience, the arbitrator -- in an effort to be fair -- will "split the baby in half," with neither side getting what they are asking for.
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. Often, however, small-claims courts are the best means to resolve small disputes. You should check the jurisdictional amount for the small-claims court in the county or city in which you live.
Here's one suggestion for your construction contract. Whether you use arbitration or litigation, include the following sentence in your contract: "The prevailing party in the litigation (or arbitration) proceeding shall be entitled to reasonable attorney's fees as directed by the court (or arbitrator)."
We follow what is known as the American Rule of Legal Fees. Each side pays its own lawyers, unless certain conditions are applicable. One such condition is that the parties have agreed in a contract that the losing party will pay the winner's lawyer.
Choosing between arbitration and litigation to resolve possible future disputes is a tough decision, but you must make it before you sign your construction contract. Once the contract has been signed -- and if you have agreed to resolve all disputes by way of arbitration -- you will not be able to change your mind and bring your case to court.
Benny L. Kass is a Washington lawyer. 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, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.