Mediation, Arbitration, Litigation:  What Difference Does It Make?

Construction contracts often contain “dispute resolution” provisions. In many cases, those contracts state that a party must “mediate” the dispute before attempting litigation, or that the parties must use “arbitration,” rather than litigation.  If you are going to include these “dispute resolution” provisions in your contracts, or if you are presented with a contract that includes these provisions, it is important that you understand the advantages and disadvantages among these various methods of dispute resolution.

Mediation refers to a process in which the parties seek to amicably negotiate and hopefully resolve their dispute without arbitration or litigation.  (Mediations can also occur while arbitration or litigation is ongoing.)  Generally, a retired judge or an attorney who is not affiliated with the case serves a mediator.  The mediator does not decide the case or even, in most cases, recommend a particular result.  Instead, he facilitates a negotiation.  Typically, the parties will agree to meet at a specified time and place and will be placed in separate, private rooms.  The mediator will then visit each party, explain his opinion of the strengths and weaknesses of each party’s case, and, in some cases, offer his honest opinion of the likely outcome if the case isn’t resolved through mediation.  Ultimately, he will exchange settlement terms between the parties with the goal that an agreement can be reached.  Mediations allow for a quick, and, in many cases, more creative resolution of the dispute because the parties control the process. 

Arbitration refers to a process in which a private individual or panel of individuals chosen by the parties hears and decides their case.  Historically, construction industry contracts have preferred arbitration over litigation, but it has its advantages and disadvantages.  On the one hand, arbitration is more private than a lawsuit filed in state or federal court, the parties can select an arbitrator or panel of arbitrators with knowledge of the construction industry, the process may be more streamlined than litigation, and arbitrators have a fair amount of flexibility in conducting the cases that come before them.  On the other hand, in some cases, depending on the complexity of the issues, an arbitrated dispute may take just as long, be just as expensive, and require discovery just as extensive as an ordinary lawsuit.  While the parties need not compensate a state or federal judge that hears their case, the fees associated with using an arbitrator can be significant.  Finally, an arbitrated decision is usually binding, and very little grounds exist for an appeal – which is either an advantage or disadvantage, depending on a party’s satisfaction with the outcome.

Litigation refers to the traditional process in which a judge or jury decides the case.  Unlike arbitration, most court pleadings are publicly available, and most hearings are open to the public.  Depending on their experience, some judges may be fairly familiar with the construction industry, but others may have little to no knowledge about it.  The litigation process also involves more formalized rules than an arbitration.  While arbitrators must also base their decisions on the law, they do have some leeway to reach an “equitable” or “fair” result.  Judges and juries, however, are bound to follow the law, meaning that litigation may prove the better choice if you have strong legal arguments in your favor.  While litigation has the reputation of being slow, costly, and inefficient, depending on the complexity of the case, the same challenges may be encountered if the case arbitrated.   Finally, unlike an arbitration, decisions reached through litigation may be appealed.

For questions, contact our Sioux Falls, Sioux City, or Omaha office today!