Should a Residential Construction Agreement Contain an Arbitration Provision?

Arbitration provisions are ubiquitous in commercial construction agreements. But in residential construction, the choice to include one may not be as clear. Here are some talking points to discuss with your client when deciding whether to include an arbitration provision in a residential construction agreement.

• Arbitration is expensive because you have to hire a private judge to hear your case, usually at $10,000 a day or more (in addition to attorney and experts fees). Like lawyers, arbitrators charge for all their time—including all phone calls, emails, etc.
• If the contract has no limits on discovery, an arbitrator may allow any discovery authorized by statute. You can limit the arbitration expense by limiting the amount and kind of discovery allowed in your arbitration provision.
• Arbitration awards are usually final and not appealable. So, the expense of arbitration may be offset by avoiding the expense and time of appeal.
• Arbitration is private, allowing parties to avoid a public record of the dispute. Court filings are typically public, permanent, searchable, and, more and more often, included in databases such as LexisNexis and Westlaw.
• Arbitration proceeds on your schedule, not the court’s, because you’re paying for the arbitrator’s time and schedule. Courts are frequently backlogged, especially now after COVID-19 delays, which delays trial. Judges control their calendars, often delaying months between hearings. Getting an emergency hearing before a judge may be difficult. Not so with an arbitrator who gets paid for every call, hearing, or email. And court hearings require filing documents to argue a point, while those same disputes may be handled quickly and efficiently by a letter and a conference call with an arbitrator.
• In court, judges often transfer among departments; a family law judge may be hearing your construction dispute. But in arbitration, the parties may choose an arbitrator for their expertise in construction. This may save time in presenting the case and have more predictable results.
• An arbitration provision may be meaningless if the dispute involves a construction defect, which may include claims against subcontractors and the general. Since there is no contract (and thus no arbitration provision) between the owner and the subcontractors, an owner may have to arbitrate against the general and sue the subcontractors, leading to greater expense and a risk of contradicting results. In these cases, a judge may ignore the arbitration agreement and order everyone to court instead.
• Finally, consider whether an attorney’s fees provision allows for recovery of the cost of arbitration. If not, the cost of arbitration may outweigh the value of the dispute.

This is not a comprehensive list but a starting point when considering whether to include an arbitration provision in a residential construction agreement. There is no obvious right answer, but weighing these issues can help you and your client arrive at the right decision for their particular circumstances.