By Jeffrey R. Cruz

Arbitration or litigation? Coke or Pepsi? Regular or decaf? Our choices and preferences are based in part on what we hear from others, but the more substantial factor in those choices and preferences is personal experience. Many of our clients already know that they prefer Pepsi and can't stomach decaf - but they have no preferences when it comes to dispute resolution because they have had little or no experience with it.

Recently, along with another lawyer, I spoke at a lunchtime seminar at our local American Arbitration Association (AAA) office to about a dozen commercial and construction arbitrators. We talked about our expectations as "users" of the arbitration process and recommendations for increasing the level of satisfaction that our clients have with arbitration. As a prelude to that discussion, we also talked about whether our clients were electing to include arbitration clauses in their contracts. Even with the recent boom in alternative dispute resolution (ADR), many clients still are unfamiliar with the arbitration process. Some of these clients are first-time owners of construction projects. At the contract drafting stage, they usually are preoccupied with breathing life into their project and feel trepidation about its launch. At that point in time, they are not inclined to focus on how to resolve future disputes with their designers and contractors.

Construction lawyers and professionals have all kinds of old chestnuts they like to dust off when asked to recommend a dispute resolution process for a contract. For example, some say that arbitration is better for subcontractors and litigation is better for contractors, or that you should arbitrate when your case is strong on the facts but weak on the law. Others have it that you would he better off litigating when the contract is drafted in your favor.

Today it is vital to be able to advise clients on dispute resolution based on more than old chestnuts. The attorney's experience is perhaps the most important source of advice on this subject although that is not the only source. Attorneys rarely have the opportunity to compare arbitration and litigation in the same case.

A few years ago, I found myself in the unusual situation of being involved in arbitration and litigation of two roughly similar cases, the former in New Jersey and latter in New York. Although the amount in controversy in the New York litigation was much greater, the cases were similar enough to be instructive on the advantages and disadvantages of using arbitration and litigation. This article compares key aspects of these two cases. This comparison is based not on empirical research conducted under controlled conditions but on my fortuitous involvement in two similar cases very close in time.


A Tale of Two Cases

Background of the New Jersey Case

The New Jersey case involved the design, construction and start-up of a cogeneration facility owned by an independent power producer. My firm at the time represented the owner against the EPC (engineer, procure, construct) contractor, which was contractually responsible for designing the plant, procuring all materials and equipment for constructing it, commissioning it and turning over a fully operating plant to the owner. The contract contained a warranty clause providing a one-year period from commercial operation in which to raise any deficiencies in the EPC contractor's performance. The contract contained an arbitration clause calling for arbitration administered under the AAA Construction Industry Arbitration Rules.

The owner asserted a variety of claims against the EPC contractor within the one-year warranty period. In fact, virtually every significant plant system (except the steam turbine generators and the gas turbine generators) had a warranty claim associated with it. Although the claims filled the spectrum between relatively minor (deficient boiler drain valves) and very significant (leaking tube to drum joints in the plant's heat recovery steam generators), there was a common thread running through the claims. For each claim, we had to learn the engineering behind how these plant systems were designed, constructed, procured, commissioned and operated and then devise a persuasive presentation for a trier of fact.

The EPC contractor asserted counterclaims for the balance due under the contract, a bonus for completing the project on schedule and delay damages.

Background of the New York Case

The New York case also involved an EPC project but had a different owner and contractor. My firm at the time represented the contractor against the owner. The contractor was responsible for designing, procuring, constructing, commissioning and turning over an operating plant to the owner.

When the owner terminated the turnkey contract before completion of the project for alleged performance defaults, the turnkey contractor asserted that it was wrongfully terminated and claimed additional compensation and an extension of the time for completion of the contract. The owner asserted counterclaims seeking substantial damages for delay and defective and incomplete work. This case implicated at least as many technical engineering issues as the New Jersey arbitration. In addition, the parties had completely different views of the construction schedule.

The contract did not contain an arbitration clause, so it was headed to state court.

Because these cases involved very different amounts in controversy, one might conclude that this would account for the different experiences in arbitration and litigation. While the amount in controversy was certainly a factor, in my view it does not tell the whole story.


Differences in the Two Cases

Commencing the Proceedings

The New Jersey case was commenced by a simple demand for arbitration. The contract required each party to appoint an arbitrator and for the two party-appointed arbitrators to select the arbitrator who would serve as chair of the panel. The parties nominated their arbitrators, and the chair was selected. This process was not unduly combative. Indeed, it was completed in several weeks. (However, it is not difficult to imagine how objections and challenges, legitimate and otherwise, to arbitrator candidates might extend the time to appoint a panel.) Within a short time after selection of the panel, the chair convened an administrative conference.

The litigation in the New York case had a more tortuous beginning. The turnkey contractor commenced an action in state court in California, seeking to attach funds belonging to the owner. It also filed a complaint for breach of contract. The owner commenced a separate breach of contract action in state court in New York. Before our client and the owner would even begin to address the merits of their respective claims, they would spend two years filing motions and appeals relating to three issues:

		Our client's pre-trial attachment of the owner's funds in California.
		The proper venue, New York or California, for the breach of contract action.
		Disqualification of the owner's counsel for a conflict of interest.

The California court granted our client's motion to disqualify the owner's counsel while the New York court denied it. The non-prevailing party in each action appealed, which led to more time and attorney fees.

Pre-Hearing and Pre-Trial Motions

Both cases involved potentially dispositive legal issues tempting enough to provoke early motions for summary judgment.

In the New Jersey arbitration, the EPC contractor consistently took the position before and throughout the arbitration that the owner had not given proper notice of the warranty claims under the contract and that some claims had not been asserted within the one-year warranty period. In the New York case, the owner consistently took the position during construction and before and during litigation that the contractor had failed to comply with the contract's notice provisions concerning assertion of claims.

The arbitrators in the New Jersey case permitted the EPC contractor to file a motion for summary judgment based on the warranty provision. They asked parties to organize their arguments and supporting documents by claim so that a decision could be rendered for each claim.

In the New York litigation, the parties filed their summary judgment motions and opposition papers. But in contrast to the arbitration, they received no guidance from the court as to how to organize their claims so that they might be examined in the most efficient manner. In my experience, I have rarely seen a state court provide pre-filing direction or guidance to the parties to facilitate disposition of a motion for summary judgment.

The result? The arbitrators in the New Jersey case rendered decisions indicating which claims did not survive summary judgment and which did and, perhaps more important, what needed to be proved in order for these claims to be viable in the arbitration.

Preliminary Hearing

One of the keys to making the New Jersey case run as smoothly and efficiently as it did was the preliminary hearing conducted by the panel. This hearing was not on the telephone, as such hearings often are.

At the preliminary hearing, the panel conducted an intensive inquiry into the nature of the claims and counterclaims that would be presented. Then it challenged the parties to pare down the amount of discovery they wanted in order to prepare for the hearings. The panel also asked us to work cooperatively to present the claims and counterclaims in an orderly and efficient manner and to devise creative approaches to presenting the evidence in the most efficient and effective way.

As a result, the parties discussed several witness-presentation techniques, such as using a panel of witnesses and having party experts testify simultaneously so that they could challenge each other's testimony. Although the parties did not agree to use these innovative techniques, they did agree to run the hearings on a "chess clock." The chair directed each party to estimate the amount of time that would be needed to present its case in chief, cross-examine witnesses and present rebuttal. As I recall, the chair then reduced these estimates by 10 to 20 percent. He also said that the clock would run except for breaks and questioning by the panel, and then advised us, "Once you run out of time, you're done, so think twice before you ask a question you've already asked or call a witness whose testimony you suspect may be cumulative."

There were no analogous preliminary hearing discussions in the New York litigation. Thus, court procedures had to be followed without creative adjustments.

Discovery

At the preliminary hearing in the New Jersey case, the parties each expressed a need for extensive pre-arbitration discovery, including document production, depositions, a site inspection and discovery from third parties. The panel did its best to persuade the parties to keep their discovery requests to a manageable level. The parties then agreed that each side would take no more than three depositions (including depositions of non-parties). The panel authorized an inspection of the plant and helped the parties fashion reasonable rules for the inspection. The panel was invited to attend the site inspection in the hope that seeing the plant in operation would help the arbitrators visualize and understand the technical issues in the case.

In the New York litigation, the parties exchanged discovery requests requiring the exchange of more than 1 million pages of documents. They also served dozens of deposition subpoenas on parties and third parties. In addition, they requested three site inspections as well as destructive and non-destructive testing.

Although the parties were required to and did provide periodic reports to the court describing their progress in completing discovery, progress was slow. The entire discovery process took three years, and it often felt like an unsupervised free-for-all.

Conducting Hearings and Preparing for Trial

Because of the complexity of the issues, the arbitration of the New Jersey case could not be completed in one hearing day. In order to accommodate the busy schedules of everyone involved, the panel scheduled the hearings to take place one week out of every month until concluded. The parties agreed to focus on discrete claims during each week of hearings. The panel required each side to pre-mark its proposed arbitration exhibits and organize them in binders and to serve them on the other side and the panel about a week before each round of hearings. Objections to any exhibits had to be exchanged before the hearing week during which the exhibits were intended to be presented so the arbitrators could promptly rule on them. The chess clock contributed greatly to moving the proceedings along.

The process also benefited from the customary relaxation of evidentiary rules in arbitration. Thus, all exhibits were deemed admitted unless objected to. Business records and other hearsay evidence were admitted without the need to lay a formal evidentiary foundation. The panel asked clarifying questions and often conducted extensive questioning after counsel had concluded direct or cross-examination.

It is my understanding that the arbitrators deliberated after each monthly round of hearings in order to exchange their thoughts about the evidence while still fresh in their minds. The arbitrators rendered opinions on the pre-hearing motions for summary judgment but did not issue interim decisions on the discrete claims. The case settled before the end of the hearings, less than two years after the demand for arbitration was filed.

Even though the panel did not have to issue an award in the arbitration because of the settlement, I believe my client in the New Jersey case received a fair hearing by a sophisticated panel whose members understood and appreciated the legal and technical details involved.

In the New York case, counsel for the parties estimated it would take six months to complete the trial. Both parties demanded a jury trial, so if the case had been tried, a dozen ordinary citizens and a judge, none of whom was likely to have an engineering or construction background, would have had to understand the failure analyses, critical path method schedule analyses and highly technical facts and expert testimony in order to decide the case. However, this case never went to trial. It settled just before the trial was to begin.

Nevertheless, the New York litigation lasted 3½ years longer than the arbitration as a result of motion practice and extensive discovery and the need for extensive trial preparation, including the need to prepare expert witnesses for trial. Had the case been tried, I believe the parties would have had significant difficulty dealing with the substantial volume of technical data and expert witness testimony that would have been offered into evidence because New York court rules provide for very limited discovery of experts and do not provide for expert witness depositions.


Lessons Learned?

We construction litigators are "result-oriented" folks. In both cases, one result was the same: Both settled before a decision was made by a third-party decision maker. This result, however, is not important to the lessons learned. These lessons are very practical. Arbitration led to a resolution in much less time overall and allowed the parties to customize the process to a complex construction case. True, the case that was arbitrated involved smaller amounts in controversy. But I don't think that is terribly significant because the issues were of equivalent complexity.

I believe that at several different stages of the process from claim to resolution, arbitration presented the "alternative" we so fervently seek from ADR. During the pre-discovery stage, arbitration provided a forum in which to custom-tailor the process of gathering and presenting the evidence so that the issues could be decided. A big dividend was the panel's strong interest in limiting and managing discovery. The efforts to curb discovery to what was important were instrumental in moving the case along.

The proceedings were made more efficient because arbitration, unlike litigation, allows flexibility in scheduling hearings, organizing the evidence and presenting witness testimony. It also allows questioning by the panel.

Technically complex engineering and scheduling issues usually are well-suited to arbitration because the parties can select arbitrators who understand such issues. I imagine that counsel for both sides would have adopted very different approaches in the New York litigation if it had been destined for arbitration rather than a jury.

In the litigation, the parties became embroiled in a procedural morass that consumed two years of motions on the attachment, attorney disqualification and venue issues and related appeals. Would arbitration have prevented this? Probably not, but arbitrating could have saved substantial time involved in motion practice over the venue issue.

Although the New York case settled before trial, I think the prospect of a long, costly trial before a jury contributed to the parties' decision to settle.

I am not advocating any particular dispute resolution process for every situation. Each case has its own needs. I have even had some bad experiences with arbitration. But it has not soured me on the process, which, when managed properly, can give the parties a fair hearing in less time and at less cost. (Of course, if you always prefer to litigate, then my conclusions from this accidental experiment with arbitrating and litigating two similar cases may not interest you.)

I hope my experience will encourage you to arbitrate and take stock of that experience at different stages of the process. Then you can mine that experience about the advantages and disadvantages you have encountered. You also can compare your experiences with the experiences of other lawyers in and out of your firm and see what was different about them. By doing so, we put ourselves in a better position to counsel our clients well when it comes time to pick a dispute resolution method and forum.

If you would like to receive legal reports and updates more quickly, by e-mail, click here and fill out the mailing list form.

For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-369-7210 or at jralls@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.





©2006 Thelen Reid Brown Raysman & Steiner LLP