Arbitration vs. Litigation in Construction Contracts: A Guide to Resolving Disputes

In this post, we’ll explain two of the most common dispute resolution strategies in the construction world: arbitration and litigation. We’ll take a closer look at their unique benefits, costs, and relevance to contractors just like you.

When it comes to construction contracts, disputes can be just as complex as the projects themselves – not to mention, costly.

It’s estimated that the average value of construction disputes in North America reached $42.8 million in 2022 alone, and as project costs rise in line with inflation, those numbers will only continue to increase.

And it’s not just about money. 

With deadlines, reputations, and yes, budgets, on the line, resolving disagreements quickly and efficiently becomes a top concern. That’s why integrating a clear dispute resolution method into your contracts is more than just legal housekeeping: it’s a smart move to protect your business.

What is Dispute Resolution in Construction Contracts? 

Dispute resolution refers to the previously agreed-upon methods outlined in your contract to address conflicts between parties during or after a construction project.

These could range from payment disputes to claims surrounding defective work or delays. Typically, dispute resolution methods fall into one of two categories:

Pre-Suit Mediation 

This is often the first step required before formal proceedings (such as arbitration and litigation) can commence. Pre-suit mediation involves a neutral third party who facilitates discussions between the involved parties to help them find a middle ground.

Though less costly and time-intensive than going to court or arbitration, it only works when both parties are willing to negotiate in good faith. The good news is that even when meditation doesn’t fully resolve the issue, it’s still a valuable tool to assess how far apart both sides are. It can give you a clearer picture of what to prepare for next.

Arbitration and Litigation 

When mediation falls short, contractors typically turn to more formal dispute resolution processes known as arbitration or litigation. These are often written into contracts, laying out how disputes will be handled depending on the parties’ preferences. 

Arbitration vs. Litigation in Construction Disputes 

When disputes arise, contractors must determine whether arbitration or litigation is the better route forward. Here’s how the two compare: 

Key Benefits of Arbitration 

Arbitration is a private process. Unlike court cases, which are part of the public record, arbitration proceedings (and their associated outcomes) are confidential. If you’re worried about maintaining a clean reputation, this privacy can be an invaluable benefit.

Another benefit of arbitration is that it streamlines the discovery process. Discovery drives up legal fees and can drag cases out for months in court litigation. By focusing only on materials essential to the case, time and money can be saved across the board.

Arbitrators tend to be experts in construction. They’re lawyers who have relevant experience, retired engineers, or contractors themselves. This means the decision makers involved in arbitration understand the nuances of construction projects, such as scopes of work and industry standards.

For this and other reasons, arbitration offers consistency, especially if you frequently deal with similar disputes. The rules and processes remain familiar, reducing the learning curve and helping you resolve issues quickly and more predictably. 

When Litigation Might Be Preferred 

There are a few situations in which litigation might be a better option. For instance, litigation tends to offer broader discovery tools. 

Unlike arbitration, courts have the legal authority to enforce subpoenas and compel parties to produce documents or appear for a deposition when they might otherwise be unwilling to do so. 

For disputes involving third-party evidence, courtroom discovery can be a powerful advantage. Similarly, litigation offers a structured system backed by decades of established legal precedents. Contractors familiar with the court system may feel more comfortable navigating these formalities.

Last but not least, judges have the power to enforce legally binding orders and address violations more effectively. This leverage may be beneficial in cases where one party is less cooperative.

Cost Comparison 

Often, arbitration has higher upfront expenses because you’re essentially “hiring” one or more arbitrators to manage the case and paying an hourly or daily rate. Filing fees can also be more substantial, as they’re usually calculated based on the potential monetary value of the dispute.

Comparatively, filing fees in litigation are generally lower. Filing a lawsuit in state court might cost just a few hundred dollars. With that said, litigation becomes significantly more expensive as the case drags on, with extended discovery and trial preparation piling on legal expenses.

Attorneys’ Fees in Construction Contracts 

You’ve likely come across attorneys’ fees provisions in contracts. On the surface, they may seem straightforward, but their implications can be far-reaching.

Understanding Attorneys’ Fees Provisions 

There are two types of “rules” in attorneys’ fees, the American Rule and the British Rule.

In the American Rule, each party covers its own attorneys’ fees, win or lose, unless otherwise agreed in the contract. Compare this to the British Rule, where the losing party must pay the winning party’s attorneys’ fees. 

As you might expect by the verbiage alone, the American Rule tends to be the default in the United States. Florida law provides that any contract that allows one party to recover fees in the event of a dispute, the provision will automatically convert to a “prevailing party” fee provision. So, even if the contract says “the contractor is entitled to recover its attorneys’ fees in the event of a dispute” Florida law requires that provision to be applied equally to both parties, so that if the owner files suit, the owner can recover its attorneys’ fees.

Despite careful wording of your contract, you may end up covering their attorneys’ fees. 

That’s why, for most contractors, working without an attorneys’ fees provision and relying on Florida’s Chapter 713 lien law may be a safer bet. Chapter 713 gives contractors a very powerful tool to encourage payment without needing a fee-shifting provision, and protects your rights in a less risky manner.  Alternatively, an attorneys’ fee provision limited to the issue of non-payment can insulate the contractor from paying legal fees on an unrelated issue of dispute.

Drafting Attorneys’ Fees Provisions 

As you can see, how your contract handles attorneys’ fees can significantly impact your leverage in a dispute. 

When you’re drafting contracts, consider avoiding or limiting fee-shifting. Again, Florida’s lien laws already provide strong protections, allowing contractors to file a lien against a property if they aren’t paid. Fee-shifting provisions could end up backfiring and put you in both legal and financial hot water.

If fee-shifting provisions are unavoidable, the next best thing you can do is to make them as specific as possible. For example, limit fee-shifting to certain issues like unpaid invoices, not workmanship disputes.

Remember, attorneys’ fees provisions are not boilerplate clauses you can afford to overlook. To prevent any missteps, work closely with a top construction law firm in Florida like Bachara Construction Law Group. This way, you can make sure all provisions are drafted in your favor.

Pre-Suit Mediation as a Useful Tool 

The contract is written. The project has started. And now, there’s a dispute. So now what?

Before you rush into arbitration or litigation, you may want to consider pre-suit mediation first. Mediation is often a low-cost way to resolve disputes without the high financial and emotional toll of a drawn-out legal battle.

Pre-suit mediation is ideal when both parties are willing to compromise and understand the risks of litigation or arbitration.

It allows for an early assessment of the dispute’s scope and costs. This way, both parties can evaluate a potential resolution with minimal legal expenses.

It also helps maintain relationships. With reduced hostility and less at stake, mediation is perfect for owners and contractors who may need to work together again in the future.

Mediation does, however, have limits. If one side is highly entrenched or unwilling to cooperate, mediation often becomes a standoff with little information exchanged. 

Pro tip? Approach the mediation process armed with clear expectations and a skilled representative who understands the complexities of Florida construction law.

Best Practices for Contractors 

Now that you know the ins and outs of dispute resolution, here are a few best practices to follow to make sure your contracts are watertight (and disputes are easily resolved):

1. Define How Disputes Will Be Resolved

Decide upfront whether disputes will be resolved through arbitration or litigation, then include specific language in your contract to memorialize that decision. For example, you could state that any claims “shall be resolved exclusively by arbitration pursuant to [specific arbitration rules]” or “shall be resolved in the courts of [specific jurisdiction].”

2. Include Presuit Mediation Steps

Pre-suit mediation is often a mandatory first step in construction contracts before arbitration or litigation begins. It’s an opportunity for all parties to come together with a neutral mediator to resolve issues before escalating the dispute further. This step can save significant legal fees, even if it doesn’t result in a resolution.

3. Limit Attorneys’ Fees Clauses

As addressed earlier, many contractors believe attorneys’ fees provisions are mutually beneficial, but these clauses can backfire – big time. Florida’s lien laws already provide contractors with powerful leverage to ensure they are paid, and adding an attorneys’ fee provision can unintentionally shift risks if an owner sues you for alleged defects or delays.

Avoid unnecessarily broad clauses that could expose you to paying the other party’s legal fees in unrelated disputes. Not sure how to word things? Consult with an experienced construction lawyer, like our team at Bachara Construction Law Group, to help you limit or remove these provisions in a more strategic manner. 

Bringing it Together 

Deciding between arbitration and litigation depends on your priorities as a contractor. Arbitration offers privacy, industry-specific expertise, and a quicker resolution process but comes with higher initial costs. Litigation, while more public and rigid, might be more suitable for larger-scale disputes requiring extensive documentation.

Regardless of these differences, the true key to successful dispute resolution lies in your contract. Well-drafted agreements can proactively mitigate disruption, control costs, and avoid unnecessary (and unpleasant) legal entanglements.

If all this sounds a bit more complicated than you’d like, know that you don’t have to go it alone. At Bachara Construction Law Group, our team is experienced in drafting contracts, resolving disputes, and protecting the rights of contractors around the state, including Jacksonville, St. Pete, and Tampa. 

Take control of your contracts by working with a top construction contract lawyer. Give us a call today!