3/20/11: Arbitrate Or Litigate

Housing Counsel

By: Benny L. Kass

You have a problem. It can be with your contractor who claims you still owe him money for the work. Or with the persons who signed a real estate contract to buy your house, but at the last minute did not go to settlement and now want their earnest money returned.

How can those disputes be resolved? Obviously, litigation is one answer, but that is time consuming, expensive and always uncertain. Often, the cost of litigation may exceed the amount of the controversy.

There are alternatives?

First, you can decide it just does not pay to fight. Pay the contractor or release the deposit and move on with the rest of your life.

Next, you can try mediation. This is a process whereby the parties meet with a neutral person who listens to both sides, and makes a recommendation. But mediation is not binding; either party can reject the mediators position, and you are back at square one.

You can also arbitrate the dispute. Because both parties must agree to this process, arbitration is binding. If the losing party does not comply with the arbitrator’s decision, a court of law will – in most cases – enforce it with a judgment.

Alternative dispute resolution – referred to as ADR – has become commonplace. In fact, many corporations – such as credit card companies – require arbitration in the event of a consumer dispute. There have been many court decisions on whether such “arbitration clauses” in boilerplate contracts are valid and enforceable. Some judges have held that unless the consumer fully understood the consequences of arbitration when they signed the contract, that clause cannot be enforced. However, other judges have taken the opposite position.

But where two parties have voluntarily signed a contract which requires arbitration, the Courts will generally not allow the dispute to be litigated. The public policy – as spelled out in the Federal Arbitration Act – is that the “courts favor arbitration”.

How does arbitration work? The leading organization in this field is the American Arbitration Association (AAA), although you are not required to use their services if the two parties can agree on a neutral party (or parties) to hear the matter. While most proceedings usually involve just one arbitrator, some times – especially if it becomes difficult to select just one neutral party – three arbitrators can be used. Each side selects one arbitrator, and those two select a third.

There is usually a cost involved in arbitration. The AAA charges an upfront fee (which is based on the amount in controversy), and the arbitrators will also charge a daily fee for their participation.

In a court of law, both parties are entitled to discovery. That means that you can submit written questions (called interrogatories) of the other side, require production of all documents that will be used in trial, and even take depositions of all relevant persons. A deposition is where the plaintiff or the defendant (or even a potential witness) will be required to answer questions, under oath, before a court authorized stenographer, who will prepare a written transcript of the proceeding which can subsequently be used at the trial.

In arbitration, however, discovery is at the discretion of the arbitrator.

Court proceedings are very formal. Arbitration is relatively informal. The parties meet with the arbitrator at an agreed location and sit around a conference table. Sometimes, the arbitrator will have been provided background information of the dispute by both parties. The complainant presents his/her case, the respondent follows with its position, and the arbitrator issues a written opinion. If the case is complex – or requires legal research by the arbitrator – the decision may not be immediately provided.

Once the decision is made, the losing party must comply with it. If this does not happen, the winner has the right to go to court to enforce the decision.

For a long time, I was a strong advocate of the arbitration process. Over the years, however, I have changed my mind. Some times, arbitration can be as expensive as litigation. In a court of law, there are a number of due process protections afforded both sides, which may not be available with arbitration. The Rules of Evidence — no matter how archaic they may seem — will exclude certain evidence which has no place in a courtroom. For example, hearsay evidence, where one person testifies what another has told him or her, is generally not admissible in court.

In an arbitration proceeding, however, the arbitrator has the discretion to 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.

In a court of law, 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. Should you opt for arbitration, insist on receiving a written decision at the end of the proceeding.

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 appellate 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. Unless the losing party can show that the arbitrator was not impartial and did not disclose facts which would otherwise have disqualified him, or can prove that the award was procured by corruption, fraud or other undue means, a court of law will not overrule the arbitration decision.

Clearly, there is merit to arbitration in many instances. If a dispute is in the $5-$20,000 range it may not pay to spend the same amount of money for legal fees in litigation. Often, however, small claims courts are the best means to resolve small disputes.

In Maryland, Virginia and the District of Columbia, if your claim is for $5000 or less, you can use the services of the Small Claims Court. (In Maryland, it is known as the District Court , and in Virginia referred to as the Small Claims Division).

Your claim is for $9,000. If you are willing to reduce your claim down to $5,000, you do not need an attorney to file in the Small Claims Court where your property is located. Often, the mere filing of the lawsuit will spur the other side to try to reach an amicable settlement.