Let's Talk: The Pros and Cons of Arbitration over Litigation

The Yonkers co-op's contract called for a three-step process to be run by the New York-based, not-for-profit American Arbitration Association (AAA). The first step was an informal attempt to have the engineer resolve the dispute with the contractor. That failed. The second step was non-binding mediation between the co-op and the contractor with an AAA mediator. But the contractor proved uncooperative, and the contractual 60-day time limit on the mediation elapsed without resolution.

The Ties That Bind

Next came binding arbitration, which is usually less expensive and time-consuming than litigation. In a typical case, after paying a non-refundable fee (ranging from $750 to $2,000, depending on the number of arbitrators), the parties work together to agree on the parameters of the process. If the two parties can't agree on an arbitrator, the AAA can appoint one. The parties must share their evidence with each other and present copies to the arbitrator prior to a formal hearing.

"There are two big advantages to arbitration," says board president John Kolenda (right), a real estate attorney. "When you do litigation, you spend a tremendous amount of time in discovery, producing documents and evidence. In litigation, that would have taken us a year, minimum. And second, in every litigation, the judge who handles the discovery may or may not handle the trial. It's a crapshoot. Some judges are great, some are terrible. With AAA, you get a list of potential arbitrators and you get to choose one, or three, based on their area of expertise. And they must disclose if they have any connections to either party."

In large projects, the decision whether to arbitrate or litigate can be complicated, says Dan Rice, the attorney retained by the co-op. "In a smaller project, arbitration is useful because it limits expense and brings rapid resolution.

On the Other Hand...

Having said that, some lawyers feel arbitration doesn't bring about a just result." Kenneth Block, a partner in the law firm of Tannenbaum Helpern Syracuse & Hirschtritt, explains that "when there are more players involved and the disputes are more complex, arbitration can be just as time-consuming and costly as litigation. You have to pay fees, pay up to three arbitrators, sometimes as much as $500 an hour. And it can drag out. If you go to trial, you continue until it's done. And in court, you have the right to appeal."

You end up in court

anyway because 

you can't enforce

an award without

a court's confirmation.

That said, Block still regards litigation as a last resort. "I want to resolve disputes without litigation or arbitration," he says. "If there is an issue and the parties don't resolve it, I bring up the cost of lawyers and court costs — and I find that the desire to avoid those is an incentive to resolve the matter. Sometimes when we're already in litigation, in the discovery process, I might suggest bringing in a mediator and trying to resolve it. If that fails, we might go into arbitration, or back to litigation."

In the co-op's case, the contractor failed to show at the hearing, while the board's engineer spent five hours laying out the evidence. In the summer of 2011, two years after the repair job was supposed to be completed, the AAA arbitrator awarded the co-op $230,000, about two-thirds of what it had sought. Now came the last hurdle: collecting the money.

Cashing In

"Now we get to the downside of arbitration," Kolenda says. "You end up in court anyway because you can't enforce an award without a court's confirmation. We had to file a lawsuit in state supreme court to get confirmation of the arbitrator's award."

In court, a judge's decision produces a judgment — a legally binding document specifying who owes what to whom. A marshal or sheriff is legally empowered to take the money from the losing party's account and transfer it to the winner's — if there is any money. In arbitration, the arbitrator produces an "award," which has no binding legal power. When confronted with the demand for $230,000, the contractor simply refused to pay. So the co-op had to go to court, after all.

Getting an award converted into a legally binding judgment is "a fairly quick process," according to one lawyer. Even so, the contractor argued that the award was invalid because the mediation process had been mishandled — a baldly technical ploy. In a 12-page decision, a supreme court judge ruled in the co-op's favor. The contractor appealed the ruling, and the appellate court ruled in favor of the co-op. Nearly two years after firing the contractor, the cooperative finally collected its money.

Kolenda estimates the co-op spent between $10,000 and $15,000 on the arbitration — and estimates that the bill would have been three or four times higher if the board had gone to court at the outset. 

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Photo by Jennifer Wu.