An expert panel assesses the cost of arbitrating and litigating a hypothetical two-party construction dispute.
The key question everyone asks about arbitration is whether it is cheaper than litigation. The problem with answering this question is that rarely does one have the opportunity to arbitrate and litigate the same case. It is only possible under a statutory scheme providing for non-binding arbitration and allows a dissatisfied party in arbitration to seek a trial de novo.1 The only other basis of comparison is the rare instance in which a lawyer has the opportunity to arbitrate and litigate two similar cases.2
For this article, we asked three experienced construction litigators and arbitrators from different parts of the country-Joseph F. Canterbury, Jr., of Dallas; Christi L. Underwood of Orlando, Florida; and Howard D. Venzie Jr. of Philadelphia3-to estimate the claimant's cost of arbitrating or litigating in state court4 a hypothetical two-party construction dispute5 in order to see how they compare.
Wanting more than a cursory "bottom line" estimate, we asked our experts to first opine on how the case would be staffed by counsel and to set the attorney fee rate.
Then we asked them to identify the varied representational activities they typically see at each stage of construction arbitration and litigation, and then estimate the hours required to perform them. (We are not suggesting this is the "ideal" arbitration or litigation.) We asked them not to artificially increase the cost of litigation by adding litigation activities (e.g., a motion to join third parties).
Our experts determined that this hypothetical would likely be staffed by a mid-level partner, an associate and a paralegal. The hypothetical rates charged for their services are $300, $200 and $100 per hour, respectively.
We calculated the arbitrator's compensation using a $2,200 per diem rate, and the mediator's compensation using a $310 hourly rate. These rates represent an average of the rates charged by AAA arbitrators and mediators from different parts of the country.
Table 1, which represents the costs of the hypothetical arbitration, shows a total outlay for the owner of $94,500, while the costs of litigation, shown in Table 2, are 27% higher at $120,300. We show the estimated costs of the owner's outlay for mediation in Table 3 at $10,140, clearly the most economical choice.
Then, of course, there is the issue of appeals. An appeal as of right is an almost irresistible temptation in litigation. According to our experts, this would add another $25,000-$35,000 to the cost of resolving the dispute. By comparison, they think that the cost of preparing a motion to vacate or defending against one would cost between $5,000-$7,500.6
Although these cost estimates are undeniably speculative, our experts believe that the figures shown for arbitration are fair and reasonable. They have also pointed out that because arbitration is a flexible process, the estimated arbitration costs could be reduced by streamlining the proceedings to eliminate certain activities in Table 1. For example, the parties could agree, either in their arbitration agreement or in an early preliminary conference, that there would be no depositions or dispositive motions (which are rarely granted anyway) or post-arbitration briefs. If these steps are eliminated, the owner's costs in the hypothetical arbitration would be $81,500, while the litigation would cost 47% more ($120,300).
Another area of potential savings is attorney fees. More than half the cost of arbitration is attributable to lawyer time spent on the case. Attorney fees could be reduced by an agreement with counsel to staff the case with one attorney, with minimal delegation to associates and paralegals.
As to litigation costs, our experts believe their estimates are conservative because litigation tends to involve more activities than …