In the past year, the Victor and CNA professional liability program has had some arbitration outcomes that were larger than expected given the claims that were asserted against the firms. We thought it important to provide some guidance on the matter since arbitration is a contractually authorized dispute resolution mechanism. We believe that for the majority of firms, litigation is the preferred adjudication mechanism. Firms should carefully examine the pros and cons of selecting arbitration as their dispute resolution method.
Every contract should have a good-faith negotiation provision
Every contract should incorporate a “good-faith negotiation” provision as the first step in resolving disputes. This provision serves as a foundational element in the dispute resolution process, encouraging parties to engage in earnest discussions before escalating matters to more formal adjudication methods. By establishing a framework for negotiation, contracts can foster a collaborative environment that may prevent disputes from escalating. Ideally, a good-faith negotiation provision should be followed by mediated negotiation, allowing the parties to explore amicable solutions with a mediator before resorting to more adversarial methods. If these efforts fail, adjudication becomes necessary.
Choosing litigation or arbitration to settle disputes
Many defense attorneys and claims specialists prefer litigation over arbitration in most situations. This preference stems from the fact that litigated disputes are often settled rather than taken to trial. In fact, only about 3% of all claims in the Victor and CNA program are resolved through trial, with most of these cases involving bodily injury or third-party property damage. By opting for litigation, parties retain the possibility of settling disputes, which often occurs after depositions when the facts become clearer. Additionally, pursuing litigation may compel plaintiffs to reassess their claims and potentially reduce their demands.
The choice between arbitration and litigation is a critical one as it can significantly impact the resolution of disputes. We have found that in multi-party arbitration proceedings, there is a tendency for arbitrators to apportion equal responsibility among the parties involved without particular regard to underlying responsibility. This decision can lead to unfair outcomes as it is unjust for the client, design professional, or contractor to bear responsibility simply because they are part of the arbitration process. Our perspective is that if the parties involved in the arbitration are limited and the dispute is simplified, there is a greater likelihood that responsibility will be assigned to the responsible party.
There are some situations where selecting arbitration as the dispute resolution mechanism makes sense for a design firm. Arbitration may be preferrable in the context of low-cost or highly technical claims against design professionals. Low-cost claims can have high expenses and legal fees that may end up significantly exceeding the cost itself. If arbitration offers a more streamlined process, it may reduce the overall cost of resolving a low-cost dispute. On the other hand, for highly technical claims, the selection of an arbitrator who understands the technical aspects of the profession can lead to more informed decision making. The arbitrator’s expertise can be invaluable in assessing the merits of a claim against prevailing industry standards and evaluating the technical details that may be central to the dispute.
You are free to select the dispute resolution mechanism prior to a claim
It is essential to note that there is no requirement for consent from the Victor and CNA program if you select arbitration as your dispute resolution mechanism prior to a claim or circumstance. Note, however, that complications arise when there is a contractual agreement to arbitrate or settle a matter through mediation, dispute review board, mini trial, or another voluntary method after a claim has been initiated. In such cases, the consent of the Victor and CNA program is necessary. This requirement for written consent only applies if arbitration is selected after a claim has been made.
Final thoughts
Incorporating a good-faith negotiation provision in contracts is vital for fostering constructive dialogue and resolving disputes amicably. While both arbitration and litigation have their merits, the choice between them should be made with careful consideration of the specific project characteristics. By understanding the implications of those two dispute resolution mechanisms, design firms can make informed decisions when negotiating dispute resolution provisions in their contracts with clients. Based on claims resolution experience, we think litigation is the more advantageous dispute resolution mechanism for most design firms.