The Collective Cost Paid for Arbitration’s Numerous Benefits

This article was originally published in the Daily Journal of Commerce on December 19, 2024.

Arbitration agreements have become commonplace in construction contracts. As a result, a significant portion of construction disputes are resolved privately through arbitration rather than in public courts.

Arbitration has many benefits ranging from cost savings and faster resolutions to a private forum that keeps disputes from spilling out into the public arena to adjudication by an experienced construction practitioner. There is good reason why most construction lawyers recommend arbitration to their clients and why those clients regularly come away satisfied with that recommendation.

But for all the considerable benefits of arbitration, there is a downside: the increasing prevalence of arbitration has contributed to a slowdown in the development of construction law.

Construction law is an amalgamation of principles from various sources of law. Common-law contract and tort doctrines, statutes passed by Congress or the state legislature, and regulations issued by federal and state agencies all have important parts to play. But how those common-law doctrines work in the construction context isn’t always clear. And even the best-worded statutes and regulations can’t possibly provide clear answers for every scenario that will arise.

As a result, construction case law provides an important good to the industry as a whole—it fills in the inevitable gaps left by other sources of law. Case law, which is the product of opinions written by judges addressing the lawsuits before them, provides valuable guidance about how legal doctrines, statutes, and regulations apply to real-world circumstances. And parties can use those judges’ opinions to help predict how those same doctrines, statutes, and regulations will apply to their circumstances. That, in turn, delivers greater certainty to the industry and helps owners and contractors alike realize the considerable savings that can flow from that certainty.

Arbitration, however, does not generate case law. So, if an arbitrator issues a well-reasoned decision interpreting a statute and applies it to that case in a way that could guide the industry’s conduct in the future, the industry usually can’t benefit.

This isn’t a hypothetical issue. Take Oregon’s prompt pay statute, ORS 701.630, as one example. Prompt pay statutes are often at issue in construction litigation. And yet, in the more than two decades in which Oregon’s prompt pay law has been on the books, it has never once been cited—let alone analyzed—in any reported case. So how “material” must a contractual provision be to justify withholding billing under ORS 701.630(4)(h)? Do the “costs and reasonable attorney fees” authorized by ORS 701.630(7) include expert witness fees? Courts have not provided clear answers.

Although arbitration isn’t the only factor holding back the development of construction law, it is undoubtedly a meaningful contributor. Fixing this, however, presents a collective action challenge for the industry. The benefits of arbitration to industry participants are real and significant, so many can and should consider arbitration as an option. But the industry as a whole benefits from well-developed case law.

The challenge, then, is to find a way to advance the law while keeping the benefits of arbitration available to industry participants. Should the industry consider opening avenues for publicizing arbitration orders that address novel legal issues—perhaps on an anonymized basis? Should the industry support a more robust body of scholarly work to provide persuasive authority to fill some of the gaps left by the absence of case law? Or is a slowdown in the development of construction case law an acceptable industry-wide price to pay for the many party-specific benefits of arbitration?

Whatever the path forward, the conversation about the use of arbitration in the construction industry should consider the costs to the development of construction law along with the benefits of arbitration.