Home Contractor Claims - to Litigate or to Arbitrate (From the Contractor's Point of View)?

Unless a contractor has a provision in his contract that entitles him to attorney's fees when pursuing a claim against a homeowner, at least in Massachusetts, the contractor will be forced to pay his attorney's fees whether he is choosing to arbitrate or litigate. If the homeowner opts to file with the Home Improvement Contractor Arbitration Program in MA, then neither side is entitled to attorney's fees.

So, let's assume the following scenario: The contractor has fully performed, and the homeowner now refuses to make the final payment, or the homeowner is withholding payments, or the homeowner has unlawfully terminated the agreement (the contractor should have the terms for termination included in her contract). What should the contractor do?

First of all, do not underestimate the stress and impact of a lawsuit (the subject of an upcoming post). It should always be one's goal to try to resolve disputes without a formal proceeding. Contractors should attempt to communicate with clients so that irresolvable conflicts do not arise. However, there are situations where the communication does break down and it is helpful to have a plan if this occurs.

First of all, most states offer a powerful option for contractors/construction workers, and that is the mechanic's lien. The procedures required for filing liens vary by state, so it behooves contractors to try to familiarize themselves with their rights under the law. You should also form a relationship with an attorney so that you do not have to frantically search for one if you need to file a lien.

The contractor should also consider sending a demand letter to the homeowner. Although this is not required, it is helpful to spell out your side of the story and understanding about how the work has progressed, what (if anything) is left to be completed and why payment is due.

Then, consider whether you want to arbitrate or litigate if all other options fail. Actually, the time to decide whether to arbitrate is when the contract is drafted, but the homeowner might agree to arbitrate even if there is no arbitration provision in the contract.

Advantages of arbitration: The parties choose the arbitrator (as opposed to a judge, where there is usually no choice), they choose the location and timing of the arbitration, they can elect an arbitrator with expertise in construction, and the process is frequently more expedient and less expensive than litigation.

The main disadvantage? Arbitration is usually binding and not appealable. That means that the parties are subject to the whims of the arbitrator, and there may be little or no discovery (the exchange of information prior to the hearing), and in some states, arbitrators can disregard the law. The bases for appealing an arbitration are so limited (bias or fraud on the part of the arbitrator and in some states, manifest disregard of the law) that one must assume that the arbitration will be final.

Litigation is a well-established process with rules of evidence and legal precedent. The parties all work with the same rules and there is an opportunity to exchange information by sending out interrogatories (written questions), document requests, requests for admission and taking depositions. This gives each side the chance to continuously assess the strength of their cases and consider whether settlement is an option. If one is unhappy with the outcome, then appeals are possible. However, one should keep in mind that parties usually do not appeal because the process is costly.

The main problem with litigation is that costs can spiral out of control depending on how the other side approaches their case. If they request numerous depositions for example, costs can quickly accumulate. In addition, one is subject to the court's timetable, and hearings and trials frequently get postponed even though the attorneys have prepared. They will then need to prepare again which adds to the cost.

All in all, it is better to avoid disputes altogether. However, it is better to be well-informed about one's alternatives and think them through before an irresolvable conflict occurs.

P.S. I always appreciate questions or comments.