Insight

Making the Case for Arbitration of Commercial & Construction Disputes

Published on: June 29, 2023

Clients frequently ask their attorneys whether they should arbitrate their commercial and construction disputes instead of litigating in the court system. This question arises either when drafting the contract or, if the contract contains an arbitration clause, once a claim occurs. Claims that require analysis of complex contracts, government regulations, and technical issues, such as those that arise in the construction, environmental, and energy industries, are well-suited to arbitration.

Parties typically want the quickest and least expensive means to a fair result. This is true even for highly sophisticated businesses where the amount in dispute is high. Arbitration gives parties a high level of control in the dispute resolution process. It is specifically designed to provide an alternative to the onerous and expensive discovery and trial procedures required in litigation. Parties can tailor the discovery and schedule to the needs of the case, which drastically reduces the overall time and cost of reaching resolution.

Arbitration also allows parties to select an arbitrator with specialized knowledge necessary to decide the case, which is especially beneficial in complex cases. Because parties agree to arbitration in their contract, they have control over the process in a way that is not available in litigation. For example, the parties may designate the administrative body and applicable rules, require a three-arbitrator panel for a complex case, name a particular arbitrator, require confidentiality, or dictate the timeframe for the hearing.

The following four factors are key considerations in assessing arbitration:

Expertise of decision-maker – One of the most important benefits of arbitration is the parties’ ability to select the arbitrator. This affords parties an opportunity to designate a decision-maker with specific qualifications and expertise needed to understand the contracts, legal issues, engineering and technical facts, and expert evidence to be presented. The parties can also select someone with strong management skills to handle complex matters or difficult decisions. The benefit is two-fold: Fewer resources are needed to educate the decision-maker in the critical industry background information, and the risk of an unreasonable ruling is reduced.

Timeframe for resolution – The median time to resolution in commercial arbitrations is less than one year, whereas the time to trial in federal court is two to three years.* Because appeal rights in arbitration are limited, the award typically terminates the dispute and the expense. However, after a trial, the case could linger through the appeal process for several more years, thus increasing the expense.

In addition to direct cost saving, decreasing the resolution time creates an indirect cost benefit to industry. Because “time is money,” shaving years off the process results in significant savings that likely can be better used advancing the business than litigating a case. Businesses lose billions of dollars every year because of the inherent delays in the litigation process.^ These losses stem from uncertainty in the outcome, capital set aside as reserves for potential losses, open claims reported to insurers, investors, potential clients and auditors, and loss of employee hours and administrative costs expended in litigation. Arbitration offers an alternative to mitigate and control these costs.

Expense – Arbitration typically costs more upfront than litigation. The parties must pay the administrative costs and arbitrator fees, which vary depending on the time and complexity involved, but generally range from $20,000 for a $100,000 claim to $60,000 for a $1 million claim. The costs are shared among the parties, which decreases the per-party cost in multiparty claims.

However, parties can control the cost of arbitration. Discovery, depositions, and document production in complex cases can come with staggering costs. In arbitration, the rules governing discovery and evidence are less formal. Additionally, discovery is more limited, which encourages a streamlined process and reduces costs and time significantly.

Risks – An often-cited risk of arbitration is the lack of appeal right. An arbitration award can only be vacated on limited grounds of fraud, corruption, misconduct, or where an arbitrator exceeds their power.~ However, if the initial decision-maker has expertise in the industry and law involved, the expectation is that the decision will be a well-reasoned one that the parties can accept.

In contrast, a major risk of litigating a complex commercial dispute is the fact-finder’s lack of understanding of the issues, the escalating potential for nuclear verdicts, and the appellate court’s limited power to correct factual findings.

In sum, arbitration is a good choice for dispute resolution where parties want to control the risk of an unreasonable outcome, reduce the time and expense of the process, and select a decision-maker with special expertise in their industry.

About the author: Mary Anne Wolf is an engineer and attorney. She is on the panel of commercial and construction arbitrators for the American Arbitration Association. Her goal as an arbitrator is to assist parties in managing their case for efficient resolution, give a high level of attention to each party’s position, and achieve a fair result.

References:

* AAA, Measuring the Costs of Delays in Dispute Resolution [online]; Micronomics, (March 2017), Efficiency and Economic Benefits of Dispute Resolution through Arbitration Compared with U.S. District Court Proceedings.

^ Efficiency and Economic Benefits, pp. 4-5, 16-23.

~ La. R.S. 9:4210 (LA Binding Arbitration Act); 9 USCA §10 (FAA).

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Insight

What's the Delay? Contractor Delay Damages Under the Public Bid Law

Generally, a provision in a construction contract for private work limiting the contractor's right to recover additional costs arising from delays outside of the contractor's control may be enforceable. However, under the Public Bid Law, such a provision has been found to be against public policy. La. R.S. 38:2216 prohibits any public contract provision that purports to waive, release or extinguish the rights of a contractor to recover delay damages if the delay was caused in whole or in part by the acts or omission of the public entity.

A recent First Circuit decision struck down a contract provision that purported to limit a contractor's right to damages in a public contract. In F.H. Myers Const. Corp. v. State, Div. of Admin. Office of Facility Planning & Control, 2013-2153 (La.App. 1 Cir. 6/18/14), reh'g denied (July 22, 2014), a general contractor brought an action against the State for breach of contract, seeking payments for extended-fixed job site overhead.

The State argued that the contract contemplated that the contractor could recover extended-fixed job site overhead only if there was a complete stoppage of work solely attributable to the State. The contractor argued that the contract provision was in violation of La. R.S. 38:2216.

The court found that La. R.S. 38:2216 contemplates that a contractor who is a party to a public contract shall be able to recover for any delay they may suffer from the fault of the State entity. Because the contract waived the contractor's rights to seek damages for extended-fixed job site overhead for any delay short of a complete stoppage of work, the contract imposed a stricter limit on damages than the statute allows. The court also noted that the contract only allowed for damages where the State was 100% at fault, whereas the statute allows recovery even if the State is only partially at fault. As such, the provisions at issue were held to be void and unenforceable.

Insight

Back to the Beginning - Veil Piercing

The longstanding rule that the analysis for "piercing the corporate veil" of an LLC is substantially the same as the analysis for piercing the veil of corporations has been called into question by the recent Louisiana Supreme Court decision in Ogea v. Travis Merritt and Merrit Construction, LLC, 2013-1085, --- So.3d ---. In Ogea, the Court addressed "the extent of the limitation of liability afforded to a member of an LLC" and the statutory basis for exceptions to this limited liability.

Typical of a veil piercing case, the Ogea Court began its discussion by citing familiar Louisiana cases on the topic: Riggins v. Dixie Shoring Co., Inc., 590 So.2d 1164 (La. 1991) and the more recent Charming Charlie, Inc. v. Perkins Rowe Associates, L.L.C., 11-2254 (La. App. 1 Cir. 7/10/12), 97 So.3d 595. However, the similarities stopped there.

The Court noted that traditional veil piercing doctrine was not invoked by the lower courts or the plaintiff. Instead, the Court's analysis turned on the interpretation of an infrequently cited statute within Title 12 that addresses the limitation of liability for LLC members. La. R.S. 12:1320(A) states that the liability of members and managers of an LLC "shall at all times be determined solely and exclusively by the provisions of this Chapter." Subsection (B) provides that members and managers are generally not liable for the debts, obligations, or liabilities of the LLC. Subsection (D) prescribes the exceptions to this limitation of liability, to include fraud, breach of professional duty, and any other negligent or wrongful act by the member or manager.

Addressing this statute as a matter of first impression, the Ogea Court applied the statute to the facts of the case. Merritt Construction, LLC was hired to build a home for plaintiff, Mary Ogea. As part of the process, Ms. Ogea requested that she have a friend prepare the site for the foundation. Travis Merritt, the sole member of Merritt Construction, LLC, informed Ms. Ogea that having someone else prepare the site would waive the warranty. Mr. Merritt subsequently operated the bulldozer to prepare the site for a subcontractor to pour the concrete slab. A dispute arose when a concrete contractor informed Ms. Ogea of problems with the home's foundation. Under these facts, the Court concluded Mr. Merritt was not personally liable under the exclusive exceptions to limited liability found in La. R.S. 12:1320(D).

The first exception, fraud, was rejected because no evidence in the record supported a finding that Mr. Merritt committed fraud.

Turning to the next exception, the Court also rejected the argument that plaintiff breached a professional duty as the sole member of the construction company. The professions recognized in Louisiana's corporate laws do not include individuals who perform construction work. Thus, Mr. Merritt could not breach a "professional duty" as contemplated by the statute. The Court also noted that the contract at issue only recognized Merritt Construction, LLC as a licensed contractor and did not reference any contractor's license held by Mr. Merritt personally.

Finally, the Court addressed the final exception to limited liability: "negligent or wrongful act." Plaintiff asserted that the term "negligence" in the statute only required proof of a tort by the individual. The Court quickly rejected this argument, noting that such an interpretation would improperly expand the liability of LLC members.

Rather, the Court set forth four factors to assist in the analysis under the last "negligence" exception: 1) whether a member's conduct could be fairly characterized as a traditionally recognized tort; 2) whether a member's conduct could be fairly characterized as a crime, for which a natural person, not a juridical person, could be held culpable; 3) whether the conduct at issue was required by, or was in furtherance of, a contract between the claimant and the LLC; and 4) whether the conduct at issue was done outside the member's capacity as a member.

It appears from the Ogea Court's focus that the prior analysis for "piercing the veil" of an LLC has perhaps been set aside and replaced with a new analysis which considers the exceptions to limited liability listed in La. R.S. 12:1320. However, the Court failed to expressly state that the prior analysis is improper and therefore no longer applicable. For now, it appears that the rules for piercing the veil of an LLC have changed but the true impact of Ogea remains to be seen.

Insight

Supreme Court Clarifies Requirements of Unjust Enrichment Claim

Under Louisiana law, unjust enrichment is a cause of action that is based in equity and provides that no one should be enriched at the expense of another. The elements of an unjust enrichment claim are: (1) an enrichment; (2) an impoverishment; (3) a connection between the enrichment and the impoverishment; (4) an absence of justification or cause for the enrichment and impoverishment; and (5) no other available remedy at law. The Supreme Court recently addressed the fourth element regarding the absence of justification for the enrichment.

In H & O Invs., LLC v. Par. of Jefferson Through Sheng, a grass cutting contractor entered into a contract with the Parish for grass cutting in certain areas. The Parish separately contracted with a second contractor for weed control of the same areas. During the contract period, the grass cutting contractor notified the Parish that there was unanticipated weed growth and suggested that the weed control contractor was not properly applying the herbicide. The grass cutting contractor alleged that its work became more expensive because of the weed control contractor’s failure to perform its contractual obligation.

The grass cutting contractor sued the Parish alleging unjust enrichment. The Parish filed an exception of no cause of action, claiming that there was no claim for unjust enrichment because a contract existed between the parties. The Fifth Circuit disagreed and held that the contractor could bring a claim for unjust enrichment because there was no contractual claim between the contractor and the Parish, as both parties fulfilled their contract obligations.

The Supreme Court reversed, noting that a claim for unjust enrichment requires a showing that there was an “absence of justification or cause for the enrichment.” The Supreme Court held that when a contract exists between the parties, it serves as the law between them, and that contract is the legal cause or justification for the enrichment. Therefore, the contract between the contractor and the Parish was in fact the justification for the enrichment such that it could not be “unjust.” The Supreme Court dismissed the contractor’s suit against the Parish.

Reference:

H&O Invs., LLC v. Par. of Jefferson, 24-554 (La. App. 5 Cir. 12/18/24), writ granted, decision rev'd sub nom. H & O Invs., LLC v. Par. of Jefferson Through Sheng, 2025-00086 (La. 5/20/25), 408 So.3d 958.

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