07/ 30/ 2004
by Jeffrey Moses
Recently, two business partners refurbished a small office building they purchased in northwest Florida. They bid the job in sections: hardwood flooring, electrical, plumbing, etc.
The subcontractor for the flooring ($25,000 worth of beautiful red oak) botched the job badly. Apparently, the subcontractor improperly installed the under flooring, resulting in buckling of the oak planks, which were nailed to the under flooring. When the subcontractor refused to repair the work without additional payment, the partners had to bring in another subcontractor to tear out the planks, repair the under flooring and install new planks.
A worst-case scenario developed between the partners and the original subcontractor who blamed the flooring manufacturer, saying the material had been substandard. The manufacturer disavowed responsibility, saying the subcontractor used inexperienced labor during installation.
The contract with the original contractor called for arbitration in case of dispute, rather than a trial before a judge or a jury. As arbitration got underway, the contractor stalled, using his on-staff attorneys to run up legal expenses for the partners. The partners quickly realized that in arbitration, the winning party couldn’t recapture attorney fees. They also realized that arbitration limits compensation to actual loss, with the slight possibility of additional compensation for lost business. It’s not possible, however, to collect punitive damages through arbitration. Ultimately, attorney fees ran almost as much as they collected in damages.
The lesson: When the other party to the contract is the only one who can botch the work, don’t sign a contract that stipulates arbitration rather than a trial in case of a dispute. What, after all, could the partners have done from their side that would result in a poor job? Clearly, a contract agreeing to binding arbitration was to the advantage of the subcontractor, who had attorneys on staff with nothing to do but delay, throw curves and run up attorney fees for the partners.
The section of a contract that states both parties agree to arbitration normally names the venue, or location, where the arbitration will take place. If this is at some distance from one of the parties, additional attorney fees and travel costs will be required. Also, an attorney near the venue may need to be hired. The cost of paying an attorney to travel for deposition or arbitration meetings is a considerable one.
Always consult with an attorney before signing a contract. Question the section about arbitration, or trial, and understand all eventualities before signing. One possibility that can be less expensive than arbitration is mediation, in which parties to the contract select mediators. Still, considerable legal costs may be involved -- little of which will be collected in an eventual settlement.
This column and all other items you read on NFIB.com are not legal advice. Always consult your own attorney before acting.
