Contracts & Disputes

Arbitration vs. Litigation: What Contractors Should Know

The usual framing — arbitration is faster and cheaper, litigation is slower and more thorough — is not wrong, but it is not what decides most construction disputes. What decides them is the contract clause, and then two California statutes that most contractors have never heard of. One can defeat an arbitration clause entirely in exactly the multi-party situations construction produces. The other can strip the right to compel arbitration from the party who drafted the clause. This guide, reviewed by Jayson R. Elliott, covers both.

Contracts & Disputes

Start with the clause

Whether a dispute goes to arbitration is decided first by what the contract says, and construction contracts vary enormously. Some require mediation before anything else. Some require arbitration. Some require mediation then arbitration. Some are silent, which means court.

Two practical points before the law. Where a contract requires mediation as a precondition, skipping it can carry consequences beyond procedure — on some contracts a party who refuses or skips a required mediation step can lose the right to recover attorney fees even after prevailing. And a clause the contractor has never read is still binding on the contractor.

The general rule: courts enforce arbitration agreements

Code of Civil Procedure section 1281.2 provides that on petition of a party alleging the existence of a written agreement to arbitrate and that a party refuses to arbitrate, the court shall order the parties to arbitrate if it determines that an agreement exists — unless it determines that the right to compel arbitration has been waived by the petitioner, or that grounds exist for rescission of the agreement, or that subdivision (c) applies.

That is a strong default. California courts enforce arbitration agreements, and a contractor hoping to avoid one because they would prefer a jury is unlikely to succeed on preference alone.

§1281.2(c): the provision built for disputes like construction

Subdivision (c) is unusual to California and it matters more in construction than in almost any other field.

It applies where a party to the arbitration agreement is also a party to a pending court action or special proceeding with a third party, arising out of the same transaction or series of related transactions, and there is a possibility of conflicting rulings on a common issue of law or fact. The subdivision expressly includes an action initiated by the party refusing to arbitrate after the petition to compel was filed, provided it was initiated on or before the hearing date.

Consider how ordinary that fact pattern is on a construction project. An owner has an arbitration clause with the general contractor. The subcontractors, the suppliers, and the design professional are not parties to that clause. A defect claim implicates all of them on overlapping issues of causation and scope. That is the situation subdivision (c) was written for.

The four things a court can do

Where the court determines that subdivision (c) applies, the statute gives it four options. It may refuse to enforce the arbitration agreement and order intervention or joinder of all parties in a single action or special proceeding. It may order intervention or joinder as to all or only certain issues. It may order arbitration among the parties who have agreed to arbitrate and stay the pending court action. Or it may stay the arbitration pending the outcome of the court action.

The first of those is the one to register: a court can decline to enforce an arbitration clause the parties actually signed, and consolidate everything into one action instead. An arbitration clause in a construction contract is therefore less of a guarantee than contractors are often led to believe.

Note the carve-out in the statute: subdivision (c) does not apply to an agreement to arbitrate disputes as to the professional negligence of a health care provider made under section 1295.

The fee trap: §§1281.97 and 1281.98

These provisions are usually discussed as employment law, and contractors are rarely told they apply to them. They can.

Section 1281.97 provides that in an employment or consumer arbitration requiring the drafting party to pay certain fees and costs before the arbitration can proceed, if the fees or costs to initiate the arbitration are not paid within 30 days after the due date, the drafting party is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration under section 1281.2.

Section 1281.98 applies the same structure to fees required to continue an arbitration already under way: if those are not paid within 30 days after the due date, the drafting party is in material breach, is in default, and waives its right to compel the consumer to proceed with that arbitration.

The consequences run further than waiver. The consumer may withdraw the claim and proceed in court, with the statute of limitations tolled as of the first filing; may compel arbitration with the drafting party paying reasonable attorney’s fees and costs; may petition to compel the drafting party to pay the fees; or may pay the drafting party’s fees and recover them in the award without regard to the merits. Section 1281.99 provides for sanctions.

Why this reaches contractors

The provisions apply to “consumer” arbitration, and a residential home improvement contract with a homeowner is the kind of agreement that raises the question. The party who drafted the arbitration clause is the drafting party — and on a residential job that is very often the contractor, using their own contract template.

The result is counterintuitive and worth stating plainly: a contractor who puts an arbitration clause in their own contract may be the party carrying the fee obligation and the 30-day deadline, and may lose the right to enforce their own clause by missing an invoice. Whether these sections apply to a particular agreement is a legal question that depends on the contract and the parties, and it is worth asking before drafting a clause rather than after receiving an invoice.

A 2026 development

The strictness of the 30-day rule has been heavily litigated, including on whether the Federal Arbitration Act preempts it. In a 2026 decision the California Supreme Court is reported to have held that the rule is not preempted by the FAA, but that it cannot be applied in a rigid, automatic fashion — resolving a split among the Courts of Appeal.

That development softens the edges of an otherwise unforgiving rule, but it does not make the deadline safe to miss. A party relying on relief from forfeiture is litigating a question it could have avoided by paying an invoice.

The trade-offs, honestly

Where the choice is genuinely open, the conventional comparison holds up reasonably well, with qualifications.

Arbitration is usually faster and more private, and the arbitrator can be someone with construction experience — which matters in a technical dispute. It has limited discovery, which cuts both ways depending on who needs the documents. And arbitration awards are very difficult to appeal, so an adverse result is usually final.

Litigation is slower and public, offers full discovery, and preserves appeal rights. In multi-party defect cases it may be the only forum that can resolve everything at once, which is the practical thrust of section 1281.2(c).

There is no general answer. A payment dispute between two parties with a written contract and clean documentation is a good candidate for arbitration. A defect claim with four trades, a design professional, and two insurers usually is not.

What to look at in your own clause

Does the contract require mediation before arbitration or filing, and what does it say about the consequences of skipping it?
Who is the drafting party? If it is you, sections 1281.97 and 1281.98 are a question to raise with counsel.
Who pays the arbitration fees under the clause and under the provider's rules?
Which provider and which rules, and are the fees proportionate to the value of the disputes likely to arise?
Does the clause bind the subcontractors, or only the owner? Where it does not, section 1281.2(c) becomes live on any multi-party claim.
Is there an attorney fee provision, and does it apply in arbitration as well as in court?

Before you ask

Questions contractors ask first.

Can a California court refuse to enforce an arbitration clause in a construction contract?

Yes, in defined circumstances. Code of Civil Procedure section 1281.2(c) applies where a party to the arbitration agreement is also party to a pending court action with a third party arising out of the same transaction or series of related transactions, and there is a possibility of conflicting rulings on a common issue of law or fact. The court may then refuse to enforce the agreement and order joinder of all parties in a single action, among other options.

Why does §1281.2(c) matter so much in construction disputes?

Because construction generates exactly the fact pattern it addresses. An owner may have an arbitration clause with the general contractor while the subcontractors, suppliers and design professional are not parties to it, and a defect claim implicates all of them on overlapping issues. Code of Civil Procedure section 1281.2(c) is the provision that lets a court consolidate rather than split such a dispute.

Can a contractor lose the right to enforce its own arbitration clause?

Potentially. Code of Civil Procedure section 1281.97 provides that in an employment or consumer arbitration, if fees required to initiate arbitration are not paid within 30 days after the due date, the drafting party is in material breach, is in default, and waives its right to compel arbitration. Section 1281.98 applies the same rule to fees required to continue an arbitration already under way.

Do the arbitration fee rules apply to a contractor who drafted the contract?

They can. Sections 1281.97 and 1281.98 apply to consumer arbitration and attach the obligation to the drafting party — which on a residential job is very often the contractor using their own template. Whether they apply to a particular agreement depends on the contract and the parties, and it is a question worth asking before drafting a clause rather than after receiving an invoice.

Is arbitration better than litigation for a construction dispute?

It depends on the dispute. Arbitration is usually faster and more private, allows an arbitrator with construction experience, has limited discovery, and produces awards that are very difficult to appeal. Litigation is slower and public but offers full discovery, preserves appeal rights, and may be the only forum able to resolve a multi-party defect claim in one proceeding.

What happens if a contract requires mediation and a party skips it?

That depends on the contract, and the consequence can be more than procedural. On some construction and real estate contracts a party who refuses or skips a required mediation step can lose the right to recover attorney fees even after prevailing, which is a reason to read the clause before deciding how to proceed.

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If this describes your situation, an attorney affiliated with Bay Legal PC, CA Bar No. 332479, can review it with you.