Tuesday, June 17, 2014

American Arbitration Association Announces New Supplementary Rules for Construction Cases

On June 15, the American Arbitration Association rolled out a new set of supplementary rules aimed at addressing complaints about the increasing costs and durations involved in construction arbitration for those claims that total less than $5 million.  Called The Supplementary Rules for Fixed Time and Cost Construction Arbitration, these supplementary rules are intended to allow the parties to calculate maximum fees for the arbitrator and for the AAA's administration fees at the beginning of their arbitration. 

A copy of the rules is located at this link (note: this link leads to a PDF of the rules).  

What is not new in these rules?  First, the Supplementary Rules do not change how arbitrations involving claims of less than $75,000 are handled.  Those smaller claims have been -- and will remain -- decided by the submission of documents to a single arbitrator.  Second, the Supplementary Rules do not affect large claims of over $5 million.  

What is new?  The Supplemental Rules include several schedules setting forth the fees to be charged based on the size of the largest monetary claim in the case.  For example, using the largest group of claims -- above $1 million to a maximum of $5 million -- AAA Administration Fees will be capped at $10,000.  The maximum days from the claim being filed to the award is 360.  The maximum number of hearing days is limited to ten, and arbitrators are limited to a maximum of 40 study hours compensated at a maximum rate of $350 per study hour.  

Further, the maximum total arbitrator fees are capped at $52,000, not including travel-related expenses and costs incurred based on the remaining fee schedules.  The additional fee schedules include costs for administrative conference calls, site visits, and reviewing post-hearing briefs.  For claims of over $1 million to a maximum of $5 million, administrative conference call arbitrator fees and post-hearing review of briefs are each capped at $1,400 at $350 per hour over a maximum of four hours respectively.  For site visits, a maximum of 8 hours at $350 per hour is allowed for a total fee to the arbitrator of $2,800.

To invoke the procedures under these Supplementary Rules, parties may include provisions within their contracts to provide for this relative cost certainty.  Alternatively, the parties to an existing arbitration may choose to apply the Supplementary Rules to a dispute through a joint submission to the AAA that the parties wish to proceed under the Supplementary Rules.

Another new wrinkle in the Supplementary Rules relates to the notices provided by AAA related to arbitration-related communications.  The AAA requires parties under Supplemental Rule SR-2 to identify a representative other than their attorney -- for example, a company executive or in-house counsel -- identified as the "designated employee" to be included on all communications via e-mail. In the Corporate Counsel article regarding the new rules, AAA construction division vice president Rodney Toben stated his belief that this designated person will "be able to track the case, because they are going to be receiving those communications throughout the life of the case." Toben stated further that the AAA believes that it is "very important" that in-house counsel is kept in the loop on the arbitration process.

In an effort to streamline the procedures, several other Supplemental Rules are worth noting. Under Rules SR-5 and SR-6, the statement of claim and any counterclaims are limited to no more than five pages.  Further, SR-6 limits amendments to either the claim or counterclaim to the time period of thirty days following the filing of the counterclaim, though this time may be extended or changed only by the arbitrator in his or her determination.  

Under SR-9, the parties and the AAA will hold an administrative conference within three days of the filing of the Arbitration Demand (or as soon thereafter as is practicable).  The rule states that this administrative conference is meant to allow the AAA and the parties to explore administrative details and, most importantly, to establish an efficient means to selecting the single arbitrator by ascertaining the parties' preferred arbitrator qualifications.  Within two days of the administrative conference, the AAA will provide a list of at least 10 prospective arbitrators to the parties.  

To select the arbitrator -- and to agree on such issues as the time, date, and place of hearing, the number of days for the arbitration and the allocation of those days between the parties, the time period for and limitations on discovery, and the date by which discovery disputes must be submitted to the arbitrator or be waived -- the parties are required to engage in a Meet and Confer Conference under Rule SR-11.  Rather than relying on the parties to cross out those names that are not acceptable without any discussions with the other party, the Meet and Confer Conference requires the parties to agree on three potential arbitrators ranked in order of preference.  After that, the AAA contacts the prospective arbitrators in order to serve.  If none of the three arbitrators on the list are willing to serve, then the AAA appoints an arbitrator itself.

If the parties fail to reach agreement on any or all of the items set forth in Rule SR-11 at the Meet and Confer Conference, then Rule SR-12 provides that the AAA will appoint an arbitrator off its National Roster of Construction Neutrals.  Within seven days thereafter, the parties may request an administrative call with the arbitrator to resolve any other open issues from the Meet and Confer Conference.

Finally, another interesting twist in the Supplemental Rules is the procedure when a party fails or refuses to pay its share of the arbitration fees.  Under the current Construction Industry Rules, rule R-56 provides that parties cannot be precluded from pursuing their claims even though they have refused or have failed to pay the arbitrator compensation or AAA administrative charges in full.  To make sure that the arbitration goes forward, the AAA generally asks the other party to the arbitration to pay the fees that the first party has not paid.  In many situations, this is an untenable position for a party to be put in -- paying up front for the other party's right to assert a counterclaim against them generally is not something most business people wish to do.  Under the Supplemental Rules, however, Rule SR-22 states that, "[f]ailure of a party to pay requested fees or deposits without good cause shown shall result in a default award. . . . The party seeking a default award must prove its damages to the arbitrator at a scheduled hearing."  

There are a number of other procedures which are vital to the arbitration process which are altered under these Supplemental Rules.  Before using these rules, the parties and their counsel need to review the processes closely to make an informed determination that following these faster-track rules is in the best interest of the parties in resolving their dispute.

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