Should You Use the DRB or Go Straight to Arbitration?

Dispute Resolution Boards (“DRBs”) continue to grow in popularity, particularly for major infrastructure projects. As such, we can expect that construction lawyers will increasingly be advising clients on whether to send a dispute to the DRB or go directly to arbitration. In this post, we outline a few of the factors that may inform whether your client should submit a dispute to the DRB or go straight to arbitration.

DRBs (also known as “Review Boards”) are most common in major infrastructure projects. They typically consist of three independent and impartial experts, such as engineers. Lawyers can also make up the DRB. The DRB is actively involved in the project from its inception so its members are familiar with the parties and need little time to get up to speed on the events leading to a dispute.

When disputes arise, the parties may refer it to the DRB. The DRB will then typically investigate the dispute, hear submissions from each side through an informal process, and render either a binding or a non-binding opinion, depending on the nature of the DRB. The precise process followed by a DRB depends on the terms of the applicable contract.

DRBs usually play a very important role in major projects by dealing with issues as they arise on site. By providing prompt decisions, they allow construction projects to proceed without delay. Real-time prevention and resolution by the DRB often promotes open communication, trust, and cooperation between the parties.

When considering whether to refer a dispute to the DRB, clients may be concerned that most DRB decisions are non-binding recommendations. There is a risk the parties will still need to arbitrate (or even litigate) after a DRB recommendation is rendered. Fortunately, it appears that the vast majority of disputes resolved by DRBs do avoid further dispute resolution steps.¹

However, DRBs may also have some downsides. In Canada, there are reports that parties are increasingly seeking a lawyer to chair the DRB committee because of their knowledge of legal processes.² The emphasis on legal procedure may erode the cost and time-saving benefits of the DRB while leaving the parties without the benefits of arbitration, such as finality of the decision.

Moreover, the nature of the dispute may not be within the DRB members’ expertise. While members of the DRB with engineering expertise may be well positioned to adjudicate technical disputes, claims involving contract interpretation and other legal matters may be outside their expertise. Such disputes might be better left to an adjudicator with legal training.

Parties should also consider whether they will end up arbitrating or litigating related disputes. In one high profile project involving the construction of a subway station in Toronto, Canada, one dispute was resolved through the DRB but over 40 individual claims are still being litigated.³ If the parties are already incurring the expense of complex litigation, there may be little benefit gained by hiving off one issue for a separate hearing through the DRB.

The DRB’s heavy involvement in the project can sometimes be problematic too. Depending on the relationships that form on site, parties may benefit from the fresh perspective of an arbitrator who is new to the project. An arbitrator may alleviate any concerns about bias from members of the DRB who have worked on site for months or years.

Overall, DRBs are usually an excellent option for resolving disputes in real time on site. However, it is still important to weigh the other dispute resolution options carefully before choosing to proceed with the DRB.

Author Laura Brazil is a partner in the Toronto office of McMillan LLP. Her practice is focused on construction and real estate disputes. She primarily acts for owners and contractors but also represents subcontractors, material suppliers, designers and other members of the construction pyramid.

Author Anthony Labib is an articling student in the Toronto office of McMillan LLP. He is a graduate of Western University’s Faculty of Law.

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1 “Construction Dispute Resolution Arbitration and Beyond”, American Jurisprudence Trials, August 2021 Update, by Thomas H Oehmke and Joan M Brovins.^↩
2 https://canada.constructconnect.com/dcn/news/government/2019/10/dispute-resolution-board-use-on-the-rise-in-canada.^↩
3 Walsh Construction Company Canada v. Toronto Transit Commission, 2020 CarswellOnt 8055, 2020 ONSC 3688.^↩

Don’t Mess with Texas: 5th Circuit takes Litigators Back to Law School

 In the recent decision of Sayers Construction, L.L.C.v. Timberline Construction, Inc. and High Voltage, Inc., the Fifth Circuit affirmed a federal district court’s determination that it did not have jurisdiction to vacate an arbitration award in Florida. 976 F.3d 570 (5^th Cir. 2020). The court reminded us that jurisdiction really is power, just like lawyers everywhere learned in their very first civil procedure class in law school. After walking us through the trodden legal framework of Pennoyer, International Shoe, World-Wide Volkswagen, and Burger King, and hinting at the liberal policy of promoting arbitration, the court concluded, “this is Florida’s problem. Not Texas’s.” Sayers Construction, 976 F.3d at 574.

The case serves a friendly reminder of the importance of jurisdiction, especially in the context of arbitration. In this case, the Texas-based general contractor sought to vacate a Florida court’s enforcement of a Florida-based arbitration award. See id. at 572. Step one of the court’s analysis highlighted the most well-known limitation of the Due Process Clause when it comes to jurisdiction of out-of-state defendants: that of “minimum contacts.” See id. at 573. The court pressed that we must always ask whether our counterparts “purposefully avail[ed] [themselves] of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.” See id. (citing World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297-98 (1980)). Here, the general contractor defendant pressed that this was a standard breach of contract dispute where “minimum contacts” existed because (1) subcontractors solicited a business relationship with the general contractor in Texas, (2) the subcontractors contracted with the general contractor, which has an office in Texas, (3) subcontractors mailed invoices to general contractor’s office in Texas, and (4) the parties’ contract has a Texas choice-of-law clause. Id. The court found that none of these facts established “minimum contacts.” Importantly, in response to facts (3) and (4), the Fifth Circuit held that, mailing payments, especially when all of the work is performed outside the state, is insufficient to establish “minimum contacts” and choice-of-law clauses are probative, but not dispositive, of purposeful availment. See id. at 574.

With its terse ‘this is not our problem’ ending, the court emphasized that any doubts as to the legitimacy of arbitration should be put to bed. Case law, in conjunction with the Federal Arbitration Act (“FAA”), makes clear that there exists a liberal policy of promoting arbitration, thus making arbitration agreements “valid, irrevocable, and enforceable.” 9 USC § 2. As we all know, arbitration is favored amongst many construction clients due to its privacy, speed, and finality. But with every decision comes a cost. In agreeing to arbitrate, the cost to parties is the relinquishment of much of their right to a court’s decision. Parties may still seek court review of an arbitrator’s decision, but the courts will set that decision aside only in very unusual circumstances. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). In fact, grounds for vacating arbitral awards are few and far between[1] – and if you’re still not convinced of just how rigorously courts enforce arbitral awards, consider the fact that the Manifest Disregard of Law Doctrine remains one of the few proper grounds of vacatur of an arbitral award and there exists a circuit split as to whether even that is proper. See Philip D. O’Neill, Jr., International Commercial Arbitration 459 (2012).

In conclusion, the case of Sayers Construction, 976 F.3d at 574, is a reminder to experienced lawyers not to lose sight of either the legal frameworks of personal jurisdiction or the FAA. And, of course, litigators everywhere beware: don’t mess with Texas.

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[1] Per the New York Convention on the Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”) and the Federal Arbitration Act (“FAA”), courts are directed to confirm arbitral awards unless it is found that there exist grounds for refusal or deferral of recognition. Those grounds include 1(a): incapacity of a party; invalidity under the law to which the parties subjected their agreement, or invalid under the law of the country where the agreement was made; (b) lack of proper notice; an inability by a party to present their case; (c) exceeding the scope of the arbitral agreement; (d) composition of the arbitral authority or process was not as the parties agreed; (e) set aside by a competent authority or in accordance with the law of the arbitral seat; (2)(a) the subject matter may not be lawfully resolved under the law of the place of enforcement; or (b) contrary to the public policy of that jurisdiction. In short, the legal framework and the New York Convention (Article V) provides that the decision to decline to enforce an award is a matter of stringent discretion, for “recognition and enforcement of the award may be refused,” but only very limited circumstances. See Philip D. O’Neill, Jr., International Commercial Arbitration 405-06 (2012).

Author Lexie R. Pereira is a third year J.D./M.B.A. candidate at Boston College Law School and Carroll School of Management, studying to become a litigator, with a specialty in construction law. Currently, she works as a Law Clerk at Consigli Construction Co., Inc., serves on the Editorial Team of the ABA’s Forum on Construction Law’s Dispute Resolver blog, and acts as the 2020 Student Liaison of the ABA's Forum on Construction Law. At school, Lexie is the President of the Real Estate Law Society and the President of the Eagle-to-Eagle Mentoring Program. Lexie grew up in the construction industry and has spent time working as an estimator, field engineer, laborer, and, of course, in the legal capacity at Consigli and formerly Hinckley Allen as a Summer Associate. 

Contact Lexie: pereirle@bc.edu | https://www.linkedin.com/in/lexie-pereira/

Meet D1's Neutrals - Daya Naef

We are excited to introduce Daya Naef for this month's Meet D1's Neutrals feature! Daya is an experienced arbitrator and mediator, with over 20 years of practice. She attended Loyola University New Orleans School of Law studying Civil Law and International Law. We sat down with her, virtually, of course, and asked for her to tell us more about her mediating style and to share practical tips with our fellow ‘dispute resolvers.’ D1, Meet Daya!

 DAYA'S MEDIATION PRACTICE

When and why did you choose to become a mediator?

As early as law school, I was interested in learning a more direct route to dispute resolution than what seemed like the very tedious and complicated route through litigation.  When I graduated, however, family law was the only mediation certification you could get, so I decided to hold off. I started my law practice in New Orleans right after Hurricane Katrina in 2005. Having grown up in the construction industry, I already had subject matter expertise in what was an important subject at the time. Since then, construction has been my focus in both the practice of law and now, since 2012, in the practice of alternative dispute resolution.

I had been using dispute resolution in my practice, but it was not until I was taking time off from practice, while recovering from a major car accident, that I did my 40-Hour Certification and joined the Mediatory Registry in Louisiana. Coming back, I knew I wanted to do more ADR and less traditional litigation. Now I have done over 200 hours of certified training, both nationally and internationally, and I can say I'm pretty well-versed in what's new in the world of mediation.

Can you describe your mediating style?

My purpose and my goal is to get the project back on track. So, my practice is more of an extended pre-mediation where we're not usually together in a room, or Zoom room. Instead, it's more facilitative. I strive to work out as much as possible between the parties before we have an actual “sit down.” The way that I approach things is to resolve them with the parties. For instance, contractors and subcontractors have a lot of friction getting jobs completed. I get their information and see where the commonalities are so that we can keep the job moving or, if it is at completion, work it out so that the parties part as professionals who are able to work together again. Or should they choose to not work together again, then I hope that they part from a better position – a position of completeness – not with animosity where it's going to be gnawing on them and making them want to badmouth the other person after the process.

Do you have a standard mediation practice regarding pre-mediation exchange of information/memorandum and joint sessions?  If so, what is it?

Once we all agree we're going forward with the objective of getting the project back on track, I have the parties make individual statements on an audio recording, either on the phone or Zoom recording (or write a written statement if they prefer), and have them send it to me. I then have them upload the contracts, pictures of what's going on, and any other statements that they want to take. I peruse this information and bring myself up to speed on the job with the goal of finding out (1) where they are on the job, (2) what their commonalities are, and (3) where their sticking points are. Then I go back and interview them separately to see where we can make more alliances. Again, my goal is to keep the job going.

If there are still some sticking points after those two conversations, and especially if there's a job-stop pending, then we schedule a time to get on Zoom together. On Zoom, I go over the things that we have accomplished so far and then the things that we haven't accomplished yet. Believe it or not, at this point, it is pretty smooth sailing getting to a resolution between the parties since we all agreed on that objective from the beginning. So, then my work is done until a new dispute arises. 

What is a common mistake you see parties and/or their counsel employ in mediation and what steps do you recommend to avoid it? 

A mistake I see with parties is that they either do not take it seriously or do not understand the value of actually having a dispute resolved in this alternative manner. As a society, we are litigious-minded and we see going to court as a ‘thing.’ As dispute resolvers, we have the ability to remind parties that they have the power to make their own decisions, with someone who is a neutral third-party holding the space from them when making those decisions. Reminding parties that it often is just not practical to go to court and that there are other options is very important. 

I've been doing surveys over the last year or so the find out different construction companies' legal budgets. The data suggests that there is a certain threshold where a company hires a general counsel. I would encourage those that are not yet there to think about the alternative solutions. For example, I have encouraged some of my clients to consider hiring a project neutral or a pre-engaged dispute resolution professional for the duration of the project. I'm also working with D1's Toolbox talks, enlisting some examples from our D1 members who are using Early Dispute Resolution as In-House Counsel. Be looking out for that event January 28, 2021!

What is the most important skill to have as a mediator?

Listening skills, seeing the big picture, and creating an environment for people to pause, be listened to, and be heard. Sometimes in the fast-paced world of construction, you have to get people out of their hamster wheel a little bit and say, “okay, look, I am really here to listen to you, but need you to help me help you.” So, I guess it is like being part mediator, part social worker. Also, cultural sensitivity skills, especially in this virtual era, are important. It is best to avoid culture shock when “Zooming” into different areas of the country by going slowly and adjusting to the norms.

How can ‘dispute resolvers’ better resolve disputes?

Gaining a comfort with working on video and using technology are important skills for 'dispute resolvers.' We've gone from typewriters and dictaphones to fax machines and email to now Zoom conferences. There are great benefits to this new technology, especially in terms of real-time document sharing, that I think everyone should get on board with (if they're not already!). I’ve been on a committee in the DR Section putting together an info-video for attorneys and their clients to get familiarized with what a Zoom mediation looks like and what they can expect. That should be out by the Spring meeting. Stay tuned.

How does the Forum and Division 1 relate to your arbitration practice?

I've had the best time being in the Forum. I've been to the meetings in Nashville, Philadelphia, and Chicago, as well as New Orleans. My first Forum experience was when the meeting was in New Orleans, I think it was 2006 or 2007, right after Hurricane Katrina. I had just started my law practice there and someone actually reached out to me and said that they'd waive my conference fees if I came because I was a young woman professional member who just started practicing. The meeting was just great. I joined Division 8 because I was interested in learning more about construction internationally. Afterwards, we all went to dinner at Delmonico's private room, and just had a ball. I could not believe that I was so young and new to practice, and yet had the opportunity to meet some of the some of the stars of the Forum at the time. Since then, I've gotten more involved with the ABA. I’m serving a second term as co-chair for the Women in Dispute Resolution (WIDR), as well as being one of the liaisons between the Forum on Construction Law and the DR Section.

So, the Forum has clearly served as a resource for my development. There are certain members that if I have a question or somebody needs a referral, I literally just hop on LinkedIn messenger and send them a message. Similarly, , in a matter of minutes, I can find an attorney in San Antonio for something because I've met someone through the Forum. The Forum has built a community, or like a fraternity, of the legal practice that we don't always get anymore. We have such a diversity of practice now, too. The Forum is all over the country and we do all these different things. It's so amazing.

What hobbies, activities, or interests do you do outside of work and the Forum? 

I'm an artist. It's a pretty dedicated hobby. I've gone to art school and studied in Italy, D.C., and New York. I draw with charcoal and pencil, usually figure studies. So, yes, that's nude people. Sometimes people think that's weird, but it does come from the classics – Michelangelo, Leonardo da Vinci – classical art school, as opposed to modern art school. I love it.

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As the litigation and dispute resolution division of the Forum, our members regularly serve as arbitrators, mediators, and other neutrals who resolve disputes. In an effort to promote and educate our membership about our talented neutrals, D1's Incoming Chair, Tom Dunn, decided to spearhead a series here on The Dispute Resolver blog to feature our Division 1 Neutrals (email him at rtdunn@pierceatwood.com if you'd like to be featured!).

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Daya J. Naef, Esq. is a third-generation member of the Construction and Real Estate industries. At an early age she gained experience working with her family’s residential construction company and was in close contact with relatives working as realtors, brokers, interior designers, developers and commercial contractors. When she decided to pursue her legal career, specializing in construction was a natural fit. She has represented general contractors, subcontractors, suppliers, owners, developers, condominium associations, property managers, design professionals, agencies, associations and municipalities/non-governmental organizations in Michigan since 1999, and Louisiana since 2005.

Daya has a stellar reputation for seeing a job through from start to finish. She is proficient in drafting and reviewing construction contracts, preparing and filing liens/releases and bond/insurance claims. In addition, Daya can handle business formations, office and site set-ups, real estate transactions, title opinions or reviews, compliance audits, municipal and state taxing issues, board complaints and multi-party mediation or arbitration. Daya can also serve as a project neutral or independent decision-maker.

Because of the depth of Daya’s knowledge of construction law and her excellent communication skills, her clients know what to expect in terms of time, outcome and cost. By choosing Daya Naef, LLC as your consultant, mediator, arbitrator, or legal service provider, you will gain reliable expertise and excellent service.

Contact Daya: daya@dayanaef.com | 504.669.1020

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Editor Lexie R. Pereira is a third year J.D./M.B.A. candidate at Boston College Law School and Carroll School of Management, graduating in Spring 2022 and studying to become a litigator, with a specialty in construction law. Currently, she works as a Law Clerk at Consigli Construction Co., Inc., serves on the Editorial Team of the ABA’s Forum on Construction Law’s Dispute Resolver blog, and acts as the 2020 Student Liaison of the ABA's Forum on Construction Law. At school, Lexie is the President of the Real Estate Law Society and the President of the Eagle-to-Eagle Mentoring Program. Lexie grew up in the construction industry and has spent time working as an estimator, field engineer, laborer, and, of course, in the legal capacity at Consigli and formerly at Hinckley Allen as a Summer Associate. 

Contact Lexie: pereirle@bc.edu | 407.782.2717 | https://www.linkedin.com/in/lexie-pereira/

Is Arbitration on the Briefs Right for your Client?

As clients increasingly demand options for timely, efficient dispute resolution, attorneys need to stay apprised of all available alternatives. Private arbitration was developed with efficiency in mind and has become wildly popular in the construction industry, providing parties a means to avoid delays caused by backlog in state and federal court dockets as well as evidentiary and procedural formalities. The American Arbitration Association’s Fast Track Procedures within the Construction Rules further trim the usual arbitration procedures, pushing parties through a streamlined pleading and discovery process. However, even the AAA Fast Track Procedures require significant time and resources, primarily those invested in conducting a hearing before an arbitrator.

Submitting a case for decision on briefs alone, without presenting in-person evidence or argument to the adjudicating body, is common in appellate litigation. It is also frequently used in trial court-level litigation, sometimes without the parties’ consent. Parties agreeing to arbitration on briefs alone, however, is exceedingly rare. Yet, when employed in the appropriate situation, agreeing to submit a dispute to an arbitrator on briefs alone can be a useful tool for quick and efficient dispute resolution and a highly satisfied client. On major construction projects, the commitment to arbitrate certain matters is often made before a dispute arises. So, when is arbitration on the briefs the right choice for your client’s project? And, what can you do to ensure a successful resolution? Let’s explore.

Arbitration on the briefs has two primary benefits. First, it can be highly cost-effective. Eliminating the costs associated with witness and hearing preparation and presentation can significantly reduce the overall price tag of arbitration. Second, arbitration on the briefs provides for speedy dispute resolution without sacrificing equity or expertise. Again, jettisoning a hearing can expedite a final resolution on the merits by weeks, if not months; certain disputes may even be submitted for a decision on the briefs without a traditional discovery process, which all practitioners know can be extremely time-consuming. Furthermore, the arbitration agreement allows the parties to dictate the timeline for decision, eliminating uncertainty and facilitating easy mid-project or mid-term dispute resolution.

Foregoing a hearing is not without its downsides. Without a hearing, an arbitrator may miss or misunderstand certain complex factual issues, and the parties have limited opportunity for clarification. Thus, astute construction attorneys will recognize that arbitration on the briefs is not one-size fits all. Predicting the nature of disputes likely to arise on your project and the evidence necessary to resolving those disputes is critical in 1) deciding whether arbitration on the briefs is appropriate for your client’s project and 2) drafting the terms of such an arrangement. When considering an agreement to arbitration on the briefs, keep in mind the following tips for success.

Identifying the Issues Subject to Arbitration. Not all disputes lend themselves to resolution on written arguments alone. For the same reasons decisions without a hearing are regularly issued in an appellate court setting, an arbitrator’s decision on the briefs is most successful when the dispute is straightforward and turns on a few narrow questions if not a single, objective issue. Lay witness and/or subjective evidence-heavy fact patterns and other, more complex disputes may be difficult for an arbitrator to grasp on paper alone and key details may be lost without an opportunity for the arbitrator to ask questions. Conveying witness credibility and evidentiary context may also be difficult. Accordingly, disputes involving competing expert testimony are not well-suited to resolution by this method. By contrast, a foreseeable, single-issue quarrel that requires either interpretation or application of a contract clause to a limited factual scenario is easily decided with limited party input. For example, in an agreement based primarily on unit prices, disputes over adjustments to unit prices may be well-suited to arbitration on the briefs. Adjustments to unit pricing are often necessitated by either 1) market fluctuations or 2) significant changes to the quantity of units subject to the agreement. Hence, few subjective factual issues will compound a dispute over the equity of an adjustment to an agreed unit price. Design ambiguity controversies and cost-only change order disputes may also lend themselves to resolution through arbitration on the briefs, particularly when employed mid-project to mitigate damages resulting from postponing a final resolution.

Careful Clause Drafting. Once you have identified the types of disputes amenable to arbitration on the briefs, your arbitration clause should carefully identify and describe those disputes to be subjected to arbitration. In addition, the language should plainly outline the particularities of the arbitration process itself. Each condition applied to the process should promote swift and cost-effective adjudication. Contemplate the following terms when developing an agreement to arbitrate without a hearing:

Arbitrator Selection. Before agreeing to arbitration on the briefs, consider the qualifications an arbitrator needs to provide a speedy and fair resolution. Ideally, an arbitrator should be able to jump into a dispute with minimal education on the intricacies of the particular dispute. In pricing disputes, an arbitrator with an accounting or financial background might be valuable. Alternatively, in a design ambiguity scenario, an arbitrator with architectural or design expertise will require less explanation to understand the parties’ respective positions and reach an equitable decision. To avoid wasting the expediency provided by arbitration on the briefs, the parties should also delineate explicit terms as to how a candidate pool will be developed and how the arbitrator will be selected in the event the parties cannot agree.

Specific Timeframes. As discussed above, a timely resolution of your dispute is a principal benefit of arbitration on briefs alone. Thus, the parties should settle on hard and fast deadlines for brief submission and the arbitrator’s decision. If needed, a limited timeframe for seeking clarification or enforcement of the arbitrator’s decision should also be employed.

Evidentiary Limitations. Your arbitration agreement should place strict limitations on the type and volume of evidence each party is permitted to submit in conjunction with its brief. Disputes that may be decided on objective, empirical, and/or documented evidence will find the most success in arbitration without a hearing. This is not to say that no fact witness testimony should be admitted; a successful arbitration on the briefs provision will permit submission of an affidavit or similar sworn statement to verify documentary evidence and provide necessary project details to put the dispute in context. Still, the primary source of evidence submitted to the arbitrator should be documentary, not testimonial. Taking it a step further, restricting evidence included in the briefs to evidence exchanged prior to submitting the case to arbitration may facilitate the arbitrator’s decision making process, and may even promote interparty resolution without arbitration. Similarly, you might also consider a page limitation on the briefs; a limited writing will force each party to concisely state its position, and it will assist the arbitrator in identifying the key issues she must consider in making her decision.

Decision Implementation and Cost Allocation. Finally, consider how an arbitrator’s decision should be effectuated. Should the decision or award be applied retroactively? If so, at what point should its application begin? Take our example of a unit price disagreement. Should the arbitrator’s decision apply only to future units? Or, if the pricing decision applies retroactively, should it apply to all units from the time the adjustment was requested forward? Or from the time the dispute was submitted to arbitration? The answers to these questions depend on the projected disputes and your client’s anticipated position. Another important term to consider in an arbitration on the briefs agreement is an attorney fee-shifting provision. In keeping with the cost-efficiency goal of opting for arbitration on the briefs, an agreement that the prevailing party will recover its attorney’s fees will aid in ensuring only truly unresolvable disputes reach the arbitration phase and dis-incentivize over-lawyering.

Arbitration on the briefs is an interesting dispute resolution procedure to consider for your clients’ future projects and disputes. While it may not benefit all clients or all projects, under the right circumstances, proposing this procedure can yield dividends for your client and allow you to appear strategically savvy and cost-minded.

Author Megan K. George is an attorney in the Lexington, Kentucky office of Stites & Harbison PLLC.  She counsels clients on a diverse array of construction matters and routinely drafts, negotiates and reviews contracts for clients. She also frequently handles complex construction litigation and arbitration, advising clients in all stages of dispute resolution.

Don't Let the Distance Destroy Your Communication -- Lessons Learned from Arbitration by Zoom

Is “Remote Arbitration” an oxymoron? Or is it the wave of the future?  While most of the ADR rules allow for video presentation of evidence in an arbitration, there is little guidance on full hearings being conducted through remote procedures. In the past, parties have agreed to present one witness via videotape or videoconference where the witness was not able to travel to the venue of the hearing. However, most parties, lawyers and neutrals have been reticent to agree to fully remote proceedings.  With the continued restrictions required by the COVID 19 pandemic, parties, lawyers, and arbitrators are all starting to look at the need to embrace remote proceedings. Click here for an introductory video from the author.

So What’s the Big Deal About Remote Arbitration?

Most lawyers handling dispute resolution and litigation count on the use of their keen communication skills to present persuasive arguments to the trier of fact in a lawsuit.  In arbitration, the neutral (or panel) is the target of the communication. Lawyers are known for using skill in how to examine a witness to elicit the facts and information needed to present their client’s case. Also, the timely use of an exhibit is key – with the technological advances, some of the best trial lawyers have become quite adept in using video clips, charts, and visual images to effectively communicate information and facts, as well as to engage the tier of fact.  However, the successful lawyer also will use various forms of communication other than the presentation of evidence through witnesses, exhibits, and written briefs. Body language and non-verbal cues are critical to the trial lawyer. In addition, the lawyers in an arbitration often “read” the room – both the neutral and the other parties and counsel present to see how various factual and legal arguments are landing, and the reaction can cause a change in strategy, tone, or emphasis.

Non-verbal communication plays an integral part in effective communication.  “In fact, experts have argued that 70 percent of communication is non-verbal and that includes workplace communication.” Body language can tell you how urgent or serious an issue is. Eye contact and posture can convey confidence or sometimes lack of it. Gestures and movements can show enthusiasm or communicate more than the words express.

“One study from Columbia University found that gesticulation helps a speaker communicate effectively with an audience. Researchers explained that someone who gesticulates actually helps convey the fullness of the message they’re trying to deliver. They’re speaking on two levels at once!” “Business Insider also revealed some rather telling facts on verbal communication. Those stats showed that content is only valued at 7% in a presentation. This was verified in Science of People’s research as well. We can’t stress it enough – it’s not what you say, rather, how you say it." While this may or may not be fully accurate, it is telling that much of our effective communication is not just the words and content of your presentation but how you communicate it that will bridge the gap, even across a video screen.

This is why many lawyers are wary to arbitrate via remote processes – it loses the “feel” of the proceeding where the human interchange and interaction communicates so much more in person across a conference room table than through a screen.

However, with the status of the corona virus pandemic, the future of dispute resolution clearly will be dependent upon the use of remote proceedings, and the well-informed practitioner should come to the proverbial table with an approach to make the most of the remote process.

Four Key Considerations For An Effective Remote Arbitration

As more cases are presented through remote arbitration (potentially jury trials in the near future), there are several considerations that practitioners should keep in mind to ensure the most effective representation of their clients. Of course, reams have been written about communication skills and styles, but there are four key considerations for a remote arbitration proceeding to consider: (1) understanding your audience; (2) getting the evidence to your arbitrator; (3) controlling the room; and (4) managing the technology.

1. Understanding Your Audience

While it is important to know your arbitrator’s background, most counsel are not vetting the neutral’s ability to use technology or how the neutral will be able to engage in the process over video or control the process and witnesses.  This is a difficult skill to assess. However, many arbitrators have been working diligently to come up to speed on the technology and have familiarized themselves with the various platforms.  Once more arbitration occur, some neutrals will likely further distinguish themselves in their abilities to manage remote arbitration hearings.

Don’t let the age or background of a neutral be your guide, however.  There are many younger neutrals who are not adept in using the remote programs and older neutrals who are tech savvy and have every cutting edge device available.

Regardless, it is imperative to know and understand who your arbitrator or panel is and the work with your neutrals to ensure that they feel comfortable with the process, the platform, and the related technology needed, such as the right video camera(s).  Before you begin a remote hearing, if the arbitrator does not ask for it, request a joint session to practice on the platform, including ensuring that the arbitrator understands and knows how to control the process and that all can access and view the exhibits effectively. You may wish to have a technology person available for the practice and the remote hearing itself to assist the arbitrator.

2. Getting the Evidence to the Arbitrator

Be sure that you have worked with the arbitrator to have all of the proper procedures and rules in place to allow for an effective remote hearing as well as to ensure that you can get the necessary evidence to your arbitrator.

Do the Rules Provide For What You Need?

Each of the main arbitration providers’ arbitration rules have some rules that address – at least in part - virtual hearings. However, the perceptive practitioner will review the rules and scheduling order carefully to ensure that the evidence needed can be effectively presented. Notably, there is little formal guidance currently for a full merits hearing by internet or other remote presentation.

JAMS Rule 22(a) acknowledges that an arbitrator may vary procedures so long as they are reasonable and appropriate. Rule 22(g) authorizes an arbitrator, at his or her discretion, or upon the parties’ agreement, to conduct the hearing through virtual platforms, stating: “(g) The hearing, or any portion thereof, may be conducted telephonically or videographically with the agreement of the Parties or at the discretion of the arbitrator.” Like JAMS, the American Arbitration Association is mindful of maintaining the efficiency of arbitrations while securing the parties’ rights to be heard and to present their cases (See, R-32(a), AAA Commercial Arbitration Rules and Mediation Procedures). Rule 32(c) gives the arbitrator the right to “allow for the presentation of evidence by alternative means including video conferencing, internet communication, telephonic conferences and means other than an in-person presentation” but also requires that “[s]uch alternative means must afford a full opportunity for all parties to present any evidence that the arbitrator deems material and relevant to the resolution of the dispute and, when involving witnesses, provide an opportunity for cross-examination.”

Neither the International Institute for Conflict Prevention & Resolution (“CPR”) the International Chamber of Commerce (“ICC”), the London Court of International Arbitration (“LCIA”), nor the Singapore International Arbitration Centre (“SIAC”)  provide any specific rules for full merits hearings by video. There are not specific rules for how such video hearings should proceed in any of the ADR providers’ rules; therefore, counsel should seek a scheduling order with specific details on how the proceedings are to be conducted including the split of time, presentation of witness testimony and hearing timetables, production of exhibits, and opening and closing statements.

Getting the Witness Testimony Clearly Communicated

Many practitioners are concerned about the ability to test the credibility of witnesses in a videoconference format. However, this issue can be overcome with careful preparation of the witnesses, and having clear rules in the scheduling order addressing where and how witnesses can be presented (ensuring there is no coaching or others in the room).  In fact, many arbitrators assert that credibility issues are not as critical as many lawyers may believe. The arbitrator will still be able to observe the witness during video testimony and observe facial expressions and reactions. In fact, as stated by arbitrator Wayne Brazil, “We can see initial reactions to questions, reluctance to respond, indirection, indecision, circularity, obfuscation — as well as forthright, straight-on answering (which, we've learned, sometimes can pose the greatest threat to making accurate findings). Given these facts of videoconferencing life, the real question is this: How much is an arbitrator's ability to assess credibility compromised, really, when he or she watches a witness testify, live, on a big screen, instead of watching the witness testify a few yards away in person?”

Instead, when it comes to witness testimony, you must ensure that you are preparing your witness to testify to the arbitrator – but instead of looking at the small screen of the questioning lawyer, the witness needs to be trained to look at the camera on his screen.  When reviewing an on-screen exhibit, the witness should also be trained to periodically look up at his or her camera to respond to the question. One tip is to advise witnesses to imagine the arbitrator is ‘in the camera” and to focus on that instead of the small box of the questioning attorney.

Who Has Control – Remote Exhibits

One of the most important issues that is a difference for many practitioners is the handling of exhibits in a remote proceeding.  Depending on the agreement of the parties, the exhibits can be exchanged in advance between the parties and a set provided to the arbitrator electronically for use during the hearing, or the exhibits can be uploaded onto the remote proceeding site.  If the exhibits are exchanged in advance, a set will also need to be provided to the witness in advance; it is recommended that they be placed in a sealed envelope to be opened by the witness on screen once under oath.

If the exhibits are presented “live,” the question of how to maneuver through the document can be handled by giving the witness “control” of the screen and mouse to scroll through to specific portions of the document. To do this effectively, counsel will need to have carefully pre-prepared the documents and have a separate copy either in hard copy or on a second screen to ensure a crisp and clear presentation of the information to the arbitrator.

Cross-examination and introduction of exhibits that were not pre-planned will be a bit more challenging in a remote setting.  However, having a set of potential exhibits pre-marked can address this issue. For rebuttal, one good option is to have anticipated potential exhibits saved on your desktop and carefully described/labeled with your prepared cross-examination.  Counsel should practice in advance of the hearing uploading the exhibits and while asking questions.  If appropriate, particularly for document-intensive cases, like many construction cases, having a paralegal or tech assistant participate and upload your exhibits will make the process more streamlined and prevent counsel from distractions of trying to find the right exhibit.

3. Issues Raised By Who Is “In The Room”

One other question to consider before you proceed with the arbitration hearing is how to maintain the confidentiality of the process and who will be allowed to be in the videoconference and when. Will witnesses be held in a “waiting room” and be admitted when their time slot is ready?  Will counsel have pre-set times for when witnesses will be called? Will witnesses be called out of order? These issues will require a discussion of counsel and the arbitrator to resolve these issues in advance.

4. Technology- Choose the Platform

What platform will be used is another consideration that will need to be agreed upon early on. This will allow counsel sufficient advance time to practice and be familiar with the platform. In addition, you can work with your witnesses to practice, particularly with how to work with the exhibits and how to readily find sections on the documents in response to questions posed.

One key issue is to anticipate and plan for technology hiccups.  Have a designated person for trouble-shooting on standby to jump in and have a ready text message to bring them into the call. In addition, be sure that the arbitrator and counsel provide and exchange contact information and the arbitrator should also be provided contact information for all witnesses in case of connection issues.  You also may want to consider having a fall back of what to do if there is a problem with connection for any particular witness – will you have them dial in only or require webcam access? Thinking through and having a backup plan will give you more peace of mind and take away the distractions during the hearing.

Overall, conducting a remote arbitration is not the most ideal scenario, but effective lawyers can prepare their witnesses, ensure clarity and credibility of their cases and presentations by being aware of use of non-verbal communication to support their cases, and pre-planning and preparing exhibits carefully and having a plan in place for maneuvering through exhibits to ensure that the information you want the arbitrator to see, understand, and digest.  In addition, paying careful attention to the technical details and discussing how the witnesses will be presented will allow for a smoother process where the more confident counsel’s case can be effectively presented to the arbitrator.

Addendum: Construction companies and practitioners should be aware that some of the ADR providers are starting to develop protocols for remote arbitrations. In fact, CPR has developed a Model Procedure Order for remote arbitrations. The model order can be found here.

Author Brenda Radmacher is a Partner in the Los Angeles office of Gordon Rees Scully Mansukhani LLP and a noted expert in construction law.  Ms. Radmacher is called on as a counselor, litigator, and noted speaker on issues involving land owners, general contractors, developers, and builders.  Ms. Radmacher's practice emphasizes resolving complex construction disputes through negotiation, mediation, and, when necessary, arbitration and litigation, on projects in California, nationwide, and internationally.

Agreements to Arbitrate Are Simple, Right?

Ira M. Schulman, Partner, Pepper Hamilton LLP

The construction industry has been a leader in the use of arbitration to resolve disputes. In the past 30 years, it is fair to say that arbitration has outpaced litigation as the dominant method of dispute resolution. The protracted time for a construction case to get to trial and the attendant cost and expense has led the construction bar away from the courthouse and into the arbitration room. It not unusual for a lawyer bringing a construction case to court to receive a frosty reception from the judge, whose first remark is often akin to “why are you not in arbitration?” In other words, sitting through a construction trial is not among the court’s favorite pastimes.

The decision to arbitrate is made most typically, although not exclusively, by the parties’ agreement. The American Institute of Architects’ templates of construction agreements include an arbitration option wherein the parties agree that all disputes arising out of the agreement shall be determined in an arbitration to be administered pursuant to the Construction Industry Rules of the American Arbitration Association. These rules, well known to construction lawyers, provide for the orderly administration of an arbitration. Most construction lawyers, out of either lassitude or ignorance, pay scant, if any, attention to the arbitration clause. This is a mistake, perhaps a significant one, that can affect the outcome of the arbitration in numerous ways that cannot be predicted when the underlying contract is signed.

The arbitration clause is not a holy scripture that came down from Mount Sinai and cannot be altered or amended. Arbitration clauses get amended all the time, and it is up to you to decide how best to modify the standard arbitration agreement.

In addition to my law practice at Pepper Hamilton LLP, I have served as an arbitrator for the American Arbitration Association since 1987 and have presided over numerous cases both as a sole arbitrator and a member or chair of an arbitration panel. My experience has taught me that the prudent negotiation of an arbitration clause is as important to an arbitration as jury selection and jury charges are to litigation. Here is some advice:

1. Who can demand arbitration? The standard arbitration clause allows either party to initiate an arbitration. If that is not what you want, the arbitration clause should be amended. For example, an owner may want to have an exclusive option on whether a dispute will be arbitrated or arbitration will only be allowed for disputes under a particular dollar threshold.

2. Who will the parties be? The American Institute of Architects’ templates, not surprisingly, protect architects from being joined as parties to arbitrations unless they consent. This protection often leads to a situation where the owner and general contractor are in one arbitration and the owner and architect are in a separate arbitration. This arrangement frequently results in inconsistent results and very unhappy owners. If the thought of this keeps you or your client awake at night, modify your arbitration clause to allow for liberal consolidation so that all disputes arising from one project are determined in one arbitration. 

3. Who will be the arbitrator(s)? Unless your arbitration clause addresses this issue, your arbitrator will be selected by mutual agreement of the parties or, failing that, by administrative appointment. Too frequently, arbitration panels consist of all lawyers. Before the contract is signed, ensure that one arbitrator will be a contractor or design professional — or you may exclude lawyers altogether. If your adversary is very well-known in town and you or your client are less well-known or not known at all, you should require that none of the arbitrators can be from the local jurisdiction. It is appropriate to require that arbitrator(s) have a minimum number of years of experience in their specialty.

4. How many arbitrators? Absent express agreement, the number of arbitrators who will hear your case is determined by the entity that administers the arbitration. The American Arbitration Association uses a $1 million threshold. If the claim is equal or less than the threshold, one arbitrator is assigned; if greater, three arbitrators are assigned. Why should you be concerned? A few reasons: given the arbitrator’s extremely wide latitude in his/her management of the case, casting your lot with one arbitrator can be an extremely risky proposition. If you or your client successfully alienates a solo arbitrator, your case is in deep trouble. For that reason, many counsel insist on three-member panels. On the other hand, the costs of a three-member panel can easily surpass $10,000 per day, excluding the arbitrators’ incidental expenses, which can include meals and lodging in a swanky hotel.

5. Where will the arbitration be held? Arbitration clauses are often silent on this issue. Do not leave this point to the discretion of the administering agency. Clearly state where the arbitration must be held. Remember that requiring your arbitration to be held in New York City could have you traveling to Staten Island. You are better to state the venue as New York County.

6. How much discovery will be permitted? One of the perceived advantages to arbitration is that the money-burning discovery so common in litigation is nowhere to be seen. Discovery in litigation can take too long and can be too expensive. However, are you certain that your case would not benefit from modest discovery? For example, allowing each side to take two fact witness depositions and a deposition of each expert witness, where each deposition does not exceed seven hours, may be a prudent use of resources.

7. What rules of evidence will govern? One of the nasty surprises that may await a party in arbitration is the haphazard application of the rules of evidence. The American Arbitration Association encourages arbitrators to accept evidence that will foster an understanding of the dispute. Unfortunately, some arbitrators allow everything into the record with the refrain of “I’ll take it for what it’s worth,” while other arbitrators are far more restrictive.

The arbitration clause is the place to take control of this issue. For example, the clause could read, “the Rules of Evidence shall be as set forth in the Federal Rules of Civil Procedure except that hearsay testimony may be admitted but the absence of the opportunity to cross-examine the declarant shall be considered in determining the weight to be afforded to the proposed testimony or document.” In reading the rules of the American Arbitration Association, it is surprising that arbitrators are not required to exclude evidence on the grounds of privilege, e.g., attorney-client or settlement discussions. The risk of having an adverse inference drawn against your case because of your justified refusal to produce a privileged document can easily be dealt with in the arbitration clause.

8. How long will the arbitration take? Clients are often disappointed or outright angry over the length of time to complete an arbitration. After all, one of the major selling points of this form of dispute resolution is its relative speed compared to litigation. Unfortunately, due to scheduling conflicts, especially with a panel of three arbitrators, arbitrations seldom proceed from start to finish in consecutive days. Rather, there are often gaps between hearing days lasting days, weeks or, in some cases, months. The arbitration clause is a good place to set express deadlines. For example, the clause could state that “the parties agree that the Arbitration shall be completed in not more than ## days measured from the appointment of the arbitrator(s).” This clause will assist the administering entity in selecting arbitrator(s) who can meet this commitment.

9. Attorney’s Fees and Costs. Absent an agreement to the contrary or controlling statute, the “American Rule” provides that each side bears its own legal fees. The arbitration clause is a good place to provide for a mandatory award of attorney’s fees in favor of the prevailing party. Of course, if you or your client is likely to be the respondent in the arbitration, you may wish to omit this clause. As for the costs of the arbitration — which may well include arbitrator compensation (which in complex cases can run into the six figures) — I often include the provision that “The costs and fees of the arbitration, including arbitrator compensation shall be borne as incurred and the arbitrator(s) are without power to apportion them.”

10. Modification of Award. The rules of the American Arbitration Association only allow an arbitrator to modify the award if there is a computational error or other similar imperfection. The arbitrator may not revisit any of his/her substantive conclusions. You could allow a party to request the arbitrator to revisit the merits of the award, especially where the arbitration is conducted before one arbitrator who may simply have swung and missed. The clause should include a tight time frame for this request and, to avoid having the other side incur needless legal fees, that party should not be required to respond to the modification request unless the arbitrator directs it.

The above ten points are far from exhaustive, but they should encourage you or your attorney to pay closer attention to boilerplate arbitration clauses.

Article originally posted March 31, 2016 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

Appointing an Expert with Final and Binding Decision Authority

By Ben D. Nolan, III PE PSP, Managing Director, Construction Consulting, Berkeley Research Group LLP

Based on a True Story

The Situation

Imagine a situation where a large international general contractor has been terminated for default mid-project on two major unbonded educational campus projects on a UK protectorate island.  The government takes assignment of the subcontractors, who happen to be the only competent subcontractors on the island, to continue progressing the work until a completion General Contractor can be hired.  A year later, there has been only an additional ten percent progress and, due to a payment dispute, the subcontractors decide to terminate the government for default. After some negotiation, the parties agree to a termination for convenience and attempt to follow the contract ADR procedures, but they are generally unworkable given the peculiarity of the situation.  As a last resort, the parties agree to a mediation using an experienced Quantity Surveyor from the UK; the mediation fails miserably and the parties are at the end of the contractual ADR options.

The parties are determined to keep the pending dispute out of the island court system, so they get creative.  Queen’s Counsel suggests the appointment of an independent Expert to decide the disputes.  Candidates are identified from a global pool, a short list of face to face interviews are held, the preferred Expert spends a week with the parties working through representative issues and the parties agree on the Expert.  The resulting appointment agreement includes this clause:

“The parties agree that all decisions and awards made by Expert in the course or at the conclusion of the Valuation Exercise shall be final and binding on the parties…and the parties also waive irrevocably their right to any form of appeal, review, or recourse to any court or other authority with jurisdiction, insofar as such waiver may be validly made.”

This clause is the essence of the Expert with Final and Binding Decision Authority (“BDA”) ADR process.  To coin a phrase, I’ll call this particular ADR process the “BDA” process and the Expert the “BDA Expert”.

To Bind or Not to Bind

Having been that appointed BDA Expert and having issued that final, binding decision, I see many complex construction disputes that could potentially benefit from this BDA approach to ADR.  However, US litigators have not been inclined to take the leap of faith required to entrust a BDA Expert with their client’s fate in a construction dispute.  I believe with a little more understanding of their slightly altered role in the ADR process, US litigators could accept this binding ADR process to fairly resolve certain types of construction-related disputes.

There are many popular variations of non-binding ADR which involve independent expert analysis and recommendations, but none that I’m aware of that give the Expert this final and binding decision authority.  The primary reason is that the US litigators want to stay in control of the legal process.  This fear of being out of control (i.e. out of appeal options) is largely unfounded.  In the BDA process, the US litigators are still in control of the legal process, they are simply dealing with a very involved Expert instead of a lesser involved Dispute Resolution Board, a neutral listener, a mediator, an arbitrator, a panel of arbitrators, a judge or a jury.  Any arguments that would be made on appeal are made during the review of the Draft decision.

It is also crucial to recognize the difference between the level of involvement of the BDA Expert and these other triers of fact: the BDA Expert has complete access to all the facts from all parties throughout the analysis phase and decision process.  While the starting point is the traditional plaintiff’s statement of claim, from that point forward, the BDA Expert decides which claims merit consideration, works with the plaintiff and defendant to perfect the claim facts and conclusions, allows rebuttal from the defendant, allows re-statement of claims from the plaintiff, finalizes the BDA Expert analysis and issues a written DRAFT decision.  The parties can respond to the DRAFT decision, discuss any final points with the other parties and the BDA Expert and, after hearing all arguments, the BDA Expert finalizes the decision on that issue.  This process is repeated for all issues that are agreed to be decided.  In my experience, both parties were satisfied with the fairness of each decision, knowing that they had enjoyed the full benefits of natural justice.

Recognizing the Situation to Suggest Expert BDA

US litigators with experience in international construction dispute resolution will likely recognize the BDA Expert model, as it is an established ADR process in international venues.  In the US, disputes with certain characteristics would likely be good candidates for the BDA Expert approach:

• When the parties desire to design an expedited decision-making process on key disputed issues.
• When the parties desire the trier of fact to master the technicalities of large, complex technical disputes in order to fully understand and consider the underlying root cause of the dispute, including:
  • causes of late and out of sequence work,
  • causes of labor productivity problems,
  • assessing “or equal” equipment or material substitutions,
  • causes of equipment and material cost escalation,
  • responsibilities for design versus shop drawing details,
  • causes of equipment performance problems, and other things.
• When the parties desire to have individual decisions on a large number of disputed issues, such as:
  • an independent valuation of base contract work completed;
  • an analysis of entitlement to and valuation of disputed change orders;
  • an analysis and valuation of partially completed value engineering work;
  • a valuation of deductive credits for incomplete work or work not performed;
  • auditing of incurred costs in a termination for convenience;
  • an adjustment of final contract value due to the costs of correcting defective work;
  • an interpretation of disputed contract terms, such as the “value” of work completed under an AIA contract, i.e. is it the contract value or the actual cost incurred?
• When the parties desire to keep the dispute in a private ADR venue.
• When the parties desire to turn the decision over to a trusted third party.
• When the situation is so peculiar that other forms of ADR are unworkable.
• When the parties need to disclose, yet protect, commercially sensitive and auditable information.
• When the percipient witnesses are still available to participate as fact accelerators in the dispute resolution process.
• When the parties desire to maintain their business relationship with each other by reaching a fair resolution.
• When the parties desire an “open-book” approach to dispute resolution.

The Recommendation

Based upon my favorable experience with this BDA process, I recommend that US litigators consider this form of ADR in certain construction disputes.  It is a bold step for litigators to suggest an approach to ADR providing a BDA Expert with such final decision authority.  However, there is more fairness designed into this ADR process than in most other ADR processes, given the opportunities to state and re-state claims and to assure all your arguments are heard, fair and square.