AAA Releases Discovery Best Practices for Construction Arbitration

 The American Arbitration Association (“AAA”) recently released an important new document, “Discovery Best Practices for Construction Arbitration: Recommendations for AAA Construction Advocates and Arbitrators.” These best practices are intended to “educate advocates and arbitrators to better manage pre-hearing exchanges of information in construction disputes.” 

Generally, the seven-page document seeks to promote the speed and efficiency of resolving construction disputes through arbitration. While observing that construction disputes are often very document-intensive, the best practices note that the format of arbitration does not allow for unlimited discovery:

Therefore, arbitrators should, consistent with their authority, manage arbitration proceedings to achieve the goal of providing a simpler, less expensive and more expeditious process, and discovery decisions should be proportional to the size and complexity of the matter being heard. The arbitrator should stress how, due to the number of documents, discovery in a construction dispute is different than in a typical commercial dispute.

These best practices were developed in conjunction with the AAA’s National Construction Dispute Resolution Committee (“NCDRC”), advocates, arbitrators and construction industry professionals. The guidance and suggestions in the best practices are recommended for use in all construction cases administered by the AAA under the Construction Industry Arbitration Rules or Commercial Arbitration Rules. It is important to note that these best practices are in no way intended to replace the Rules.

Document Exchange

The best practices suggest filing a detailed statement of claims and defenses as early as possible. This can help narrow the focus of discovery, identify critical documents, and avoid disputes. Whenever possible, “the scope of documents should be narrowly tailored and proportionate to the disputes at hand.” Further, a scheduling order can be an effective tool to establish deadlines and avoid delays.

The best practices also address the growing importance of e-discovery. Today’s construction disputes commonly involve a high-volume of emails, drawings, submittals, and other electronically stored information (“ESI”). The new guidance suggests addressing e-discovery during the pre-hearing conference. The size and complexity of the dispute should be the driver of the ESI protocol. In situations where the cost to produce electronic documents appears excessive, arbitrators are encouraged to consider requiring the party demanding that production to pay for the costs.

Site Inspections

Site inspections can play an important role in resolving construction disputes. They can also be expensive and time-consuming. The best practices suggest arbitrators carefully weigh the benefits of agreeing to a site inspection and establish a protocol in advance. Likewise, arbitrators are encouraged to consult photographs of the site prior to a visit to help become familiar with the project. Any tour of the project site should be conducted without attorney commentary.

Disputes and Sanctions

Discovery disputes happen. Parties should make a good-faith effort to meet and confer to resolve these disagreements. If these consultations are unsuccessful, arbitrators are encouraged to schedule a telephonic conference. Hopefully many of these disputes can be precluded from arising in the first place through appropriate planning and communication.

It is important to remember that arbitrators have the authority to order sanctions. Courts may uphold these sanctions when sufficient cause exists. Arbitrators can choose to order sanctions either immediately at the time of the action, or they can choose to wait to do so in the final award. However, precluding proof should only be considered in the most extreme circumstances.

Other Considerations

The new AAA guidance suggest that depositions be used only when there are clear and compelling grounds to demonstrate they will contribute to the speed and efficiency of the arbitration process.

Third-party discovery can be a complicated and thorny issue in an AAA arbitration. Courts have reached different conclusions as to whether Article 7 of the Federal Arbitration Act allows for an arbitrator to subpoena a third-party to produce documents prior to a hearing. In any event, third-party discovery should be limited to the largest, most complex cases.

Conclusion

These best practices seek to balance the almost inherently complex nature of construction disputes with the efficiency offered by AAA arbitration. This new document is a valuable resource for arbitrators, attorneys, and construction professionals. The summary contained in this article discussed only a few of the highlights and is not meant as a comprehensive survey.

Parties interested in more information on AAA construction arbitration rules and procedures are encouraged to visit adr.org/construction.

Author Patrick McKnight is an associate in the Litigation Department at Klehr Harrison Harvey Branzburg LLP in Philadelphia, Pennsylvania. Patrick also serves on the Klehr Harrison Coronavirus Task Force. He can be reached at pmcknight@klehr.com.

Appeal of Arbitration -- answers to many "what if" scenarios will be provided

As part of the first day in at the Forum's #ADRSummit in Austin, John Bulman and Ben Wheatley are offering a practical (and hopefully interactive) workshop on the intersection between arbitration and appeals.  Both Ben and John are experienced construction attorneys and American Arbitration Association (AAA) arbitrators.  John was also a Board Member of the AAA for twelve years, is currently a member of the Board of Governors of the American College of Construction Lawyers (ACCL), and a fellow of the College of Commercial Arbitrators (CCA) -- all co-sponsors of the #ADRSummit.

During their hour discussion, Ben and John will consider many of the burning “what if” questions that can arise in the context of appellate arbitration and appealing an arbitrator’s decision to a court.  Some of the highlights include “what if the institutional provider appoints an arbitrator that lacks necessary industry experience in the subject of the claims?” and “what if a court stays your litigation pending arbitration but applies the blue pencil approach to rewrite your arbitration agreement?”  John and Ben also will touch upon the “hidden appeal,” the availability of discovery in a vacatur action, and whether manifest disregard is still viable or past its prime.  

If you haven't registered for the Fall Meeting yet, #FCLAustin, do so before August 31st to take advantage of the early bird pricing. Register here: http://bit.ly/1TodsIK.  

How New AAA Construction Arbitration Rules and Mediation Procedures Are Enacted

As you may have heard, on July 1, 2015, the American Arbitration Association announced the release of updated Construction Arbitration Rules.  Briefly, those changes include:

•  an automatic referral to mediation for all cases with claims exceeding $100,000 (though each party has the ability to opt out of this process);
• time limits and additional filing requirements for consolidation and joinder to limit the use of these time-consuming processes to delay proceedings;
• increased arbitrator control over the exchange of information, particularly electronic documents;
• new preliminary hearing rules providing detailed guidance to all involved parties and arbitrators as to what issues should be considered at the preliminary hearing;
•  emergency relief rules for contracts entered on or after July 1, 2015, to appoint an emergency arbitrator within one day of filing the demand for emergency relief; and,
•  additional authority for arbitrators to respond to parties refusing to comply with the Rules and/or the arbitrator’s orders.

To read more about these rule changes, go to the Construction Industry Arbitration Rules and Mediation Procedures page on the AAA's website.

I had the opportunity to speak with John Bulman of Pierce Atwood LLP about these rule changes. John has been a construction lawyer for over twenty-five years and, in that time, has served frequently as a mediator and arbitrator through the AAA.  He is a past member of the AAA Board and has been involved in the AAA rulemaking process for over a decade.

For this most recent revision of the rules, John served as the American College of Construction Lawyers liaison to the National Construction Dispute Resolution Committee (NCDRC), an organization founded in 1966 by the AAA and other industry and trade organizations.  Currently, thirty different industry organizations including the Forum are represented in the NCDRC.  It is tasked with analyzing proposed rule changes to the AAA Construction Arbitration Rules in addition to creating and providing input on program content and faculty for proposed neutral training and in recruiting qualified neutrals.

The way that rules are changed involves a multi-year process.  The AAA is always gathering comments, feedback, objections, and insight about the rules.  On a periodic basis, the AAA will consider whether to revise its commercial arbitration rules or one of the industry specific rule sets. In addition, the NCDRC intermittently provides its own comments or proposals for possible rule changes.

With respect to this particular set of changes, the rule changes were adopted previously by the AAA for the Commercial Arbitration Rules.  From there, the NCDRC was tasked with determining whether to adopt  similar rules for the Construction Industry. In making this determination, the AAA Vice Presidents held eighteen different focus groups across the country to discuss the rule changes and seek input.  

After receiving input from these focus groups and incorporating comments accordingly, the NCDRC developed and vetted the rules in December of 2014.  From there, the Chair of the AAA’s Practice Committee reviewed and approved the changes. Once that approval was received, the AAA’s senior counsel and staff review the rules to ensure that they are acceptable and consistent with AAA policies and procedures.  After that, the rules were released to the public.

With regard to the current changes, John believes that the checklist for preliminary hearings set forth in Preliminary Hearing Procedures Rule P-2 are extremely important in keeping a particular arbitration proceeding on schedule. Reviewing this checklist, one can see what John means – the checklist is attempting to bring the parties to as early an agreement as possible regarding the key procedural issues in the case. 

It combines the most important parts of an early conference of counsel in federal court – such as dealing with ESI at the beginning of the case – and of a pretrial conference – discussing witnesses, exhibits, the forms of testimony to be provided, and the form of the award.  As John stated to me, failing to address these issues at the beginning of the case only leads to problems and delays down the road.

John also highlighted how important the consolidation provisions are. Too often, he has seen parties wait until late in the proceedings to try to join new parties to an arbitration or to consolidate one arbitration with another. That procedural decision causes a separate arbitrator to be appointed to determine whether consolidation is appropriate – a “Rule 7 arbitrator” – and waiting until late in the process to seek consolidation only serves to delay proceedings.  To address this issue, the Rules have been revised to provide a cutoff date by which the parties must seek consolidation and still get the benefit of having a Rule 7 arbitrator appointed to determine if consolidation is appropriate. Otherwise, if the request comes later in the process, the arbitrators called the “Merits Arbitrators” – the panel appointed to decide the case – will make the determination on consolidation. 

As John noted, the AAA continues to seek feedback regarding its rules and any improvements that you might have.  To that end, Michael A. Marra, who is a Vice President with AAA in Philadelphia, welcomes your telephone calls to discuss any rules issue you might have.  He can be reached at (215) 731-6136.

Overview of AAA and DecisionQuest's CaseXplorer Arbitration

In our large, complex jury trial cases, many Division 1 members are likely using focus groups and mock juries to assist in the development of themes, evaluate the effectiveness of witnesses, and to develop presentation strategies. 

What about arbitration?  Are mock juries and focus groups worthwhile? 

I (Tom Dunn) talked about this issue with Michael Powell at a conference a couple of months.  Mr. Powell is a Vice President of the American Arbitration Association.  He oversees the Western States: Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, and Washington.  He told me about a new service offered by AAA and DecisionQuest that offers "mock arbitration" services.  The service is Called CaseXplorer Arbitration.  I asked Mr. Powell if he could write up a brief summary about the service. It is below. 

Open Questions for D1 Members: What have you done to test themes in the context of your construction arbitrations?  Have you attempted to find "mock arbitrators" that share some of the characteristics of your selected arbitrator?  Other evaluative tools? Has anyone had an opportunity to use the CaseXplorer Arbitration service?

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Have you ever wanted cost-effective feedback on your case from a mock arbitration panel, just to be sure that you are giving your client an objective assessment of their case? Well, the American Arbitration  Association^® (AAA^®) and DecisionQuest^® teamed up to create the online tool CaseXplorerArbitration, a lower cost alternative to in-person mock arbitrations. It enables users to receive an objective evaluation of their case from experienced arbitrators. CaseXplorer Arbitration can be utilized before an arbitration case has been filed or while the actual arbitration is pending. 

With the CaseXplorer Arbitration online case evaluation tool, users are able to obtain feedback on their arbitration case from three or five AAA evaluative arbitrators who are not associated with the actual arbitration. The user provides the selected arbitrators with written materials—facts and legal arguments—along with questions. Documents and videos may be provided as well. The arbitrators’ written responses are provided to the user once all the arbitrators have completed their responses. This process usually takes three to four days. At minimum, users will learn more about their case, and the arbitrators’ feedback may allow for cases to be resolved sooner.

Selecting the arbitrators can be the most critical and challenging component of a construction mega project arbitration. Unlike traditional arbitration where parties select a local arbitrator or panel of arbitrators, construction mega project disputes often involve parties from different states and/or countries. Consequently, it is likely the parties will need to deal with an unfamiliar sole or tripartite panel of arbitrators. CaseXplorer Arbitration’s online arbitrator search can help parties in these challenging situations.

The online search allows users to peruse the AAA’s full roster of CaseXplorer Arbitrators by keyword, expertise and locale to select three or five participating arbitrators.  As part of the process, users are required to provide party information regarding themselves as well as the other side to the dispute (i.e., names of persons, firms, companies) in order to facilitate conflict checks and disclosures by prospective CaseXplorer Arbitrators.

If you are interested in learning more about CaseXplorer Arbitration and how you can use this process for your arbitration cases, please contact Michael Powell at PowellM@adr.org or 213.362.1900.

 

Discovery in Arbitration: Take Aways from Division 1's Mid-Winter Lunch Program

Division 1: Litigation and Dispute Resolution

This was one of the handouts given during Division 1’s lunch program on Discovery in Arbitration. Special thanks to our speakers: Kelsey Funes, Phelps Dunbar LLP; John Bulman, Pierce Atwood, LLP; Nancy Wiegers Greenwald, Construction Dispute Solutions, LLP; and Linda Turteltaub, Skanska USA Building Inc.  Additional materials relating to the  presentation have been posted  in Division 1’s Dropbox. Please e-mail Division 1 Chair, Nick Holmes, nholmes@nkmlawyers.com, to receive an invitation to the Dropbox. 

The Dirty Dozen:

Best Practices for Discovery in Arbitration

1. Conduct discovery in stages or phases.

2. Use the neutral’s help to create a discovery blueprint.

3. Focus on the relevant facts early. Conduct early witness interviews and think about what you really need to present the case to the arbitrator(s).

4. Require each party with an affirmative claim to specify their damages (category and amount) in the early stages of the case.

5. Use negotiated discovery protocols (search terms; custodians; deposition time limits)

6. Narrow the issues to be arbitrated. Resist the tendency to tell the entire story of the construction project. Focus on the matters in dispute.

7. Select appropriate arbitrators. Select arbitrators with appropriate subject matter and process expertise.

8. Make the most of your preliminary hearing with the arbitrator by having at least a preliminary plan for discovery. Know the schedules of the key participants (including key witnesses) and be ready to commit to a discovery schedule and a hearing date.

9. Include flow-down provisions in your contract to be sure all of the parties can be brought into the arbitration.

10. Work with your client and opposing counsel to craft a written discovery plan before the first call with the arbitrator.

11. Consider allowing direct testimony by written submission.

12. Submit a form of award to arbitrator with post-hearing brief.

Top Five Things to Avoid

1. Don’t – Provide for the Federal Rules of Civil Procedure or other state procedural laws to apply to discovery in an arbitration.

2. Don’t – Provide for judicial review of errors of fact or law. (But, consider the AAA and JAMS appellate process if the case warrants it).

3. Don’t allow motions in limine.

4. Don’t use four witnesses or documents when one will do.

5. Don’t engage in petty discovery disputes.

Partial Disclosure of a Source of Potential Bias Justifies Vacating an Arbitration Award in Texas

When compared with traditional litigation judgments, it is much harder to vacate arbitration awards after they are issued. The Texas Supreme Court recently addressed the standard by which an award can be vacated due to inadequate disclosures by the arbitrator.  In particular, the Court had to evaluate whether an award should be vacated due to an arbitrator’s partial disclosure of a source of potential bias or conflict. Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC, 57 Tex. Sup. J. 617 (Tex. 2014).

The AAA Commercial Arbitration Rules require that “any person appointed or to be appointed as an arbitrator shall disclose…any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence, including any bias or any financial or personal interest in the result of the arbitration or any past or present relationship with the parties or their representatives.” 

The underlying arbitration proceedings were based on a contract dispute between Tenaska and Ponderosa.  The parties’ arbitration agreement provided for a panel of several arbitrators. Lawyers from Nixon Peabody represented Ponderosa and selected Samuel Stern as their arbitrator.  After his selection Stern disclosed the following information to the parties regarding his relationship with Ponderosa and Nixon Peabody: (1) Nixon Peabody had designated him as an arbitrator in three other proceedings, (2) Stern, on behalf of a company named LexSite, had discussions with Nixon Peabody about outsourcing litigation discovery tasks to LexSite, and (3) “Nixon Peabody and LexSite have done no business, and it is not clear that Nixon Peabody would ever have any business to give LexSite.”  Stern, as part of a divided panel, eventually awarded $125 million to Ponderosa.

Tenaska moved to vacate the award in state court, arguing Stern was neither impartial nor free from bias.  The parties conducted extensive discovery on the issue prior to the hearings on the opposing motions. Ultimately, the trial court vacated the arbitration award based on Stern’s failure to disclose that his only contacts at Nixon Peabody were the two lawyers representing Ponderosa, he owned stock in the litigation services company that was pursuing business from Nixon Peabody, he served as president of the company’s U.S. subsidiary, he conducted significant marketing for the company, he had additional meetings and contact with the Nixon Peabody lawyers to solicit business from the firm, and he allowed one of the Nixon Peabody lawyers to edit his disclosures to downplay the relationship with the firm. The court of appeals reversed, holding that Stern’s disclosures were sufficient to put Tenaska on notice of a potential conflict. 

The Texas Supreme Court ultimately upheld the trial court’s vacation of the arbitration award, reasoning that Stern’s failure to disclose the extent of his relationship with LexSite and his attempts to solicit business from Nixon Peabody demonstrated evident partiality and supported vacating the award.  The Federal Arbitration Act allows a court to set aside an arbitration award “where there was evident partiality.” 9 U.S.C. § 10(a)(2).  The U.S. Supreme Court has interpreted the statute to impose a requirement on arbitrators to “disclose to the parties any dealings that might create an impression of possible bias.”  Commonwealth Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145, 147 (1968). Moreover, the Texas Supreme Court had previously held that “if the arbitrator does not disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality,” then the arbitrator exhibits evident partiality. 

Based upon these cases, the Texas Supreme Court held an arbitration award can be vacated if an arbitrator fails to disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality. However, information that is trivial will not rise to this level and need not be disclosed.  Looking at the facts regarding Stern’s business relationship, his potential financial gain from procuring Nixon Peabody’s business, and his decision to allow Ponderosa’s attorneys to downplay their relationship, the Court held that the information was not trivial and might have conveyed an impression of partiality toward Nixon Peabody’s client to a reasonable person. Accordingly, the failure to disclose the information demonstrated evident partiality, and the trial court properly vacated the award. 

While this case was decided under Texas law, the Texas Supreme Court’s interpretation of the Federal Arbitration Act suggests that its reasoning could be applied more broadly to cases across the country. In particular, the Court’s decision to evaluate the extent to which a partial disclosure could be misleading could give rise to more challenges to arbitration awards based on disclosure issues.

Thanks to J.P. Neyland at Griffith Davison & Shurtleff, P.C. for assistance with preparing this post.

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.