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.
The belief that there can be no appellate remedy for erroneous arbitration awards is widespread but mistaken. Granted, the Federal Arbitration Act (FAA) and many state arbitration statutes provide limited judicial relief from a final arbitration award.1 Indeed, the FAA does not allow for any judicial appellate review of an award, even by agreement of the parties.2 However, neither the FAA nor state arbitration codes prohibit parties from contracting for the right to a full appellate review of an arbitration award, on the merits, via a private panel of appellate arbitrators. On the contrary, parties have the right to agree to this option in their original arbitration contract or by written stipulation at any time after a dispute arises.3
Parties may be surprised to discover that they need not sacrifice the finality, cost savings or speed of arbitration by preserving their appellate rights. The appellate rules established by JAMS, AAA and CPR – although each slightly different – generally empower the parties to design a fast, cost effective and final process, with many advantages over judicial appeals.
For example, the finality of JAMS appellate review may surprise those who fear the delays of vacatur or remand as the reward for reversal of judgment on appeal. Instead, JAMS procedures prohibit remand for further hearing or “retrial” and limit the appellate panel’s authority to affirming, reversing or modifying an award.4 Even if a panel re-opens the record to receive any evidence excluded in error, at most, the panel will issue a new, final award.
Brevity of the time necessary for this appellate process is not only baked into the short deadlines proscribed by the applicable rules, but may be furthered by the parties’ agreement to shorten deadlines, limit briefing or waive oral argument. Additionally, in the right case, the parties can save time and expense by agreeing to an interlocutory appeal of a key issue, such as which party is in breach or the existence of insurance coverage, before incurring the – possibly unnecessary – additional expense of proving the amount of damages.
Further cost savings may result if the parties follow the lead of the European Court of Arbitration,5 by having a single arbitrator decide the underlying case, subject to the right of a subsequent review on the merits by three highly experienced, specially chosen appellate arbitrators. Obviously, using one arbitrator to manage and hear a dispute will significantly reduce the cost of the underlying arbitration, which cost savings will be much less than the fees for the appellate panel, which meets relatively briefly.
The right of the panel and parties to customize the appellate process itself is another plus: arbitration appeals need not follow any hard and fast rules. The parties and panel may agree to several hours of oral argument. The panel may request additional information after initial briefing or argument, including submission of clarifying evidence to supplement the record. If the parties want the results of the appeal to be confidential outside the confines of the arbitration, that usually can be agreed to as well.
In summary, by assuring the review of awards finally, quickly, inexpensively, and fairly, by a hand-picked tribunal with specialized knowledge and experience, “… appellate arbitration enhances the benefits of arbitration itself.”6
1 See e.g., Patton v. Signature Insurance Agency, Inc., 441 F.3d 230, 234 (4th Cir. 2006). Additionally, in Hall Street Associates, LLC. v. Mattel Inc., 552 U.S. 576 (2008), the U. S. Supreme Court limited vacation of an award to statutory grounds such as “evident impartiality”, “fraud”, “corruption”, refusing to hear “pertinent and material” evidence, and acts exceeding the powers of the arbitrator. Note, however, some states have statutory arbitration procedures, promulgated as alternatives to litigation, which allow for judicial appeals of the resulting award judgments. See e.g., Florida Statutes, 44.104, which preserves the parties’ appellate rights to the state intermediate appellate court, although the scope of review is limited to essentially legal rather than factual issues.↩ 2 Hall Street Associates, supra.↩ 3 For a scholarly discussion of the legal bases for contractual, legislative and other ways of overcoming concerns about the limited standards of review allowed for most arbitration awards, see Philip L. Bruner, The Appeal of Appellate Arbitration, in 35 INTERNATIONAL LAW REVIEW, Pt. 4, 436, 444 et seq. (2018) (“Bruner”). For example, JAMS suggests the following model contract provision: “The Parties adopt and agree to implement the JAMS Optional Arbitration Appeal Procedure” with respect to any arbitration award “arising out of or related to this [arbitration] agreement”. JAMS Comprehensive Arbitration Rules and Procedures rule 34 also allow parties to “agree at any time” during an arbitration to adopt the JAMS optional appellate procedures as an optional remedy in that proceeding. CPR and the AAA have their own, slightly different model contract language and rules.↩ 4 Thus, providing a remedy for the lament voiced in Enforcement of the Arbitration Award and Limited Rights of Appeal, in ARBITRATION AND THE SURETY, 79, 80 (A. Belleau, et al. eds. Am. Bar Ass’n 2020), that after vacatur of an arbitration award, the remedy is often no better than a costly “do over”.↩ 5 See, Attempts to Set Aside an Award, in THE PRINCIPLES AND PRACTICE OF INTERNATIONAL COMMERCIAL ARBITRATION, 216, 217 (Margaret L Moses, 3rd ed. 2017).↩ 6 Bruner, p. 448.↩
Author Patricia H. Thompson, Esq., FCIArb, is a full-time neutral at JAMS, with experience conducting virtual and in-person mediations, arbitrations and other ADR proceedings in construction and other complex commercial disputes.
Have you ever thought about what it would take to serve as a Construction Arbitrator or Mediator? Do you think you have to wait until the end of your career to pursue an ADR Practice? You don’t. Most arbitrators on the American Arbitration Association (AAA) Construction Panel still maintain a full-time practice.
On June 30th, Division 1 (Litigation & Dispute Resolution) is teaming up with the AAA, Construction Litigation Committee of the ABA Section of Litigation, and the Forum's Diversity + Inclusion Committee for a virtual program on how you can design your career path to have a successful neutral practice. Our panelists from the AAA, Forum/D1, and CLC will discuss what it takes to be an arbitrator or mediator with the AAA's Construction Panel, give tips for building the type of experience that the AAA looks for and offer insight and advice for building a successful ADR practice. Understanding that parties often seek diverse viewpoints in dispute resolution, the AAA has made a concerted effort to attract and mentor diverse arbitrators and mediators. During this session, the Panelists will discuss the training and continuing education offered by the AAA to its panelists, as well as its mentoring program.
It is never too early to start planning your career goals and aspirations. We hope you join us for this discussion. There will be time for questions at the conclusion of the program.
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. SeeFirst
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.
[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.
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.
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.
The Supreme Court of Mississippi in D. W. Caldwell, Inc. v. W.G. Yates & Sons Constr. Co., No. 2017-CA-00116-SCT, -- So.3d.-- (Miss. May 10, 2018) reversed and remanded a trial court's modification of an arbitration award for "evident miscalculation." The Supreme Court held that "evident miscalculation of figures was not apparent from face of arbitration award, and thus, modification of the award was not warranted." The Supreme Court remanded for the trial court to confirm the award.
The underlying dispute concerned a roofing subcontract for a dormitory at Auburn University. After the subcontractor started work, it discovered structural issues that needed to be addressed before roofing could begin. The general contractor and the subcontractor agreed that the subcontractor would perform the structural repairs and then complete the roofing. However, subcontractor was not paid in full for both the repair change order and the original roofing scope. A dispute arose and the parties arbitrated. The arbitrator issued a reasoned award in favor of the subcontractor. The general contractor requested clarification of this award, which the arbitrator denied, and then proceeded to Mississippi trial court on a motion to "alter, amend, or vacate the award." The subcontractor, for its party, moved to confirm the award.
In Mississippi, like many other states, the grounds justifying an amendment or correction to an arbitration award are quite limited including only: "(a) an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the award; (b) The arbitrators have awarded upon a matter not submitted to them and the award may be corrected without affecting the merits of the decision upon the issues submitted; or (c) The award is imperfect in a matter of form, not affecting the merits of the controversy." Miss. Code. Ann. § 11-15-135.
The trial court "believing that an evidentmiscalculation was present as it related to the retainage amounts" denied the subocontractor's motion to confirm the award and instead allowed the general contractor to introduce new evidence and witness testimony as to the miscalculation. The trial court held that there was a "facially evident miscalculation" as "the arbitrator had duplicated the labor costs for shingle installation in its award–once under the original subcontract and once under the oral agreement to repair the structural damage [and] amended the award, reducing the total by $104,507."
The subcontractor appealed the trial court decision and the Mississippi Supreme Court reversed holding that "arbitrator's award contained no evidentmiscalculations which would merit modification." The Court first focused on the extreme narrowness of arbitration review, but also acknowledged that "what amounts to an evident miscalculation" had not previously been decided by this Court. After reviewing cases from other jurisdictions it decided on this definition: an "evident (plain, obvious, or clearly understood) miscalculation must be apparent from nothing more than the four corners of the award and the contents of the arbitration record." Indeed the moving party must be able to show "[w]ithout looking outside the undisputed facts or relying upon testimony from a witness in the trial court" that "a different, but correct, calculation could be made." In the instant case, the Court examined "the thirteen-page award for any facially evidentmiscalculations or computational errors. In doing so, [it found] that no such errors [were] present. Looking next to the attorney-written arguments, oral arguments, and agreed-upon record evidence, [it] likewise failed to find such errors." In sum, the court "fail[ed] to find that the arbitrator erroneously duplicated costs of labor and relied on such a duplication in making his award. Nor [did the Court] ascertain that the arbitrator erred by excluding the retainage totals."
In reaching this holding, the Mississippi Supreme Court also held that the trial court had abused its discretion by hearing and crediting witness testimony during the award modification hearing. The trial court took additional testimony regarding the cost of the structural repairs in order to determine whether and to what extent there was an evidentmiscalculation of figures in the award. The Supreme Court emphasized that "arbitration is meant to supplant litigation, not supplement it" and that the trial court's error "transformed . . . the very narrow and limited purpose of its review [impermissibly] imbu[ing] it with the responsibility of the factfinder." Note that trial court's abuse of discretion was not the linchpin of its evident miscalculation decision.
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The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver. She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island.
The underlying case concerned the construction of automobile repair shop that did not proceed smoothly. The focal issue was the cement floor and foundation. The owner was displeased with the installation and ordered the contractor to stop work. Nonetheless, the contractor submitted a pay application for the floor work, which went unpaid by the owner. The contractor, claiming material breach for non-payment, terminated for cause. The owner sued the contractor for wrongful termination. The case ultimately ended up in arbitration with the contractor claiming it was owed for work performed. There, the arbitrator held that both parties were at fault and therefore the contractor could not terminate for cause. Instead, the arbitrator held that the contractor terminated for convenience by the contractor. As such, the arbitrator awarded the contractor its fair and reasonable value of the work performed.
The parties next applied to superior court with the owner moving to vacate the award while the general contractor moved to confirm. The superior court confirmed and the owner appealed arguing that the arbitrator "manifestly disregarded a contractual provision by holding that the contract was terminated for convenience" by the contractor.
The majority of the Court agreed with the owner. The three justices acknowledged that "judicial review of arbitration awards is extremely limited," but held that the case met the threshold for vacatur under the R.I. General Laws. The Court explained that where "the arbitration award fails to ‘draw its essence from the agreement, if it was not based upon a passably plausible interpretation thereof, if it manifestly disregarded a contractual provision, or if it reached an irrational result" the Court must vacate the award. Here, the majority concluded that the arbitrator exceeded his authority by "manifestly disregard[ing] a contractual term or ignor[ing] 'clear-cut contractual language.'” In sum, because the AIA contract's termination for convenience clause could only be exercised the owner completely in the owner's discretion, the arbitrator had ignored and manifestly disregarded that distinction by applying the clause in favor of the contractor. Accordingly, the Court ordered the award vacated.
As for the dissent, the two justices focused on the great deference the Court affords to an arbitrator's decision and that "review of the contract as a whole reveal[ed] that the arbitrator's award did not exceed the language of the agreement." In essence, because the clause was present in the contract and the arbitrator did not create the contractual basis out of whole cloth, the dissent was satisfied that arbitrator could interpret and apply the contract as such. And at the least, the dissent concluded, this Court was not empowered to second guess that interpretation.
Putting aside that this case was decided under state law, it is important to note that in the federal sphere, under the Federal Arbitration Act 9 U.S.C. §§ 10 & 11, the "manifest disregard" rationale for vacating an arbitration award has more limited applicability and not all Circuits recognize the standard.
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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.
In the recently decided case, LD Miller Construction, Inc. V. Kirschenbaum, - P.3d - (N.M. App. Dec. 1, 2016) the Court of Appeals of New Mexico affirmed the hearing justice's order that the American Arbitration Association ("AAA") indeed could disqualify an arbitrator from arbitrating a dispute between a contractor and homeowners for the failure of the arbitrator to follow the AAA Rules.
The Homeowners hired the Contractor to do concrete and framing work on their property in Santa Fe, New Mexico. Contractor completed the work, but the Homeowners disagreed that is was done properly. They hired someone else to correct the work.
A short time later, the Contractor submitted an invoice for the concrete and framing work to the Homeowners. The Homeowners only paid half of what was claimed owed by the Contractor. Apparently in recognition that a dispute had arisen, about two weeks later, the Homeowners and Contractor entered into an arbitration agreement:
Contractor and Owner agree to binding arbitration under AAA (American Arbitration Association) for any dispute (claim, work, material, etc.) between Contractor and Owner . . . . Contractor and Owner agree that the designated arbitrator shall be Roger Lengyel.
Fast forward two years later, the Contractor filed a complaint in court for the unpaid amount. The Homeowners answered with an affirmative defense that the action must be dismissed in light of the arbitration agreement. The Court agreed and issued an order that stated in pertinent part:
the parties are compelled to arbitrate this matter pursuant to the terms of the arbitration agreement, requiring binding arbitration under the [AAA] with . . . Roger Lengyel as the designated arbitrator.
The parties attempted arbitration but it quickly devolved with the Contractor sending a letter to the AAA requesting disqualification of the arbitrator for non-neutrality. According the Contractor, the arbitrator was having ex parte communications with the Homeowners and setting rules that only served to delay the arbitration (which benefited the Homeowners). The Homeowners insisted that the Court's order had designated the named arbitrator and usurped AAA's power to disqualify him. The AAA sought clarification from the court. The hearing justice concluded based on the language of the order that the AAA could disqualify. AAA did just that. The Homeowners appealed.
On appeal, the court applied New Mexico contract law for the interpretation and construction of the agreement. Because neither party argued that the agreement was ambiguous, the court simply was to determine "what do the words of the agreement mean and what is their legal effect"? The Homeowners argued for an "integral-ancillary" bifurcation of the agreement under the Rivera v. Am. Gen. Fin. Servs., Inc., 259 P.3d 803 (N.M. 2011). They claimed that because the designation of the arbitrator was introduced with the precatory "shall be Roger Lengyel," this provision is integral and must be abided, whereas the "under the AAA" was merely ancillary. The Court explained that Rivera was limited to its facts, where the parties had "clearly intended to use a designated institutional arbitration provider" but that provider no longer existed. As a result, the Rivera court held that the arbitration provision would have to stricken in its entirety because arbitrating with the chosen provider was integral to the agreement and the section could not be rewritten by the court. The Court continued that the instant dispute was much different. To treat the two cases as the same "would unreasonably treat as equivalent an unavailable arbitration provider and a disqualifiable arbitrator" with an available provider. Plus the Court noted that Rivera did not even get to the issue presented by the Homeowners -- weighing the relative value of two, separate provisions.
In the Court's de novo review of the agreement's language, the Court held that "most reasonable construction of this language is that 'under AAA' incorporates all of the AAA rules normally applicable to proceedings held under AAA's auspices." There was nothing in the agreement that limited the AAA's powers or made certain rules inapplicable. The Court acknowledged that the use of "shall" to designate the arbitrator is strong evidence that the parties agreed to use him. However there was nothing in agreement that this arbitrator could be non-neutral, which is contrary to the AAA rules. If this arbitrator could be non-neutral in violation of the AAA Rules, then it would "potentially cause [the Rules] to have no meaning." In sum, the Court held that "The most natural construction of the Arbitration Agreement is that the parties intended to arbitrate disputes between them concerning [the Contractor's] construction work under all of the AAA rules, with Lengyel serving as a neutral arbitrator. To interpret the Arbitration Agreement designating Lengyel to trump the AAA rule permitting replacement of a neutral arbitrator in certain circumstances would risk rendering the AAA Rules meaningless." Accordingly, the hearing justice's order and the AAA's disqualification were affirmed.
The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.”
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.
In Pershing, LLC v. Kiebach, 2016 WL 1375874 (5th Cir. April 6, 2016), the 5th Circuit considered an interlocutory appeal whether the district court properly exercised jurisdiction over a case that involved an arbitration award of only $10,000. The 5th Circuit "adopting the better reasoned approach" concluded yes.
The underlying matter concerned an alleged Ponzi scheme. Investors (Kiebach and others) claimed that a clearing broker agent of Pershing failed to disclose adverse financial information causing them $80 million in damages. After a two week hearing, a Financial Industry Regulatory Authority ("FINRA") panel found against the investors' claims, but awarded them $10,000 in compensation for "certain arbitration-related expenses." Pershing filed a motion to confirm the arbitration award in federal court pursuant to the Federal Arbitration Act ("FAA"). The investors moved to dismiss because, although the parties were diverse, the amount in controversy was only $10,000, not the threshold amount of greater than $75,000.
Noting that federal courts diverge, the 5th Circuit observed that the "courts that have confronted this issue generally follow one of two approaches—the award approach or the demand approach." As the name would suggest, the "award approach" determines the amount in controversy based on the "underlying arbitration award regardless of the amount sought." In contrast, the "demand approach" ties the amount in controversy to "amount sought in the underlying arbitration." Based on the Investors' arbitration demand of $80 million, the district court had decided that the $75,000 amount in controversy was met. The 5th Circuit agreed.
The 5th Circuit's rationale relied three points. "First, the demand approach recognizes the true scope of the controversy between the parties." The Court observed that the Investors were likely opposing the confirmation of the award because they were not satisfied with $10,000 on their original $80 million claim. Second, "the demand approach avoids the application of two conflicting jurisdictional tests for the same controversy." Essentially using the award approach would result in two different jurisdictional outcomes at the beginning of the arbitration and at the end. In other words, a motion to compel arbitration, based on the amount claimed (if more than $75,000), could be heard by the court. But then, for the exact same case, the motion to confirm the later arbitration award (if ultimately less than $75,000) could not be heard by the court. This dichotomy is irrational and would possibly promote "gamesmanship" of filing motions for arbitration at the start of the case in order to "to preserve their right to a federal forum for review of the eventual award." The third rationale for using demand approach was that the jurisdictional outcome would be the same had the case been arbitrated or litigated.
The concurring opinion pointed out that while the demand approach was appropriate in this case, it was not "necessary or advisable to adopt any such general approach" for all cases going forward. Rather the concurring judge believed the better approach was to take each matter on a case-by-case basis on its facts.
