December 11, 2020 ARTICLE

Question: A Single Arbitrator or Three-Arbitrator Panel? Answer: A Two-Arbitrator Panel

Adrian L. Bastianelli, III

One of the major benefits of arbitration over litigation is the right of the parties to select the decision maker – a person both parties trust to provide a fair, well-reasoned, accurate, and balanced decision.  The parties in arbitration also have a choice between using a single arbitrator or a three-arbitrator panel.  While they often agonize over the selection of the arbitrators, on the equally important decision, the selection of a single arbitrator or a three-arbitrator panel, they frequently default to an arbitrary dollar cutoff.  This article discusses the advantages and disadvantages of each system so a more informed decision on the appropriate number of arbitrators can be made and suggests an unconventional approach – two arbitrators.  

How Do Arbitration Providers Address the Issue?

Three of the main arbitration providers address the issue in the same way.  Rules R18 and L1 of the Construction Industry Rules of the American Arbitration Association (“AAA”) provide that disputes will be heard by one arbitrator where the claim or counterclaim is less than $1,000,000 and by three arbitrators above $1,000,000.  JAMS Construction Arbitration Rule 7(a) provides that the arbitration shall be conducted by one neutral where the collective claims and counterclaims are less than $2,000,000 and by three neutrals in all other disputes.  CPR Rule 5.1(a) provides for a sole arbitrator in cases where the amount of the claim or counterclaim does not exceed $3,000,000 and by three-arbitrators in all other cases.  All three providers allow the parties to agree otherwise.

What Are the Benefits of a Single Arbitrator?

There is no question that the costs for one arbitrator will be less than for three.  The cost of hearing time typically is tripled.  The prehearing time may not be tripled, if one arbitrator handles most of the duties for the panel without consultation with the other two arbitrators.  The difference in the award writing phase is a little more uncertain because it depends on how the panel divides the decision making and award writing duties.  Where there is disagreement among the arbitrators, the cost will be increased further. 

In addition to a reduced cost, the time to award likely will be shorter with a sole arbitrator.  Counsel and the arbitrators typically have busy schedules.  With three-arbitrators, it can be very difficult to schedule the consecutive days needed to hear a large matter.  When a delay in the hearings is required, rescheduling can be even more difficult.

Rule R46 of AAA’s Construction Industry Rules requires the award to be issued within thirty days of the close of the hearings.  This is a tight restriction, which can be difficult to achieve with three busy arbitrators. 

In summary, the cost of three-arbitrators is likely to be more than three times a single arbitrator, and the time to award may be significantly greater. 

Why Would Parties Select a Three-Arbitrator Panel?

There is a perception among many in the industry that three-arbitrators are likely to reach a more informed, accurate, and balanced award than a single arbitrator, and the outrageous or extreme result is less likely to occur.  Avoiding a bad decision is even more important in arbitration than in litigation because of the limited grounds for appeal of an arbitration award. 

Some of a lawyer’s best thinking and analysis is accomplished through discussion with another lawyer.  Just verbalizing an argument can provide a significant benefit in developing a cogent, well-reasoned analysis.  With a single arbitrator, there is no one for the arbitrator to use as a sounding board and discuss the issues with.  The award must be developed in a vacuum, which in many cases diminishes its quality.  Maybe the greatest benefit of a three-arbitrator panel is the availability of other arbitrators to confer with. 

Hopefully, every arbitrator hears and understands every fact, technical issue, and legal argument and analyzes them correctly, but mistakes are inevitable, particularly in large, complex construction arbitrations.  With a single arbitrator, there is no one to identify those mistakes.  A mistake is less likely to make it into the award where there are three arbitrators providing input.

In most cases, each arbitrator has different strengths and weaknesses which helps produce a better result.  For example, if a member of the panel is an electrical engineer, that arbitrator will help the non-technical arbitrators on issues relating to the design and performance of electrical equipment.  Even where the panel consists of three attorney arbitrators, each arbitrator likely will have different strengths – one may be detailed oriented, one may be a legal scholar, and one may have a technical background.  The combination of the expertise should result in a more informed and balanced award.

While it should never happen, biased arbitrators sometimes make it through the selection process.  An arbitrator may even have a bias of which they are unaware.  The other arbitrators on a three-arbitrator panel can dampen the impact of bias.

Most construction lawyers in a commercial dispute are petrified of an outrageous award or verdict.  It is one thing to lose, but quite another to be hit with an award that defies logic, the contract, and the law.  One reason for selecting arbitration over a jury is to avoid just an outrageous award result.  While one arbitrator might become inflamed and act irrationally, it would be unusual for all three-arbitrators to do so.

Is a Decision from a Three Arbitrator Panel Really Better?

One of the often-heard criticisms of arbitrators is that they “split the baby.”  Most arbitrators contend otherwise, and the data supports them.  AAA’s statistics for 2017 show that over 80% of the AAA-ICDR commercial monetary awards were either above 80% or below 20% of the amount claimed – near the extremes, closer to a clear winner and a clear loser, and not in the middle.  However, the dynamics of a three-arbitrator panel tend to require some compromise.  While each arbitrator’s independent conclusions normally are close to her fellow arbitrator’s determinations, all arbitrators seldom reach the exact same result, thus compromise is normally necessary in a three-arbitrator system to avoid a dissent.

One author analyzed data from securities arbitrations to conclude that three-arbitrator panels tend to reach extreme results and are less inclined to issue split-the-difference awards than sole arbitrators.  Her primary thesis is that arbitrators want their awards to be acceptable to all parties in order to protect their reputations so they do not lose future business.  Extreme awards may be viewed as biased, at least by one side, possibly damaging a sole arbitrator’s reputation in the community.  However, if the arbitrator is part of a three-member panel, the full reputational impact of an extreme award may not fall directly on her.  In addition, while an arbitrator might be unwilling to issue an extreme award by herself, with the encouragement of the other arbitrators, she might go there. 

AAA reports that in 2019, on claims over $1 million, 49% utilized a single arbitrator even though the normal default is to a three-arbitrator panel for claims of that size.  One conclusion that surely flows from these statistics is that many construction lawyers believe a sole arbitrator will produce a satisfactory award, even on large, complex cases.

Of course, if the claims are relatively small in comparison to the cost of the arbitrators, three arbitrators are never justified no matter how much better their decision may be.

Is There Another Solution?

Why not obtain the best of both systems by selecting a two-arbitrator panel?  Robbie MacPherson labelled this approach the “Bastianelli Solution.” 

When compared to a three-arbitrator panel, two arbitrators reduce the cost by approximately one-third and make scheduling easier.  Two arbitrators provide many of the benefits of the three-arbitrator panel, i.e., giving the arbitrator a compatriot to confer with and find mistakes, dampening the impact of bias, providing diversity in expertise and thought, and restraining the irrational arbitrator. 

But what does the two-arbitrator panel do when they cannot reach an agreement – who breaks the tie?  To start with, there are very few dissents in construction arbitrations.  With only two arbitrators, an irreconcilable split is even less likely, but such a split is always possible. 

In the “Bastianelli Solution,” before the start of the hearings, the parties designate an arbitrator to break a tie in the highly unlikely event one occurs.  The selection of the tie breaker can be accomplished by agreement, chance, or a third party.  The name of the tie breaker is then placed in a sealed envelope, without telling the arbitrators who it is.  Thus, during deliberations, the arbitrators do not know who will break a tie.  If an irreconcilable disagreement occurs, the envelope is opened, identifying the tie breaker. 

In conclusion, parties should take advantage of the flexibility to design the arbitration process in a way to minimize cost and time without impacting the quality of the award, including the selection of the number of arbitrators.  So, try the “Bastianelli Solution.”

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Adrian L. Bastianelli, III

Peckar & Abramson, P.C., Washington, DC, Division 1 (Litigation & Dispute Resolution)