In early 2024, the American Arbitration Association released its most recently amended Construction Industry Arbitration Rules. Under the previous set of rules, amended and effective on July 1, 2015, absent a different agreement between the parties, in a case where “the disclosed claim or counterclaim of any party is $1,000,000 or more, exclusive of claimed interest, attorneys’ fees and arbitration fees and costs,” then “three arbitrators shall hear the case.” The same appointment process applied in the set of rules amended and effective on September 15, 2005. Thus, with the AAA, the use of a panel of three arbitrators where any claim seeks $1,000,000 or more, has been the standard operating procedure for almost 20 years.
Under the current iteration of the AAA’s Construction Industry Arbitration Rules, amended and effective on March 1, 2024, different standards apply. Now, “if the parties do not agree upon the number of arbitrators and a claim or counterclaim involves at least $3,000,000, then three arbitrators shall hear and determine the case; otherwise, one arbitrator shall hear and determine the case.” As under the previously applicable set of rules, deference is still given to the parties’ agreement: “The parties are encouraged to agree upon a method for selection of the arbitrator(s). The AAA shall appoint arbitrator(s) by the method agreed upon by the parties.”
JAMS similarly utilizes a tiered process by which a single arbitrator is appointed in certain instances while a panel of three arbitrators is appointed in others, with deference given to any appointment process agreed to by the parties. Under the current iteration of the JAMS Construction Arbitration Rules, effective on June 1, 2021:
The Arbitration shall be conducted by one neutral Arbitrator with respect to any disputes arising from residential construction or with respect to any disputes, whether arising from residential or commercial construction, where the collective claims and counterclaims, in the aggregate, are less than two million dollars, unless all Parties agree otherwise. The Arbitration shall be conducted by three neutral Arbitrators in all other disputes, unless the Parties agree otherwise.
Other arbitral institutions eschew an objective tiered structure in favor of subjectivity, while still giving deference to any party agreement. For example, the BVI IAC Arbitration Rules, effective November 16, 2021, provide that the parties’ agreements concerning arbitrator appointment will be followed, but that:
If the parties have not previously agreed on the number of arbitrators, and, if within 30 days after the receipt of the Notice of Arbitration by the Respondent, the parties have not agreed on the number of arbitrators, the case shall be referred to a sole arbitrator, unless the Arbitration Committee decides, after taking into account all relevant circumstances, that referring the case to three arbitrators is more appropriate.
While a sole arbitrator or a panel of three arbitrators are by far the most common arbitral structure, panels of two or four arbitrators are not unheard of.
The primary advantage of a panel of arbitrators is diversity of perspective and skill. As one commentator previously wrote in an article entitled “Question: A Single Arbitrator or Three-Arbitrator Panel? Answer: A Two-Arbitrator Panel” for Under Construction:
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….
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.
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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.
Additionally, though efforts are generally made to avoid the impacts of biases in the arbitration selection process, the use of a panel of arbitrators further reduces that risk.
Also reduced through the use of a panel of arbitrators is the very real risk that a single arbitrator will veer from the terms of the parties’ contract and impose his or her own view or understanding of the dispute. The risk that a sole arbitrator may embrace extra-contractual or subjectively equitable theories to support an outcome is real. Arguably, one of the worst events that can happen to parties in arbitration is that they build their facts and evidence, relying on the contract between them, only to have an arbitrator ignore the terms of the contract. Similarly, for the well-prepared participant, an arbitrator who bypasses the evidence as presented in favor of relying on separately studied or obtained specialized knowledge can be a source of immense frustration. When an arbitrator issues an award in this fashion, there are generally no repercussions to the arbitrator and no ability of the parties to hold the arbitrator accountable for such actions beyond the informal discussions that sometimes follow among counsel and his or her colleagues regarding exclusion from future appointments.
A panel of arbitrators serves as a check and balance to keep this from happening. No single arbitrator wants to risk his or her reputation in this way, while working with peers on a panel. Additionally, legal education or training—and certainly specialized legal education or training in the specialized field of construction law—is by no means a mandatory prerequisite to serving as an arbitrator, though it is often preferred. Thus, not every arbitrator may fully understand or appreciate the nuances presented by factual or legal issues that a case may turn on. A panel of arbitrators can help cover for any individual weaknesses in this regard.
The primary arguments in support of using a single arbitrator are cost saving (e.g., one arbitrator costs less than three) and scheduling (e.g., coordinating with the schedule of one arbitrator is generally easier than coordinating with three). But from a macro level, there are often no cost savings if a single arbitrator, unchecked by his or her peers, leads the parties down a poorly-managed arbitration or presents an award properly subject to challenge. Significant cost savings in construction come into play at the project level, and it often may be more expensive overall to lose a case in arbitration—saving some money in having a single arbitrator as opposed to a panel of arbitrators—than utilizing a panel that cost more but provides the attendant advantages. Being truly made whole through the arbitration process (e.g., recovering all incurred damages, costs, interest, and fees, including experts and attorneys) is somewhat of a rarity, at best. Often, it is not the time to penny-pinch. If that approach is needed, serious reflection is a prudent course before proceeding.
Claims of any value, regardless of the project sector, may be relatively straightforward, but certainly have the potential to involve a myriad of issues where the input from a panel of arbitrators may be preferred. Delay and disruption claims routinely present challenging issues, or conflicting analyses, where a panel of arbitrators may be well-suited to decide the outcome. Multi-party cases often add layers of complexity.
For all of the benefits that a panel of arbitrators may offer, it may not be preferred in every instance. Claim value or expected case complexity may be viewed as an appropriate guide. To that end, building on the AAA’s sample arbitration provision, the following example could be utilized to balance these interests:
Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Construction Industry Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, three arbitrators shall hear and determine the case if: (1) any claim involves at least [insert dollar value]; (2) more than [number of parties] parties are parties to the case, whether at the time of filing or by joinder or consolidation; or (3) any claim involves [describe nature of claims requiring use of a panel or arbitrators (e.g., delay or disruption claims, etc.)].
While there are certainly justifiable reasons to consider using a single arbitrator, many owners, architect, engineers, contractors, and subcontractors may prefer that a panel of three arbitrators decide a dispute of a certain monetary level.
Thus, in negotiating construction agreements where arbitration is contemplated, regardless of the arbitral rules to apply, parties should consider how many arbitrators should decide a particular type of dispute and, additionally, what monetary levels should apply if tiered levels are preferred. Essentially, parties should embrace the deference afforded to them in determining how—and how many—arbitrators are to be appointed in any given case. At the very least, they should be informed as to how the applicable arbitral rules address arbitrator appointment.