August 30, 2017 Articles

Managing the Battlefield, Part 1: Appreciating the Value of Consolidated Arbitration

The first article in a two-part series discussing the benefits of consolidation and joinder in multiparty proceedings

by Peter C. Sheridan and Alex Linhardt

This two-part series intends to guide the construction industry, and the lawyers advising it, toward a usable arbitration agreement that is designed to meet the challenges inherent in multiparty and consolidated proceedings. In the second article, we provide a uniform contractual template that solves these many challenges. But it is impossible to appreciate the merits of this proposed template without some further context. This initial article therefore begins with a brief account of the contemporary statutory and judicial framework for arbitration, describing the circumstances in which consolidated proceedings are often warranted and examining the growing need for contractual consolidation provisions in the absence of uniform law on the subject.

A Hypothetical
Imagine that a large commercial property owner has a claim for breach of contract against many parties: its general contractor, its engineering firm, and its architectural firm. The owner consults its contract with the contractor and determines that it may commence an arbitration proceeding through JAMS, with each party allowed to strike one arbitrator from a JAMS-selected list of three arbitrators.

So far, so good. Moving to the other parties, however, the owner realizes that its individualized contract with its engineering firm expressly disclaims that either party is bound to any form of multiparty arbitration, and its form contract with its architects requires the parties to proceed through American Arbitration Association (AAA), with each party selecting its own neutral representative, who in turn must choose a third arbitrator. Moreover, neither of the design-team contracts binds either the engineers or the architects to arbitrations between the owner and the general contractor. Even worse, the contractor is likely to request that its subcontractors and suppliers appear in any arbitration proceeding and respond to direct, contribution, or indemnity claims, and both types of those second-tier relationships are governed by separate contracts with their distinct arbitration clauses (or no such clauses at all). Perhaps the subcontractors will try to place their liability on yet another party (e.g., a materials supplier), back on the general contractor, or (all too commonly) on the owner. Even in the absence of these complex contractual restrictions, there are a number of difficult strategic decisions to be made. By way of example only, for the time being, should the owner present a "united front" with its design team to recover against the general contractor, or will that raise the threat of collateral estoppel for subsequent claims against the design professionals?

The owner's counsel are left with their brows furrowed and their desks covered in at least five unique, and non-interlocking, contracts. The dispute has turned into a jigsaw puzzle. Even in a best-case scenario, the owner may have no choice but to bring simultaneous claims in separate arbitral forums, requiring the litigators to assemble and present the same evidence again and again, posing a great burden and risking inconsistent results. How did this happen, and what could have been done to avoid it?

This may be an extreme example, but it is hardly in the realm of fantasy. Too many owners never imagine that complex, multiparty disputes will arise. While a general contractor may have the experience and foresight to integrate its subcontracts with its prime contract, the average project owner may deal with the construction industry only intermittently. That asymmetry often results in a frustrating paradox: The very purpose of including an arbitration provision in a two-party or multiparty agreement is to settle any disputes that might arise through unanticipated contingencies in a project, and yet without carefully negotiated and drafted arbitration clauses anticipating the type and nature of eventual disputes, these provisions are at best useless and at worst detrimental.

The Merits of Arbitral Consolidation and Joinder
In most circumstances, parties in complex disputes prefer to use consolidation or joinder mechanisms to coordinate all parties into one arbitral venue. As one commentator has put it, "many cases reveal that consolidation or joinder may be the only adequate means of achieving the ultimate goals of arbitration: fair, efficient, and economical commercial justice." Thomas Stipanowich, "Arbitration and the Multiparty Dispute: The Search for Workable Solutions," 72 Iowa L. Rev. 473, 500 (1987). Even when parties within the same project have different claims, they likely would benefit from a single arbitrator who has a thorough understanding of the project relationships that are the source of the disputes.

Despite these clear benefits, using consolidation or joinder in arbitral proceedings often is difficult or impossible when parties neglect to draft these mechanisms adequately into their arbitration clauses. Absent contractual consent, courts often cannot order consolidation or joinder unless there is state law to the contrary. Therefore, without careful attention to the interaction between multiple contracts' arbitration provisions, the result can be a series of expensive, time-consuming proceedings that risk contradictory (yet binding) awards.

This consolidation dilemma is particularly acute in the construction industry, where development plans can implicate dozens of interrelated parties acting under multiple contracts; an average construction project may involve owners, contractors, subcontractors (including design-build firms), construction managers, suppliers, engineers, architects, insurers, and reinsurers. In a famous opinion issued by the District of Columbia Court of Appeals, Judge John W. Kern III wrote:

[E]xcept in the middle of a battlefield, nowhere must men coordinate the movement of other men and all materials in the midst of such chaos and with such limited certainty of present facts and future occurrences as in a huge construction project. Even the most painstaking planning frequently turns out to be mere conjecture and accommodation to changes must necessarily be of the rough, quick and ad hoc sort, analogous to ever-changing commands on the battlefield.

Blake Constr. Co. v. C.J. Coakley Co., 431 A.2d 569 (D.C. 1981).

As one might expect, despite the number of separate agreements involved in these large projects, the disputes that arise almost always require the involvement of multiple parties seeking to resolve common claims. Disputes "arising out of a construction contract will have a ripple effect which will precipitate separate, but related, actions." Matthew D. Schwartz, "Multiparty Disputes and Consolidated Arbitrations: An Oxymoron or the Solution to a Continuing Dilemma," 22 Case W. Reserve J. Int'l L. 341, 344 (1990). Unfortunately, more often than not, litigators rifle through fistfuls of arbitration clauses only to realize that the parties provided no adequate, reconcilable means of ensuring that the parties can gather their common claims into a single arbitral proceeding.

In this scenario, where a party fails to draft its arbitration clause carefully to anticipate multiparty arbitrations, it may find itself without any effective recourse to consolidate separate arbitral proceedings or join necessary parties to a proceeding, other than commencing litigation with the hope that a court pulls in all claims and controversies (see Cal. Code Civ. Proc. § 1281.3), finding arbitration inconvenient or inadequate to resolve all disputes uniformly. The Federal Arbitration Act (FAA) does not authorize consolidation, and federal courts have been increasingly reluctant to order consolidation without the consent of all parties. Nor can parties depend on state law to come to the rescue; some states, like California and Massachusetts, statutorily authorize court- or arbitrator-ordered consolidation, but several, like Connecticut and Ohio, forbid the practice absent consent. The joinder of non-signatory parties to an arbitration can prove even more difficult than consolidation, as state law generally allows it only under limited circumstances, such as corporate veil-piercing. As one commentator has warned, if "multiple-party arbitrations are to become common in construction, they must be created by contract." Allen L. Overcash, "Introducing a Novel ADR Technique for Handling Construction Disputes: Arbitration," 35 Constr. Law. 22, 27 (Winter 2015).

Arbitration allows parties to circumvent formal rules of evidence or civil procedure, avoid protracted pretrial motion practice and discovery, obtain flexibility in scheduling hearings, and receive the assurance of limited or no subsequent judicial review. Between those considerations and concerns about juror bias, construction lawyers understandably are enthusiastic about resolving their clients' disputes through arbitration.

Ironically, however, the same factors that motivate construction parties to opt for multiparty arbitration clauses can end up frustrating the efficacy of any actual arbitration proceeding. Arbitration is based fundamentally on contractual consent (as the courts have emphasized repeatedly); therefore, any arbitration clause binds only the parties that have signed it. Because the average commercial construction project entails multiple participants executing multiple contracts with different arbitration clauses, a party commencing arbitration often must deal with several predicaments at once: Parties have arbitration clauses that refer to different procedural rules, venues, or choice of law (or a combination of those); parties are necessary to a proceeding, yet they are non-signatories to the arbitration agreement and refuse to give consent; multiple arbitration agreements govern one or more parties; or some signatories waive enforcement of the arbitration clause, but others do not. In short, in complex transactions, it is rare for all parties to be signatories to a single arbitration agreement; therefore, any arbitration proceeding runs the risk of resolving common issues of law or fact multiple times for a single party, leading to the burdens of duplicate efforts, collateral estoppel effects, and inconsistent awards.

Federal and State Use of Consolidation and Joinder
Given the range of potential problems in establishing a single arbitral forum, consolidation and joinder represent the two procedural mechanisms for preventing the initiation of multiple arbitration proceedings arising out of the same common issues of law or fact. Notably, even arbitrators who may have an unintended pecuniary interest in duplicative proceedings widely approve of the efficiency created by these two methods. (Although there has been little empirical data recently, a 1994 report found that 83 percent of arbitrators favored consolidation procedures.) Beyond efficiency, consolidation tends to promote fairness, providing an arbitrator with a clearer view of a complex transaction and limiting the amount of gamesmanship spurred by a party's strategic abuse of separate proceedings.

Even though these procedural instruments for bringing together parties have outsized benefits for disputants and arbitrators alike, legislatures and courts strangely discourage their use in the absence of tailored contractual provisions, presumably because consolidation and joinder endanger the theories of contractual consent underlying arbitration agreements. For instance, and as discussed more fully below, despite the FAA's strong endorsement of arbitration, the act fails to provide any authorization whatsoever for federal courts to order consolidation or joinder. Notwithstanding the handful of states that have supplied statutory bases for court-ordered consolidation, it seems clear that parties should not rely on courts to compel consolidation without an express or implied basis in an agreement between the parties.

If a party neglects to craft an arbitration clause that addresses consolidation or joinder, both federal and state law generally are disinclined to supply a means to centralize the parties in a single forum. On the federal level, the FAA's failure to even refer to these procedures has prompted federal courts to resist their imposition if the parties have not clearly spelled out the terms of their use in a written contract. Despite the obvious efficiency of these procedural tools, the Supreme Court has been unequivocal in holding that the FAA is solely intended to secure enforcement of privately negotiated agreements, regardless of whether that enforcement is practical or efficient. Consequently, nearly all federal appellate courts "have held that a district court may not consolidate multiple arbitrations when an arbitration agreement is silent on the issue of consolidation." Moreover, in Green Tree Financial Corp. v. Bazzle, the Supreme Court held that where the parties' agreement is ambiguous on the question of consolidated arbitration proceedings, an arbitrator, not the court, resolves the issue (at least in a class action context). Further, non-signatories lack any standing to compel the contracting parties to arbitrate and also cannot themselves be compelled to arbitrate by any signatory, if they otherwise have not agreed to arbitrate.

At the same time, a stable, though slim, body of law has developed that puts tension on the traditional notion of arbitration-by-consent, identifying limited circumstances in which courts can compel non-signatories to an agreement into the signatories' arbitral proceeding. Under this minority line of authority, the point is not that ordering non-signatories to participate in signatories' arbitrations is allowable despite the contractual requirement of consent; rather, the point is that a party may demonstrate, by clear and unmistakable evidence, that a non-signatory impliedly consented to an arbitration clause it never actually executed. (In particular, the Seventh Circuit in Connecticut General Life Insurance Co. v. Sun Life Assurance Co. of Canada, 210 F.3d 771 (7th Cir. 2000), has inferred that parties intended to be bound to arbitral consolidation, even where the contract was silent on the issue.) Still, it is clear from even a cursory review of the case law that it is exceedingly rare for a party to find a federal court willing to consider consolidation and joinder absent the express agreement of the parties, and these rulings likely will become even rarer; although some scholars have recommended enacting federal legislation that prioritizes efficiency over consent in some circumstances, these proposals have met with hostility from both industry lobbyists and federal legislators, who generally seek to reduce the power given to arbitrators under the FAA.

Of course, state law may fill in the FAA's silence regarding consolidation and joinder, but there is little uniformity in how states have addressed the issue. Several states have embraced the consolidation provisions of the Revised Uniform Arbitration Act (RUAA), which expressly permit court-ordered consolidation, even when there is no party consent. In this sense, the RUAA flips the default position under federal case law, assuming that consolidation is permissible in the absence of consent unless the parties have expressly prohibited it by contract. A motivating factor behind this change, made in 2000, was that "it is likely that in many cases one or more parties, often non-drafting parties, will not have considered the impact of the arbitration clause on multiparty disputes." Id. at p. 37; The RUAA default therefore "encourages drafters to address the issue expressly and enhances the possibility that all parties will be on notice regarding the issue." The following states and the District of Columbia have adopted the RUAA, which was initially based on California legislation: Alaska, Arizona, Arkansas, Colorado, Hawaii, Michigan, Minnesota, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Utah, and Washington. In addition, Massachusetts, Florida, and Ohio have some form of consolidation provisions in their state arbitration acts, many of which expressly allow nonconsensual consolidation. However, several of these states exclusively apply consolidation provisions to international arbitrations (or, in California's case, exclusively to domestic arbitrations). As for arbitral joinder, despite federal law's overriding discouragement of the practice absent consent, state law generally allows parties to bind non-signatories to an arbitration clause through incorporation by reference, assignment or assumption, piercing the corporate veil, agency, or equitable estoppel.

While the RUAA—and the states that have adopted it or similar rules—significantly helps parties who have neglected to address consolidation or joinder in their contractual arbitration provisions, it still does not overcome contract language specifically disallowing consolidation. Thus, in a complex, multiparty project with numerous contracts and arbitration clauses, state law does not rescue drafters from ignoring consolidation issues, particularly when projects involve multiple state and national jurisdictions, with inconsistent consequences on procedural and substantive legal doctrines.

Because the application of federal and state law is unpredictable, the only means for parties to obtain efficient consolidated arbitration proceedings is to bargain for it in express contractual provisions. In the second article in this two-part series, we suggest a proposed uniform arbitration agreement that addresses these potential pitfalls and more, providing a practice-ready template for attorneys working in construction or on any multiparty project.


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