In the first part of this two-part series, we examined the current landscape of federal and state law regarding arbitral consolidation and joinder, and we emphasized the problems that frequently arise in construction and other large multiparty projects. Our conclusion was that attorneys who care about efficiency and predictability would be reckless to rely solely on the common law or arbitration statutes. If you want to ensure that you will be able to coordinate multiple parties and claims into a single proceeding, you have only one reliable option: to put consistent consolidation and joinder provisions in a written agreement signed by all parties. In this second article, we provide and describe our suggestion for what this arbitration agreement should look like.
Drafting Arbitration Agreements
Our first installment considered the contradictory principles of federal and state arbitration law, as well as the broad prioritization of contractual consent over practical efficiency found in the Federal Arbitration Act (FAA). Given these challenges, parties need to place a premium on drafting compatible and robust arbitration provisions at the outset of any project. In complex multiparty arbitrations, the stakes are simply too high to just leave the process to chance, post hoc negotiations, and the common law. The natural follow-up question is what should the parties include in a multiparty arbitration agreement?
Even transactional attorneys who are aware of the need for contractual protection may inadvertently rely on form arbitration clauses that do not provide their clients with much dependability. For instance, while the 2017 American Institute of Architects (AIA) A201 industry form agreement is generally liberal, allowing consolidation or joinder mechanisms that encourage architects or engineers to participate in arbitrations involving other parties (such as owners and contractors), the AIA continues to have certain restrictive measures in place: Only a party involved in multiple proceedings may seek to consolidate those proceedings, and the other proceeding's governing arbitration clause must permit consolidation. Moreover, for joinder, the newcomer still must specifically consent to its inclusion in the proceeding; if it refuses, the other parties seeking joinder likely have no recourse. Similarly, while ConsensusDocs requires the inclusion of all parties in any arbitration—"all Parties necessary to resolve a claim shall be Parties to the same dispute resolution procedure"—the ambiguity involved in determining whether a party is "necessary" to an arbitrated claim may allow a party excessive flexibility to include or exclude parties in any proceeding.
In addition, the internal procedural rules of many dispute resolution services offer potential pitfalls if transactional attorneys assume these rules are suited to their clients' needs. Under its internal rules, JAMS has the authority to impose consolidation without a motion or request by an involved party, potentially requiring a party to participate in a proceeding without being able to have any input into that proceeding's location or arbitrator or panel of arbitrators. The American Arbitration Association (AAA) specifies, without elaboration, that only a party that has filed a demand for arbitration may seek consolidation; and, of course, consolidation still requires the consent of all parties. (The AAA requires so-called "R-7 arbitrators," who are independent from the underlying arbitration proceeding, to evaluate and rule on party requests for consolidation or joinder.)
Understandably, then, lawyers with foresight emphasize individualizing arbitration clauses to protect against unreliable form agreements and internal arbitration service rules. One article, by Rona Shamoon and Irene Ten Cate, admonishes lawyers to consider a template clause that seeks to address six aspects of arbitral consolidation:
1. the clause's scope, in terms of relevant parties and agreements;
2. the procedure whereby an arbitrator determines whether consolidation is appropriate;
3. the standards for consolidation (e.g., when there are common issues of fact or law);
4. the mode for remedying inconsistent decisions rendered by multiple arbitrators;
5. the procedure for determining which arbitrator will serve for the consolidated proceeding; and
6. the mechanism for joinder of parties or claims to an existing arbitral proceeding.
Another article suggests that a paramount factor is considering "limiting how far down the chain of privity [parties] wish to have disputes consolidated," as well as limiting "how far removed a party may be from the original contract to be eligible to participate in a consolidated proceeding." 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, 373 (1990). Notably, beyond considering the language and scope of these provisions, lawyers also must ensure that similar provisions are present and consistent in all relevant collateral contracts (e.g., owner-contactor, owner-designer, contractor-subcontractor). As one commentator, Richard Jeydel, has warned, judges and arbitrators will hesitate to order consolidation or joinder without compatible and interlocking arbitration clauses agreed to by each party; a party that is not expressly bound to a contract's arbitration clause can circumvent the entire process, even when that clause mandates that related disputes must be resolved in the same forum.
Understanding the Uniform Construction Arbitration Agreement
Because the most commonly used form arbitration agreements and the internal rules of alternative dispute resolution (ADR) services leave much to be desired, parties embarking on multiparty projects should seek out a more comprehensive and tailored agreement. The authors' prototype for such an agreement—the Uniform Construction Arbitration Agreement (UCAA)—is applicable to many forms of complex multiparty arbitration with an emphasis on large construction disputes.
Our UCAA is a practice-ready template for a universal arbitration clause that provides the parties with stability and predictability. While the UCAA is the product of the authors' experiences in litigating complex construction cases, as well as a review of the extant law discussed in this article, the hope is that this model agreement applies equally to—or at least sheds light on—the sort of troublesome issues that arise frequently in consolidating proceedings for any multiparty dispute: arbitrator selection; arbitrator disqualification; arbitral subject matter; duties to incorporate arbitration clauses by reference in ancillary and subsequent agreements; the resolution of conflicts between arbitration clauses; assumptions of arbitration obligations; internal arbitral procedures, such as discovery rules; and timelines for joinder, among other topics. The parties inevitably will need to tailor the minor, procedural aspects of the UCAA to the particular needs of the project at issue, but the agreement's broader terms and purposes should be acceptable to nearly all projects. At the very least, the UCAA acts as an exemplar and checklist to ensure that parties are not surprised or frustrated when disputes occur.
In light of both the great uncertainty around arbitral consolidation without express consent and the necessity for detailed precautions prior to the emergence of disputes, the UCAA is a template for multiparty arbitration agreements that solves many of the aforementioned problems in a single instrument. It is a stand-alone, ancillary agreement that can be appended easily to the parties' larger contracts within a single project, and it provides concrete assurances about the jurisdiction, procedural framework, and finality of any arbitration, thereby stabilizing a delicate dispute resolution process.
The UCAA is intended to be easily understood by many types of construction participants, but certain features are unique and merit further elaboration here. First, pursuant to section 1, the UCAA eschews any confusion about an arbitrator's jurisdiction and scope by stating that all issues of arbitrability are submitted to—and decided by—the arbitrator. Similarly, under section 3, the parties agree to a particular set of rules, expressly acknowledging that their project implicates interstate commerce, and therefore invoke the rules and policies of the FAA (as well as the rules of the relevant ADR service, which is identified clearly in section 1(a)–(b)). That same clause also notes that the parties waive the FAA's statutory requirement that a jury decide the enforceability of an arbitration agreement. Under section 11, the parties expressly submit to the personal jurisdiction of the mandated ADR office, as well as to the corresponding forum and venue for any multiparty dispute governed by the agreement. Courts uniformly uphold these waivers of personal jurisdiction and venue challenges, particularly if the waiver has some substantial connection to the forum (e.g., the construction project's location). The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). Relevant commencement fees are set forth in section 4, and all parties' waiver of any contra proferentem argument is set forth in section 8.
Beyond providing clarity about applicable rules and procedures, the UCAA provides an array of tools designed to make arbitration proceedings highly efficient. For instance, section 2 seeks to deter parties from withholding consent to a consolidated proceeding by penalizing (or requiring additional consideration from) signatories in the event that they neglect to attach identical arbitration agreements to all related contracts (e.g., collateral contracts with suppliers and subcontractors). Practitioners will need to evaluate independently whether it is advisable, under the relevant state law, to penalize signatories or require additional consideration from signatories (or both) with regard to collateral arbitration agreements.
If a signatory fails to include identical arbitration agreements in so-called "downstream" collateral contracts, the responsible party is bound to (i) assume the obligations of the missing party's insurer; (ii) waive any rights of indemnity or contribution against the missing party; and (iii) waive any claim it may have for moneys due under the contract to which the arbitration agreement is attached. These provisions no doubt will be the subject of negotiation between the owner/developer, consultants, and contractors; one or more of them may be enough to accomplish the goal. There should be, however, some provision that compels an upstream party to properly include the UCAA in downstream contracts.
Once a dispute arises, the UCAA permits a rapid and clear method of facilitating consolidation or joinder: It provides that arbitrations will be consolidated under the auspices of the ADR service office that is nearest to the construction project or nearest to the bulk of the contracting parties (section 1(a)). This can be adjusted, of course, to move to the United States any disputes on overseas projects, subject to the jurisdiction and venue laws of the foreign state. The UCAA also limits the number of disqualifying "strikes" that a party can bring to the selection of an arbitrator, mandating in section 1(a) that a party may only move to disqualify an arbitrator for good cause and that an unsuccessful motion will result in joint and several liability for attorney fees and costs. That provision, which is California-specific (see Cal. Code Civ. Proc. § 1281.91), discourages parties from tying up arbitration with repeated attempts to disqualify arbitrators after disclosure, regardless of whether they have legitimate grounds to do so.
Similarly, the UCAA seeks to expeditiously finalize the arbitral award, providing that the arbitrator must issue the decision within 30 days of the last day of evidence or the submission of final briefs (section 1(c)). Following on these precautions to protect and economize arbitration prior to the rendering of an award, the UCAA also includes an inducement to the parties to adhere to the terms of the eventual award once it is formally issued. An unsuccessful attempt by a party in challenging the award on any basis (other than bias or corruption) will result in the losing party's double payment of the costs and fees incurred in opposing the challenge, with one share to the prevailing party and one share to a charitable organization of the prevailing party's choice (section 1(d)).
In section 12, the UCAA sets forth a robust list of provisions to include in any arbitral case management order for the purpose of maximizing efficiency and utility. This case management order includes, among other prescriptions, discovery schedules, discovery limitations, destructive testing protocols, and a prohibition on motions for summary adjudication or judgment (which are time-consuming, particularly because arbitrators appear inclined to deny them). Because the FAA does not set forth formal discovery procedures, this provision represents the sole pre-dispute opportunity for the parties to fix and anticipate the arbitrator's discretion in allowing particular discovery procedures.
In the context of residential construction, the UCAA contains an optional clause (section 13) that requires the parties to append the UCAA to all covenants, conditions, and restrictions and to all purchase and sale agreements, thereby including claims by (or, less often, against) new home purchasers and those in the chain of title thereafter. This clause expressly acknowledges—and expands on—settled case law in, for example, California, where the state supreme court has held that a project developer could enforce an arbitration agreement against a condominium owners' association even though it had been created prior to the formation of the association.
Finally, the UCAA ends with a customized integration clause, specifying that its terms represent a single, uniform agreement regardless of whether it is appended to contracts of different dates or among different parties.
As the use of arbitration continues to expand and as construction projects become more financially and technically sophisticated, participants and their attorneys must attend to arbitration agreements with even more rigor and foresight. The UCAA is a customizable template that addresses the difficult questions that often occur after a dispute has already arisen (inter alia, the scope and participants of a multiparty arbitration, collateral arbitration agreements and incorporation by reference, assumptions of arbitration costs, internal arbitral procedures, and arbitrator selection). Even in circumstances where certain UCAA provisions are inapplicable, the form offers a convenient checklist to ensure that the parties have carefully considered relevant consolidation or joinder issues prior to executing complex contracts.
As the two articles in this series have demonstrated, parties cannot depend on federal or state law, piecemeal contractual provisions, or private dispute resolution services to supply consolidation and joinder mechanisms with any certainty. Therefore, the only way to protect the efficiency and reliability of multiparty arbitration is for attorneys to do the hard work by themselves: review the UCAA carefully, use it as a model, and then draft precise and thorough dispute resolution agreements that expressly contemplate joinder and consolidation.
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