Five Tips for Controlling Time and Cost in Construction Arbitration

1. Efficiency Starts with the Arbitration Clause

Before the dispute even begins, the arbitration clause plays a critical role in managing the arbitration process. When more detail is included in an arbitration clause, parties typically are better situated to control the arbitration process. Nonetheless, parties are cautioned against excessive specificity, which may have the opposite effect. Counsel are well advised to spend the time necessary to carefully consider the needs of their clients, the type of project, the nature of the dispute that may arise, their clients’ position in the dispute, and what they hope to accomplish during the dispute resolution process. At a minimum, the arbitration clause should consider the number of arbitrators, the hearing locale, and discovery procedures.

The number of arbitrators plays a principal role in arbitration costs. American Arbitration Association (AAA) statistics show that parties that select a single arbitrator instead of three can reduce arbitrator compensation costs by 77 percent. (Statistics presented here are estimates based on AAA construction arbitrations awarded in 2013 with claims of $1 million or more.) In fact, more than half of the parties with large construction disputes select a single arbitrator. While parties may intuitively believe that higher amounts in dispute necessarily call for three arbitrators, it is not uncommon to see large construction cases (claims of over $50 million) with a single arbitrator.

For cases that do proceed with three arbitrators, the parties should consider implementing procedures that would limit the participation of the full panel where it is not necessary. For example, the AAA recently introduced the streamlined three-person panel option, which calls for a sole arbitrator to manage the early stages of the case, decide issues related to the exchange of information, and resolve other procedural matters. The full panel of three arbitrators will still convene for the hearing and ultimately decide the award, but appointing a sole arbitrator to handle these initial procedural matters can be a much more cost-effective way to manage an arbitration. Such procedures should be considered for inclusion in the arbitration clause whenever possible.

Another important cost consideration is the hearing locale. Many arbitration clauses call for the locale to be the location of the project. However, if the project is not in a major metropolitan area, travel expenses for the arbitrators—and, in some cases, parties and their counsel—will add to the cost of the arbitration. It is important to consider the ease of arbitrator selection when setting the hearing locale. Major cities typically have a larger pool of qualified arbitrators from which to choose. A remote hearing locale may make arbitrator selection difficult or require the parties to include a much broader region in their arbitrator search.

Discovery is one of the most expensive and time-consuming portions of the arbitration process, and it is often desirable to control the amount and scope of discovery through a clause in the contract. In some instances, the parties may wish to provide for a more tailored discovery program in their arbitration clause. For example, parties may wish to limit the number of depositions or specify procedures for document exchange.

Parties may also wish to consider including specialized procedures in their arbitration clause. The AAA Supplementary Rules for Fixed Time and Cost Construction Arbitration were developed to streamline disputes under $5 million. These supplementary rules allow parties to calculate the maximum time to complete the arbitration, the number of hearing days, and the arbitrator costs. In addition, the parties and their representatives have the ability to work in a collaborative manner to move cases along within the required time frames. The case stays on track through limited document exchange and discovery and through tough remedies for nonpayment of administrative or arbitrator fees.

These are only a few of the issues that should be addressed in a good arbitration clause. Counsel also should discuss confidentiality, dispositive motions, and governing law with their clients. In an effort to assist parties in creating a more comprehensive arbitration clause, the AAA has created an online tool, the Clause Builder, which will guide users through all of the options related to the development of a customized arbitration clause. Finally, to have access to the administrative expertise of an institution like the AAA, one must reference the institution in the clause.

2. Choose an Arbitrator with Experience and Specialized Qualifications

Parties often overlook the importance of selecting the arbitrator who will hear the dispute, in addition to counsel who has experience with the arbitration process. The parties should carefully consider what qualifications they are seeking in an arbitrator because appointing the correct arbitrator with appropriate and relevant construction project experience can make the arbitration process itself more efficient.

While the arbitration clause is the first place to consider what types of disputes might arise and what arbitrator qualifications would be most beneficial to the nature of the dispute, parties and counsel can also request qualifications during the initial phase of the arbitration to assist the case administrator in formulating a list of potential arbitrators. It is important to consider whether the key issues are legal disputes or technical disputes—would the case benefit from an industry professional such as an architect or engineer, or would a construction attorney be better suited to hear the dispute? Answering these questions in advance typically results in a clearer and more informed arbitrator selection.

Parties may also use this time to agree to a single arbitrator rather than three arbitrators. In addition to the added cost of three arbitrators, scheduling and logistics for a three-arbitrator panel often can become problematic, leading to increased time and cost of the entire process.

In appointing an arbitrator, parties should review potential arbitrators’ résumés in detail and perform their own outside research, such as reaching out to solicit feedback from parties who may have prior experience working with those arbitrators, searching the Internet, etc. Another way to vet potential arbitrators is through the AAA’s Enhanced Neutral Selection Process. This process enables the parties to interview potential arbitrators or pose mutually agreeable written questions to ascertain whether the arbitrator has the proper experience (or specialized experience that might not be listed on a résumé) and determine their disposition and case management skills or style.

3. It’s Arbitration . . . Not Litigation

One sure way to increase the costs and length of arbitration is to treat it like litigation. Arbitration is a creature of contract, enabling the parties to tailor the process to fit their needs and eliminate costly litigation procedures. In practice, arbitration is sometimes weighed down by litigation-like procedures, which should be avoided in order to manage time and cost. The following three paragraphs discuss the main ways to avoid such pitfalls.

First, parties should limit discovery to only what is essential for the arbitration. Discovery costs often are the largest part of any litigation budget. That is why it is important to establish a strict discovery schedule and to limit the exchange of information to only what is necessary for the arbitrator to understand the case. This includes eliminating interrogatories, limiting depositions to key decision makers, and agreeing on electronically stored information whenever possible. The parties should also engage the arbitrator to streamline the process wherever possible.

Another key to shortening the process is limiting motion practice. Motions are time-consuming and may not have any practical significance in the arbitration. Consider whether the motion will advance the ball; if it does not, it probably isn’t necessary. For example, motions in limine may be inappropriate in arbitration, where the formal rules of evidence don’t apply. In addition, arbitrators may be reluctant to grant dispositive motions absent agreement by the parties. Sometimes arbitrators will request that parties wishing to file a motion first seek permission to do so in order for the arbitrator to assess its potential effect on the case.

Finally, parties should trust the expertise of the arbitrator. In arbitration, contrary to a jury case or even a bench trial, the arbitrators have specialized knowledge tailored to the dispute. Construction arbitrators will have an understanding of the subject matter, so claims should be presented in a clear manner, focusing on key issues and facts, rather than on pleas for fairness or equity.

4. Present the Case Efficiently

The parties themselves play a large role in making sure the proceedings are efficient. Working with the opposing parties in a collegial fashion to structure the process early on is key to streamlining the process. Counsel should consider including the parties at the preliminary hearing and, in more complex cases, should even consider conducting it in person rather than by telephone. At the preliminary hearing, the parties and arbitrators should be prepared to establish procedures aimed at achieving an efficient and economical process.

At the evidentiary hearings, parties should have already prepared all of the procedures necessary to ensure that hearings flow smoothly. For example, time limits should be considered, exhibit books containing stipulated exhibits should be pre-marked, and the sequence of witnesses should be agreed on in advance. A party representative should be present at the hearings. During testimony, comments should be directed to the arbitrator, avoiding unnecessary sparring with counsel during cross-examination. Even a small delay in the proceedings can result in the need for additional hearing days. Often the availability of parties and arbitrators is limited, and requiring additional hearing days may result in a much more lengthy delay while the case awaits its next hearing.

5. Remain Open to Settlement

Parties should continuously keep an open mind as opportunities for settlement arise throughout the proceedings. Including a mediation step in the proceedings is an easy way to ensure that the parties discuss settlement options.

Rule R10 of the AAA Construction Rules calls for the parties to mediate their dispute. Unless agreed otherwise, the mediation should be concurrent with the arbitration so as not to delay the process. When mediated, many cases are settled or partially settled at the initial stages of the arbitration. Settling even part of the dispute up front can make the hearings shorter and less expensive.

It is also important to reassess settlement options throughout the proceeding. It is not uncommon for cases to settle during or even after the hearings. Sometimes an additional mediation session after some discovery is effective in reaching a settlement. Parties should leave their emotions aside; instead, they should evaluate whether any new information gathered throughout the proceedings affects the value of the case. Parties in agreement to mediate may contact their AAA case administrator at any time during the proceeding for assistance in selecting a mediator and setting up mediation.

Conclusion

Each step of the arbitration process is heavily guided by the parties and their counsel. To fully realize the benefits of efficiency and cost-effectiveness of the ADR processes, it is critical to have a well-drafted arbitration clause, counsel experienced in the arbitration process, and an experienced arbitrator with sophisticated subject-matter and case-management experience. It is important for the parties and their counsel to understand the difference between arbitration and litigation and to use an ADR provider that has arbitrators and managers who are experts in the construction industry and the rules and processes designed specifically for complex disputes that arise on construction projects. Following these tips can lead to a more streamlined and efficient process and, ultimately, save clients time and money.

Mia Levi is director of ADR Services, Construction Division, with the AAA. Michael Marra is vice president of the Construction Division with the AAA.

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