Tag Archives: construction arbitration

Construction Arbitration Is Too Lengthy & Costly. The AAA Hopes to Fix That.

As I noted last November, there’s a growing concern among construction industry stakeholders and others that arbitration too often fails to serve its intended purpose as a speedy, less costly and more streamlined alternative to civil litigation.  This rising chorus has complained that pre-hearing discovery is too extensive and drawn out, the hearings themselves take too long, and at the end of the day, no meaningful cost savings are actually achieved.

The American Arbitration Association (“AAA”) is taking those concerns seriously.

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Custom-Build Your Next Arbitration Clause

Image by Tingeling via Pixabay.com

Image by Tingeling via Pixabay.com

Of all the great AEC content in the Twitterverse this week, the following chirp from Kansas City construction attorney Rob Pitkin (@KCconstrlawyer) really piqued my interest:

Rob’s tweet links to this article from Gary Rubin, a New York construction lawyer, about how to make arbitration more cost-effective.  Gary discusses how parties can use the contract negotiation phase of their relationship to craft a better arbitration provision.  He even suggests helpful language aimed at curtailing the duration of the hearings and the arbitrators’ authority to award certain types of damages.

All of which crystallized something I’ve been thinking about in recent years: arbitration is not a “one-size fits all” deal.  While in theory arbitration presents construction industry stakeholders with an attractive alternative to the very public, very long and very expensive litigation process, in practice, arbitration procedures and costs often elude the parties’ control. These are by no means novel thoughts on my part; a number of other observers have raised similar concerns (see here and here for a couple examples).

Now for the good news.

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AAA’s New Optional Appellate Arbitration Rules Seek to Bridge the Gap Between Arbitration and Appellate Rights.

While many construction industry participants favor the finality of binding arbitration, some are put out by the inability to appeal an unfavorable award (see my previous blog post for more on the limited bases for challenging arbitration awards in court).

Photo by Eric Kilby via Flickr *

Photo by Eric Kilby via Flickr *

The American Arbitration Association® (“AAA”) has announced a new set of rules intended to bridge that gap.  As of November 1, 2013, the AAA has made available for use its “Optional Appellate Arbitration Rules,” the purpose of which was articulated by AAA in its press release:

The objective of arbitration is a fair, fast and expert result that is achieved economically.  Consistent with this goal, an arbitration award traditionally will be set aside by a court only where narrowly defined statutory grounds exist.  Sometimes, however, the parties may desire a more comprehensive appeal of an arbitration award within the arbitral process.  …  In order to provide for an easier, more standardized [appellate] process, the AAA has developed these Optional Appellate Rules.

I greeted news of the Appellate Rules with much curiosity and, truth be told, a fair amount of skepticism: how could AAA marry up a meaningful appellate process with the streamlined nature of arbitration?  And so before reviewing the new rules, I jotted down a list of questions I hoped they would address.  Those questions, and what I discovered upon reviewing the rules, follow:

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Arbitration News: 4th Circuit Weighs In On “Manifest Disregard” Confusion

Consider the following hypothetical:

You are claims counsel for a large surety company who has spent the better part of last December preparing for and participating in eight days of arbitration hearings arising from the termination of your bonded principal in late 2010.  Back then, you had made the decision to contest liability under the performance bond on several grounds, not the least of which was the owner’s retention of a replacement general contractor without surety consent and otherwise in violation of the conditions precedent set forth in the AIA-A312 form of performance bond utilized on the project.  Your bonded principal is now in bankruptcy, and you were required to take a leading role in the arbitration proceeding as a result.

Your outside counsel is now on the phone, announcing that the Award of the Arbitrator has been issued.  Unfortunately, it’s not pretty.  The arbitrator has awarded the owner virtually the entire completion premium it had been seeking in the arbitration proceeding, minus a few adjustments here and there.  Adding insult to injury, the award is completely devoid of any reference to your A312 conditions precedent defense, which from day one you believed to be a winner, based on your interpretation of the prevailing legal authorities.

“That can’t be right,” you complain to your outside counsel.  “That’s clear error by the arbitrator.  Doesn’t the Federal Arbitration Act give me a right to challenge his obvious failure to apply the law?”

“Well,” outside counsel begins, “likely not.  Generally speaking, the FAA only permits a judge to vacate an arbitration award upon proof of gross misconduct by the arbitrator.  I’m talking about partiality or corruption, or misconduct in refusing to hear evidence pertinent to the dispute, that kind of stuff.  And frankly, proving any of those statutory grounds would be a steep uphill battle for us.”

“Okay, let’s put the FAA to the side for a moment,” you respond.  “If I’m right, and the arbitrator completely blew it on our A312 defenses, aren’t there cases out there that allow us to challenge this award if we can prove that it demonstrates a manifest disregard of the law by the arbitrator?”

Ah, manifest disregard of the law.  For over fifty years, this common law doctrine has  represented the last best hope for parties seeking to challenge the enforceability of an arbitration award.  But ever since the U.S. Supreme Court’s decision in Hall Street Associates v. Mattel, Inc. in 2008, there’s been a decided split in the federal courts — and therefore a tremendous amount of confusion — as to whether manifest disregard still exists.

Last week, the U.S. Court of Appeals for the Fourth Circuit, which handles appeals from the North Carolina’s federal trial courts (as well as from the federal trial courts in MD, VA, WV and SC), finally took its stance in the ongoing mess.  And at least in this jurisdiction, manifest disregard lives on.

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