Riding the Arbitration Wave

If you have ever stood on a beach, odds are you’ve answered the siren call of the sea and surfed a wave, board or no board. You have likely also had a wipe out or two.Things were going seemingly well, you were happy, covered in salt water and child-like wonder, only to look up and find that you’re now hundreds of yards from where you started, carried off by the current, and nowhere near catching that wave that you wanted to ride back to the shore.

Discovery in complex construction litigation can be the same. In civil litigation, you start out with the pleadings and then dive into discovery. One action leads to another and, before you know it, you are two years in, no closer to a resolution, and thinking there must be a better way, which is where the premise of arbitration begins: a way to resolve complex issues more quickly.

This article contains perspectives from a litigator, arbitrator, and insurance professional on why arbitration is becoming increasingly popular and how it is changing the way construction-defect claims are resolved. Is it better or worse than the old-school way? Time will tell, but in the meantime, grab the surfboard and let’s dive into the deep blue sea. One thing we can guarantee, regardless of your role in the construction claim process, the arbitration wave ride will not be boring.

The Litigator’s Joy Ride

One of the main factors driving arbitration in construction cases is the ability to control how quickly a resolution is reached. In arbitration, the discovery process is more concise. For example, if you choose to arbitrate under the American Arbitration Association (AAA) Rules and Procedures, then the arbitrator will hold a conference with all parties in a Preliminary Management Hearing and Management of Proceedings. At that hearing the parties will agree to what depositions need to be done as well as the scope of any written discovery, and the arbitrator will, in turn, deter- mine the appropriateness.

Even if the arbitration is not subject to the rules of AAA, each arbitration should begin with a conference with the arbitrator. This conference will provide the avenue to make sure necessary discovery gets completed to develop the case toward a resolution at mediation or arbitration hearing. Many of the tools used to develop a case in a civil suit are still available. Written discovery, document production, and depositions are all available, but you have to ask for them and, most importantly, be able to explain why you need them.

Admittedly, this process could impede the ability to thoroughly identify issues and themes of the case, impacting valuation of a resolution, but that can be mitigated with a well-thought-out Management of Proceedings Order (order).

Whether or not the arbitration is occurring under the AAA rules, make sure to insist that, by agreeing to arbitrate, you are requiring that there be a conference with the arbitrator to set a Management of Proceedings and a written order. Then:

1. Confer with all counsel before that conference with the arbitrator to identify the issues and what will determine the scope of those issues and a resolution.
2. Present a plan to the arbitrator on how you want the proceedings to go.
3. Request the order issued by the arbitrator include the procedure for making motions to amend.
4. Insist that a mediation occur in the middle of any discovery in case a motion for additional discovery needs to be made.
5. Ensure that an award type is identified in the order.

The Arbitrator’s Score Card

It is not assumed that an arbitrator must provide an explanation or rationale for an award. As a result, there is minimal detail provided in the Federal Arbitration Act (FAA) or the Uniform Arbitration Act (UAA) as to the form or content of awards returned in an arbitration proceeding. In fact, both statutes only contemplate that the award be returned in writing or that some other record of the award be made by the arbitrator(s). (See FAA, 9 U.S.C. § 9; UAA § 19).

In most cases, an arbitration award in a proceeding involving construction- defect claims will take one of three forms:

• A “standard” award.
• A “reasoned” award.
• An award containing specific findings of fact and conclusions of law.

It is important to consider how the three common award types defer.

Standard Award

A standard award in an arbitration proceeding provides the shortest and most succinct ruling. These types of awards typically only identify the parties to the arbitration, confirm the authority for the arbitration (usually a contract), and identify the prevailing party and the relief or award provided. Standard awards will be the default form of an arbitration award in the absence of a statute, rule, or agreement among the parties requiring greater detail to be provided in the award.

Parties may prefer to receive standard arbitration awards for a variety of reasons: For example, since standard awards are very succinct, they are less susceptible
to challenge and therefore have greater finality. They are also more efficient for arbitrators to prepare, thus reducing the volume of the arbitrator’s work and therefore the cost to the parties associated with the same. Standard awards also allow for the better protection of information relating to the underlying dispute, and consequently are attractive because they provide greater privacy and/or confidentiality to the extent that they are reported in arbitration industry periodicals or other reporting services.

Reasoned awards

Unlike a standard award, a reasoned award provided by an arbitrator will describe the arbitrator’s key findings and reasons for the same. The parties to the arbitration proceeding may agree to receive a reasoned award in their contract either expressly or by the incorporation or adoption of particular arbitration rules for their arbitration proceeding. This award is especially attractive if there are companion cases proceeding in state courts with subcontractors.

For example, additional requirements for the form and content of arbitration awards may be provided in the governing rules provided by an arbitration association, such as the AAA, which requires reasoned awards for certain types of proceedings conducted for particular industries. If the arbitration agreement or the rules governing a particular arbitration action do not specify the form in which the arbitrator(s) must provide the award, a party may also request that the award include, or omit, certain findings or details after an arbitration proceeding has been initiated. The inclusion or exclusion of certain findings or details may impact the party to the arbitration proceeding in a variety of ways, as discussed below.

Sector-specific arbitration rules promulgated by the AAA require that arbitrators provide a reasoned award. [See, for example, AAA, “Employment Rules” § 39(d)]. The AAA’s Construction Industry Arbitration Rules and Mediation Procedures provide greater detail and require:

• A writing signed by a majority of the arbitrators.
• A concise breakdown of any monetary awards or a line-item description of the disposition of non-monetary claims.
• At the parties’ request, more detailed findings of fact or conclusions of law.

AAA’s “Construction Rules” § R-48 provides that, in general, a reasoned award returned in a construction-defect arbitration will summarize the positions of the parties, discuss the evidence, resolve the dispute between the parties, and, if appropriate, award monetary or non-monetary relief.

Since they are more detailed, reasoned awards often provide the parties
to the arbitration proceeding the benefit of greater understanding of the rationale behind the award. In addition to a greater understanding of the award itself, this information may be used to inform the parties’ future business decisions and, potentially, inform future litigation and arbitration strategies and provide leverage when pursuing underlying claims against subcontractor parties that did not participate in the arbitration. However, reasoned awards may be more susceptible to challenge—with greater detail comes a greater opportunity for attorneys to argue that the arbitrator erred—and may also involve greater time and cost to prepare.

Findings of Fact and Conclusions of Law

Finally, parties in an arbitration proceeding may agree to have the arbitrator make detailed findings of fact and conclusions of law, more akin to a trial court order. A request for detailed factual and legal findings may be made by the parties, if there is agreement, even if the original contract for arbitration identified rules for the arbitration proceeding where such detail is not required. For example, Rule 48 of the AAA’s “Construction Rules” does not automatically require detailed findings of fact and law, but contemplates that the parties may request the same.

Note, however, that one party’s unilateral request for a more detailed ruling may not be granted by the arbitrator, as this might be considered a material change in the contract for arbitration.

If a detailed factual and legal arbitration award is preferred, we recommend that this requirement be either expressly included in the contract for arbitration, or that the contracting parties select a set of governing rules for their arbitration proceeding that require the same.

Arbitration awards that include findings of fact or law will provide the greatest amount of detail on factual and legal issues, but commensurately involve the greatest expenditure of time and fees for the arbitrator to prepare. Nevertheless, and because they are so detailed, arbitration awards providing findings on the facts and conclusions of law are best suited to address the nuances of complex construction-defect cases—particularly those involving multiple phases of construction, repair or a bevy of indemnification, and/or contribution claims between contractors pursued in state court.

The Claim, Costs, Risks, and Considerations

For the insurance professional, participating in or agreeing to an arbitration brings additional considerations and the need to look at a balance between costs and risks.

Considerations for voluntary participation include:

Costs. Arbitration is usually a lower-cost alternative to state actions. By not voluntarily participating in arbitration, you run the risk of forcing a state action to commence. The simplified rules also allow for better expense cost containment, focusing on important and relevant documentation versus costly and time-consuming discovery, thereby leading to a timelier resolution.

Risk. Choice of arbitrator—the selection process mitigates the risk of a judge who is not as well experienced in construction litigation. In addition, if the matter is relatively small, arbitration could be a quicker alternative to resolve the matter.

Voluntary participation may be rejected because:

• There can be a lack of control with the opposing party. State actions allow an avenue to compel opposing parties; arbitration has a lack of pressure for subcontractor parties to participate.
• If the contracts with subcontractors are missing arbitration provisions, you may want to consider not entering arbitration. If the party bringing the claims does not prevail, then there would be no subsequent claim.
• Even if your insured agrees to participate, you may still have a state court action because their downstream subcontractors do not participate.
• Arbitrated claims with the major parties can be easier to get resolved because there will be an award or settlement to use for leverage.

Whether you are riding the waves of the ocean or arbitration, there are choices. Those choices are not necessarily right or wrong, but they determine whether the ride is smooth or a wipeout. In arbitration, the keys to a smooth ride are quickly identifying the issues, quickly obtaining a Process Management Order, and understanding what claims may continue after the initial surf so you mitigate any rip currents along the way. No matter what, the surf is up, and arbitration in complex construction cases is likely here to stay.