The Jury's Out: AAA Issues New Construction Industry Rules Expanding Powers of Arbitrators

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As the judge took the bench, the attorneys were ready for the jury’s verdict. They had worked long hours preparing their arguments, prepping witnesses, cataloging evidence, and devising cross-examination strategies. They were not, however, ready for their hard work to be squandered by sordid allegations of an intra-jury food fight. But a juror’s allegations that another juror had poisoned her and pilfered an avocado from her sandwich nearly derailed the three-week criminal prosecution. Ultimately, the juror, who admitted that she was not thinking coherently, was dismissed after the judge concluded her claims had no basis in reality, and the parties agreed to proceed without a mistrial.

This is an extreme example, but this close call illustrates the risks inherent in proceeding to trial by jury. Juries are often unpredictable, both in their behavior and their decision making, and risk-averse litigants must seriously consider the risk involved in resorting to a trial by one’s peers. This is especially true in the context of a complex construction dispute, which involves highly technical concepts, evidence, and expert testimony.

In addition to the risk inherent in entrusting complex construction disputes to lay juries, civil litigation requires extensive discovery and motions practice, which can delay resolution and increase uncertainty and costs. Arbitration has long been accepted as the “answer” to these problems, but as the nature of disputes and the needs of parties have changed, increasing costs and inefficiencies have led parties to eschew arbitration and litigation in favor of settlement or more informal dispute resolution procedures.

In an effort to address these concerns, the American Arbitration Association (AAA) has revised its Construction Industry Arbitration Rules. The new rules, which took effect July 1, are intended to make the arbitration process more efficient and more cost-effective. As a threshold matter, the new rules increase the presumptive threshold for “document submission” and “fast track” arbitrations to, respectively, $25,000 and $100,000. The diversion of more disputes into abbreviated proceedings promises to result in significant time- and cost-savings. The bulk of the remaining changes apply to the rules for “regular track” arbitration.

Revised Rule R-7 sets firm deadlines for the consolidation of proceedings and joinder of parties. Parties are now required to file consolidation and joinder motions by the later of the appointment of the merits arbitrator or 90 days after the filing of the demand and payment of the filing fee.

New Rule R-10 implicitly acknowledges the trend towards mediation. The rule requires concurrent mediation of all disputes where a claim or counter-claim exceeds $100,000. The impact of this rule is uncertain, because it allows either party to unilaterally opt-out of the “required” mediation.

Revised Rule R-23 expands the scope of preliminary proceedings. It requires a preliminary management hearing “as soon as practicable” after the arbitrator is appointed to establish procedures to achieve a “fair, efficient, and economical resolution of the dispute.” This rule also incorporates two supplemental rules, which admonish arbitrators and the parties “to avoid importing procedures from court systems” and provide a list of suggested topics to be addressed at the preliminary management hearing.

Along those same lines, revised Rule R-24 gives arbitrators greater control over discovery. Arbitrators can now, either with or without the motion of a party, require and/or limit the production of documents. Perhaps most significantly, arbitrators can now require production of electronically stored information in the manner most convenient to the requesting party. Arbitrators can also limit the scope of electronically stored information by dictating the search terms to be used in review and production.

The AAA’s new rules also expand the powers of arbitrators. New Rule R-25 gives arbitrators the power to issue any order necessary to enforce revised Rules R-23 and R-24. New Rule R-34 gives arbitrators the discretion to decide motions for summary judgment, “upon prior written application” of a party. Similarly, new Rule R-39 creates a procedure for the consideration of motions for emergency relief. Finally, new Rule R-60 gives arbitrators broad authority to order sanctions at the request of a party.

Instead of simplifying arbitration proceedings, the bulk of the AAA’s new rules attempt to achieve efficiency and cost-savings by increasing the powers of arbitrators to manage proceedings and dispose of matters early in the process. Taken as a whole, these rules edge arbitrators ever-closer towards the powers enjoyed by judges. It is uncertain what these new rules mean for the construction industry.

Rule R-7 should achieve some time savings at the beginning of the arbitration process, but it is less clear whether the other new rules will decrease costs and increase efficiency. The impact of those rules will depend on how they are implemented. If liberally administered, they could increase legal costs and fees and further delay the ultimate resolution of disputes by increasing discovery and motions practice. If applied more judiciously, they could decrease legal costs and fees and improve efficiency by allowing arbitrators to control discovery more assertively and dispose of disputes early in the dispute resolution process.

Before drafting and finalizing contracts, you should keep these new rules in mind as you consider whether to adopt AAA arbitration as the default dispute resolution approach. In the event you find yourself in an arbitration proceeding following the AAA’s rules, you should also consider exercising your rights under these new rules to leverage a more timely and cost-effective arbitration process.

"The Jury's Out: AAA Issues New Construction Industry Rules Expanding Powers of Arbitrators" was originally published on August 21, 2015, by the Daily Journal of Commerce.

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