Summary of Revised AAA Construction Industry Rules Effective July 1, 2015
The American Arbitration Association recently revised its Construction Industry Arbitration Rules and Mediation Procedures. The revised Rules, which became effective on July 1, “further align the AAA Construction Rules with most construction industry contract documents,” and give arbitrators “the tools and authority to effectively manage the arbitration process.” See https://www.adr.org News Alert “American Arbitration Association Launches Updated Construction Rules”.
The revisions send a clear message: arbitration should be a faster, cheaper and more efficient alternative to court litigation of complex construction matters. Parties who needlessly bog down proceedings with costly and time consuming requests, motions, or non-compliance with rules and orders may suffer real consequences. The revisions provide arbitrators with broader sanctions powers. The rules also provide the ability to issue orders to protect confidential information, establish electronic document search terms, allocate discovery costs, and to draw adverse inferences or exclude or limit evidence.
The rules also emphasize the importance of establishing procedures early in the process that will cause the proceedings to move forward quickly, economically, efficiently and fairly. The rules expressly caution parties against “importing procedures from court systems, as such procedures may not be appropriate to the conduct of arbitration as an alternative form of dispute resolution.” See P-1(b). The arbitrator is able to balance the burden of a requested procedure or request for information against the need for giving a party a fair opportunity to develop and present its case. The rules provide a much needed set of tools to restrict and govern requests for electronic documents and information by authorizing the establishment of acceptable search terms, confidentiality orders and allocation of costs between the parties based upon considerations of fairness. See R-23-25. This can dramatically reduce the costs and administrative burden of discovery in disputes with large amounts of e-mail and electronic documentation. Here is a summary of a few noteworthy changes:
Rule 10 sets mediation as a default requirement for cases with claims of $100,000 or more, and sets a default date for mediation, which is to happen concurrently with arbitration. Potential benefits of this revision include reduced preparation costs by allowing a concentrated preparation effort closer to the hearing date; easier scheduling for parties and counsel; and a venue for efficiently disposing of smaller, collateral claims just before the hearing. Some potential drawbacks might include a lost opportunity to resolve matters early in the proceedings, a chilled negotiating atmosphere due to the proximity to the adversarial hearing, and the inherent difficulty in enforcing the rule that the meditation “shall not serve to delay arbitration proceedings” while at the same time trying to promote negotiations that appear promising. Rule 10 allows parties to agree to other timelines and procedures, or opt out completely, and parties should consider the possible benefits and drawbacks early on when making this choice.
Consolidation and joinder time frames and filing requirements streamlined.
When to Act
|Consolidation||Before Appointment of the Merits Arbitrator*||Within 10 days after notice of receipt of the request for consolidation is sent by the AAA||All parties upon submission of request to AAA|
|Joinder||Before Appointment of the Merits Arbitrator*||Within 14 days after notice of receipt of the request for consolidation is sent by the AAA||All parties and the party to be joined, simultaneously with submission of request to AAA|
|Stay of Related Arbitrations||With Request for Joinder or Consolidation|
*Or within 90 days of the date the AAA determined that all administrative filing requirements were satisfied, whichever is later. The AAA appoints a separate Rule 7 arbitrator from a panel of construction arbitrators with consolidation and joinder experience to decide the issue of joinder or consolidation, and that arbitrator cannot then serve as the Merits Arbitrator unless all parties agree. R-7(a), (d) and (g).
General contractors or owners may want to act promptly and utilize these rules to gain control over a potential multi-party, multi-tier dispute. They should review their standard contract documents to ensure that they will be able to join all necessary parties if a dispute erupts, or that they are adequately protected against claims of parties with which they did not contract and which have not agreed to arbitrate. It may make sense and save costs to agree to allow the Rule 7 arbitrator to act as a merits arbitrator, or to act as the mediator later in the proceedings since that person will already have some familiarity with the issues in the case and an appreciation of the larger picture.
New preliminary hearing rules to provide more structure and organization to get the arbitration process on the right track from the beginning.
At the discretion of the arbitrator, and depending upon the size and complexity of the matter, a preliminary hearing is to be scheduled as soon as practicable following the appointment of the arbitrator. At the hearing, the parties will consider efficiency and fairness in determining arbitration procedures and parties may not import familiar court procedures if doing so will add cost or time to the proceeding. The arbitrator may go through a checklist of up to 20 items provided by P-2(a), and the arbitrator must issue a written order memorializing decisions or agreements made during the preliminary hearing.
The requirement of a written order after the hearing should help ensure compliance and protect against slipping or morphing of procedures as time passes. On the other hand, parties should consider building some precautionary procedures or flexibility into the order to protect against foreseeable and unforeseeable issues that could change the circumstances of the case.
Proportionality. In a word, the new R-24 gives the arbitrator greater control over the pre-hearing exchange of information to achieve a fair and economical resolution. The arbitrator balances the costs and burdens of responding to requests for information with each party’s right to develop and present its case. The arbitrator may require the exchange of documents in a party’s possession or control on which it intends to rely, and to provide updates or supplements; allow requests for documents from another party if the documents are in the other party’s possession or custody, are not readily available to the requesting party, and are relevant and material to the outcome of the dispute. The arbitrator may require production of electronically stored information in the manner most convenient and economical for the producing party, and may impose search criteria or parameters setting the boundaries for searches of electronically stored documents or information. R-24(b)(iv).
Be prepared to articulate a “good cause” for any request for documents or document types from another party in a different format than what is more convenient to that party. For example, the producing party might claim that it is easiest to produce electronically stored information by printing it out, or compiling it into a gargantuan .pdf file, or perhaps exporting it into a file format that requires proprietary software. This may not be workable for the requesting party, since that party might need the files in a specific file format in order to more easily upload and work with them in their document review software, or because the requesting party needs metadata like “to” “from” and “date” fields in e-mails or “modified date” fields in drawings, reports, schedules or other files. Metadata does not always come out with a hardcopy printout, or when a document gets converted to .pdf. Rule 24 allows the requesting party to seek specific documents or file formats, even if more cumbersome to the producing party, upon a showing of “good cause.”
Be aware of the kinds of information that you might need for your case, and inquire into how documentation was kept so that you can address these issues in the preliminary hearing. Failing to do so may leave you unable to get information (or get it in a workable format) when you need it later. Also, consider that you may be required to pay costs or fees as a condition of getting information in a specific format if your request is inconvenient for the producing party. See R-25. Note also that in panel arbitrations, the chair may resolve, or may appoint a single arbitrator to resolve, disputes regarding the exchange of information. See R-45.
Availability of emergency measures of protection in contracts that have been entered into on or after July 1, 2015.
A new rule allowing requests for emergency relief and an expedited hearing now exists, and under it an arbitrator will be appointed in 24 hours to address issues promptly. R-39. This rule applies to arbitration clauses or agreements entered into after July 1, 2015. Parties must give notice by fax or e-mail and certify that all other parties have been notified or an explanation of the steps taken in good faith to notify other parties.
The proceedings may be much like a proceeding for a restraining order or preliminary injunction but perhaps with fewer elemental requirements since R-39 requires only a showing that immediate and irreparable loss or damage will result in the absence of emergency relief, and the party is entitled to the requested emergency relief. Court procedures for emergency relief often require the satisfaction of other elements. Even so, if a party chooses to initiate a court proceeding for emergency relief, doing so does not waive its right to arbitrate, and instead it may request the court to appoint a special master who will abide R-39 and issue a report to the court. This is an important provision that alters the way emergency relief can be obtained, and parties should understand especially when they agree in their contracts to the AAA Construction Industry rules.
Enforcement power of the arbitrator to issue orders to parties that refuse to comply with the Rules or the arbitrator’s orders.
The arbitrator now has specific enforcement authority and power to issue orders necessary to accomplish the goals of a fair and efficient arbitration process. R-25. The powers include the ability to impose reasonable search parameters for electronic and other documents and to allocate the costs of production among the parties as the arbitrator sees fit. Paragraph (d) of R-25 gives the arbitrator the ability to sanction willful non-compliance and paragraph (e) authorized the issuance of other types of enforcement orders such as: order protecting confidential information, to draw adverse inferences or exclude or limit evidence, or making special allocations of cost or an interim award.
The arbitrator now also has sanctions powers that can conceivably include a host or remedies (except for default, which is the only expressly prohibited sanction.) Any sanction that limits a party’s participation in the arbitration or results in an adverse determination of an issue or issues must be explained in writing, and must provide for a response and an evidentiary hearing with oral argument before making a final determination or an award. The limitations on, or extra steps required for, sanctions that limit claims or issues might unwittingly nudge arbitrators towards issuing monetary sanctions instead, or issuing no sanctions at all. Parties should consider this when considering a request for sanctions.
Rule 25(e) allows the arbitrator to issue “any other enforcement orders which the arbitrator is empowered to issue under applicable law.” One should be sure to review the applicable law regarding arbitrator powers in the controlling law jurisdiction.
Permissibility of dispositive motions to dispose of all or part of a claim or to narrow the issue in a claim.
In keeping with the spirit of the rules revisions, parties should expect arbitrators to be more receptive to dispositive motions if those motions will likely dispose of or narrow issues in a case. On the other hand, parties should expect arbitrators to be unreceptive of dispositive motions where there are clear disputes of material fact as these motions add cost and time to a case. Parties who believe they have a good issue for a dispositive motion should keep their arguments clean and tight. The newly enhanced sanctions powers under R-60 could allow sanctions against a party that files a dispositive motion that had no reasonable chance of success and that expands the cost, scope or time of the proceedings.
Other noteworthy changes (see adr.org for more details)
- Rule 19 – Failure to disclose conflict waives right to disqualify arbitrator later
- Rule 36 allows an arbitrator to disregard written witness statements or expert reports if the witness or expert fails to appear for examination at the hearing.
- F-1 raises fast track applicability limit to $100,000 and documents only hearing to $25,000.
- L-4 and L-5 have been combined.