Arbitration continues to be the chosen dispute resolution process for many in the construction industry. Generally, arbitration is considered an efficient and cost-effective way to resolve most typical construction disputes.
Selecting arbitration as the dispute resolution process requires a written agreement. Most often, the arbitration agreement is included among many terms and conditions in the contract for a project. It is typically much easier to negotiate terms of arbitration agreement before a dispute arises as opposed to afterward, when parties often disagree about everything. Therefore, for those who want to make the most of the arbitration process, some advance planning is necessary to draft and negotiate a tailored arbitration agreement to take maximum advantage of the benefits.
Of course, it is recommended to consult experienced counsel to assist with this process. A poorly drafted arbitration agreement may still be enforced, which can inadvertently create procedural hurdles or delay the arbitration process. This, in turn, can result in additional costs to the parties. Like all provisions in construction contracts, the nuances of the language used in the arbitration agreement can be make a big difference in how the provision is interpreted and enforced.
Below are some of the key considerations for arbitrator selection. Future blog posts will address other arbitration agreement considerations.
Process for selection of arbitrators
The selection of arbitrators to decide a dispute is one of the most important decisions parties will make in the dispute resolution process. One of the advantages of arbitration is that the parties can design a process in which they have some control over who the arbitrators will be. Generally, there are three commonly used methods for selection of arbitrators:
- Selection from a list of pre-qualified arbitrators provided by an administrative agency such as the American Arbitration Association (AAA);
- The parties each select one arbitrator, and the two selected arbitrators chose a third arbitrator; and
- The parties mutually agree to an arbitrator without assistance from an administrative agency.
The first approach (list) is the default approach by the AAA under the Construction Industry Rules, unless a different method is specified in the arbitration agreement. Under the list approach, each party will strike a certain number of arbitrators from a list provided by the administrative agency and then rank the rest in order of preference. The administrative agency then identifies the potential arbitrator(s) for appointment by combining both lists and determining the highest-ranking, non-stricken arbitrators. The list approach is applicable for selecting one or three arbitrators.
The second approach (party-selected) is usually a process that starts with each party unilaterally choosing an arbitrator. This provides a party with more control over the selection of at least one arbitrator than the list method, under which a highly ranked arbitrator by one party may be stricken by the other party. Usually under this approach, the party-selected arbitrator is neutral (this is the “default” approach by the AAA under the Construction Industry Rules), but it is also possible for the parties to appoint non-neutral arbitrators. In all cases, the third arbitrator is neutral.
There are several potential methods for selection of the third arbitrator by the two party-selected arbitrators. The two party-selected arbitrators can be provided a list (similar to the first approach) by the administrative agency to rank arbitrators by order of preference, or if an administrative agency is not used, then the two party-selected arbitrators can attempt to mutually agree upon an arbitrator on their own. Whether chosen from a list or some other method, the parties could also have some input into the selection of the third arbitrator by specifying in the arbitration agreement certain qualifications for the third arbitrator. The party-selected approach is only applicable for selecting three arbitrators.
The third approach (ad hoc mutual selection) is most often used if the parties chose not to use an administrative agency. This approach requires the most cooperation and agreement between the parties to find a mutually acceptable, neutral arbitrator. As noted above, it is not unusual that once a dispute has arisen, parties cannot agree on much, including the important decision of selecting an arbitrator. Therefore, if this approach is chosen, it is recommended that the arbitration agreement include a default process for selection of an arbitrator in the event the two parties are unable to agree to an arbitrator within a specified period of time. There are cases in which parties have been required to resort to litigation to ultimately have an arbitrator appointed (undoubtedly resulting in unnecessary delay and costs), so this approach should be carefully considered. This process is usually applicable for the selection of one arbitrator.
For each of the three approaches, the potential for multi-party arbitrations should not be ignored. If it is contemplated that multiple parties may be joined (or multiple arbitrations consolidated into one), then designing a fair arbitrator selection process for multi-party arbitrations can be challenging (and beyond the scope of this blog post).
Another general consideration for the selection process is whether to include a step for interviewing potential arbitrators. As noted above, the selection of an arbitrator is very important, and parties may feel better informed and prepared to select an arbitrator if they have an opportunity to first have a discussion with the arbitrator prior to selection. The parties may inquire about the arbitrator’s philosophy about discovery, motion practice, adherence to established schedules or a host of other issues regarding the arbitration process. Of course, both parties should jointly participate in the interviews. Certainly, this process will require careful tailoring to ensure it does not become overly difficult or time consuming to complete.
Number of arbitrators
The number of arbitrators is also an important consideration for the arbitrator selection process. Under the AAA’s Construction Industry Rules, the “default” is that one arbitrator will be appointed for arbitrations with claims and counterclaims totaling less than $1 million. However, some parties may want to vary the claim amount threshold up or down, or even specify a number of arbitrators for matters with claims of any amount. Obviously, the cost incurred by the parties for three arbitrators will be more than the cost for one arbitrator, and it generally takes longer to schedule conferences/hearings with three arbitrators due to the need to coordinate more schedules.
Rules and procedures
An essential consideration in the arbitrator selection process is the adoption of established arbitration rules and procedures. As noted above, the AAA has rules that provide certain “defaults” for certain circumstances if not otherwise specified in the arbitration agreement. Other administrative agencies have similar rules and procedures, but certainly not all rules and procedures are the same. It should also be recognized that established rules and procedures will likely also address other related issues for arbitrator disclosures, disqualification and vacancies, all of which can also be addressed in the arbitration agreement.
Qualifications of arbitrators
The ability to choose arbitrators who have the background and experience with construction issues is often considered particularly valuable. Generally, it is possible for parties to specify in their arbitration agreement that arbitrators have certain qualifications to be eligible for selection. Parties may want to include requirements that arbitrators have specific legal, technical or practical construction experience. Parties can specify that arbitrators have a certain amount of experience with the arbitration process itself, or require that the arbitrators be of a certain nationality or in a certain location. There are obviously many potential qualifications that could be specified for potential arbitrators, but it also should be recognized that the more prerequisite qualifications specified, the smaller the pool of potentially qualified arbitrators.