ISSUES TO CONSIDER IN SELECTING ARBITRATION OR LITIGATION*
This paper discusses the issues implicated by the American Institute of Architects'
("AIA") proposal to remove the arbitration clause from its standard form agreements. Under the
proposed revision, parties to an AIA contract would have the ability to litigate their disputes in
court rather than resolve their disputes through arbitration, as is required under the current form
agreements. This would mark a significant change in the manner in which disputes are resolved
in construction projects. There are a number of pros and cons implicated by such a change.
The arbitration clauses in AIA contracts generally provide, subject to certain exceptions,
for the arbitration of "[a]ny Claim arising out of or related to " the contract. They further provide
that arbitration "shall be in accordance with the Construction Industry Arbitration Rules of the
American Arbitration Association currently in effect" and that the arbitrator's award is a final
award upon which a judgment may be entered in a court having competent jurisdiction.
A.
Which Version of the AAA Rules Apply?
AIA form contracts provide for arbitration in accordance with the Construction Industry
Arbitration Rules of the American Arbitration Association (the "AAA rules") "currently in
effect." This provision is ambiguous. Does it refer to the rules in effect at the time the contract
is entered into, at the time the demand for arbitration is filed, or some other time? The answer is
unclear. The AAA rules were amended several times in the 1990's, so the ambiguity potentially
has tangible effects. Omitting the arbitration clause from AIA contracts would have the obvious
advantage of removing this potential uncertainty from the process.1
B.
Consolidation/Joinder
The AIA form contracts impose strict limits on consolidation of claims and joinder of
additional parties to arbitrations. For example, AIA Document B141-1997 contains the
following provision:
No arbitration arising out of or relating to this Agreement shall
include, by consolidation or joinder or in any other manner, an
additional person or entity not a party to this Agreement, except by
written consent containing a specific reference to this Agreement
*
Prepared by Alan E. Harris and Anthony P. Schoenberg of Farella Braun + Martel LLP.
On the other hand, unless the amendments to the AAA rules were substantial, this uncertainty may not be of great
importance. One of the amendments, from 1997, allows parties to submit their claims to mediation prior to
arbitration. This amendment was intended to make the AAA rules consistent with AIA contracts. Since parties to
an AIA contract were already required to mediate disputes as a condition precedent to arbitration, this does not
affect the substantive rights of the parties. Rather, it merely provides an additional forum for mediation.
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ISSUES TO CONSIDER IN SELECTING
ARBITRATION OR LITIGATION
and signed by the Owner, Architect, and any other person or entity
sought to be joined. Consent to arbitration involving an additional
person or entity shall not constitute consent to arbitration of any
claim, dispute or other matter in question not described in the
written consent or with a person or entity not named or described
therein. The foregoing agreement to arbitrate and other
agreements to arbitrate with an additional person or entity duly
consented to by parties to this Agreement shall be specifically
enforceable in accordance with applicable law in any court having
jurisdiction thereof.
AIA Document A201-1997 contains a similar provision.
In contrast, consolidation of related claims and joinder of parties is granted quite liberally
in litigation. The limitations on consolidation and joinder under AIA contracts have the
advantage of keeping arbitrations streamlined and efficient. On the other hand, if all interested
parties and related claims cannot be joined and/or consolidated, the possibility of multiple
arbitrations or lawsuits arises, which is ultimately less efficient than one proceeding that resolves
all related disputes. It also raises the danger of inconsistent results.
C.
Venue
AIA form contracts do not specify the location for arbitrations. The AAA rules address
the topic somewhat vaguely. They provide that: (a) the parties may agree on a locale; (b) a party
may request a locale and, absent objection from the other party within 15 days of the request, the
locale shall be the one requested; and (c) if a party objects to the locale requested by the other
party, the AAA can determine the locale. In litigation, the rules of procedure provide clear limits
on what venues are and are not proper. The plaintiff's choice of venue (i.e., the place where the
plaintiff files the lawsuit) generally determines the venue at the outset of a lawsuit, but
defendants typically have the ability to challenge the plaintiff's chosen venue if it is improper or
inconvenient. Thus, there is more predictability under state and federal rules of procedure than
in the vague system under the AAA rules. On the other hand, the AAA rules provide more
flexibility in that the parties can agree on virtually any venue.
D.
Discovery
A major difference between arbitration and litigation is the extent to which discovery is
permitted. In litigation, the parties have the right to conduct broad discovery into the facts
underlying the other party's claims. There is generally no right to discovery in arbitration, which
is one of the primary reasons that arbitration is viewed as a cheaper and more efficient alternative
to litigation. The AAA rules provide only limited discovery options, which vary depending on
how much money is at stake in the arbitration. Those rules are as follows:
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ISSUES TO CONSIDER IN SELECTING
ARBITRATION OR LITIGATION
1.
In cases in which no claim involves more than $75,000, the "Fast Track
Procedures" of the AAA rules apply. Other than exchanging exhibits prior
to the hearing, discovery is expressly not permitted under the Fast Track
Procedures, except "as ordered by the arbitrator in extraordinary cases
when the demands of justice require it."
2.
In cases in which a claim exceeds $75,000 but no claim is for $500,000 or
more, the arbitrator "may" direct the production of documents and other
information and the identification of any witnesses to be called. The
parties also must exchange, five business days prior to the hearing, copies
of exhibits they intend to submit at the hearing. Otherwise, no other
discovery is permitted, except "as ordered by the arbitrator in
extraordinary cases when the demands of justice require it."
3.
In "large, complex construction disputes" (i.e., disputes where a claim is
for $500,000 or more), the rules provide for the exchange of documents
and information within the parties' control, exchange of exhibits, and
"such discovery as may be agreed to by all the parties," subject to the
arbitrator's discretion to impose limitations. The complex rules also give
the arbitrator discretion, upon good cause shown, to order depositions and
interrogatories.
The major advantage of the more limited discovery under the AAA rules is that it can
result in lower costs and less consumption of time. The disadvantage is that a party's ability to
mount a compelling case can be hindered by the limitations on discovery, although this is a risk
that would, at least in theory, be borne equally by both parties.
A related issue is subpoena power, particularly where witnesses or documents are located
out of state. Although arbitrators routinely issue subpoenas, the enforceability of the subpoenas
depends on the vagaries of state and federal law. State laws vary regarding the enforceability of
arbitration subpoenas. Moreover, subpoenas issued pursuant to state statutes generally are
enforceable only within the state's borders. Federal law is surprisingly unclear regarding the
enforceability of subpoenas issued pursuant to the Federal Arbitration Act, particularly where
multiple jurisdictions are involved. Thus, a significant amount of uncertainty surrounds the
subpoena process in arbitration, particularly when extra-territoriality issues come into play.
In litigation, the subpoena process tends to be clearer and usually provides a mechanism
for compelling witnesses and documents from other states. This is an advantage over arbitration.
E.
Fact-Finder Issues
Under the AAA rules, either one or three arbitrators hear a claim, depending on what the
parties agree on and the size of the claim. Under the AAA rules, if no claim is for $500,000 or
more, the presumption is that there will be only one arbitrator. For larger claims, the parties can
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ISSUES TO CONSIDER IN SELECTING
ARBITRATION OR LITIGATION
agree on either one or three arbitrators. Absent such agreement, three arbitrators hear cases
where a claim or counterclaim involves at least $1,000,000, while one arbitrator hears cases
where each claim and counterclaim is less than $1,000,000.
In litigation, cases are generally tried to juries, unless the parties agree to a court trial
(i.e., a trial in which a judge rather than a jury acts as the finder of fact). Construction disputes
can be technical and complex, and juries are sometimes regarded as being unqualified or unable
to digest the mass of technical evidence presented in a construction trial. Arbitrators often have
industry expertise and, theoretically, are less likely to be overwhelmed by the technical
complexities of construction cases. Retaining the arbitration clause in AIA contracts has the
advantage of keeping the fact-finding function in the hands of experts rather than jurors who, in
most cases, have no background in construction disputes.2
Related to this is the "McDonald's factor" – the fear of a "runaway" jury verdict in a
large-stakes dispute, particularly where punitive damages are sought. Although punitive
damages are possible in arbitration, they are more common in jury trials. A decision that rests
with only one arbitrator, however, also presents the risk of a "runaway" result because the
decision is made by only one person, untempered by another fact finder. While three arbitrator
panels might lessen this risk, in many cases two of the arbitrators on a panel are "party"
arbitrators, meaning that they have been selected by one of the parties and, therefore, are
expected to side with that party. As a result, there may still be some risk of a "runaway" award
in arbitration.
A final issue concerning the fact-finder is the perception that arbitrators tend to "split the
baby." That is, they will reach a compromise award, which is often unsatisfying to both sides.
While one could debate whether this perception is accurate, this is less likely in litigation due to
jury instructions and the "all or nothing" nature of a trial.
F.
Rights of Appeal
A major difference between arbitration and litigation is the extent to which parties can
appeal. In litigation, parties generally have a right to appeal an adverse judgment, and there are a
variety of grounds upon which a party might win a reversal. In contrast, arbitration provides
only a narrow possibility of “appeal” in the form of vacation of the arbitration award. The
primary grounds upon which a court can vacate an arbitration award are fraud, that the arbitrator
exceeded his or her power, or if an arbitrator was biased. Significantly, an arbitration award
cannot be vacated on the grounds that the arbitrator was wrong in his or her legal or factual
findings. Exacerbating this is the fact that arbitrators are generally not required to make
"reasoned" awards. Rather, arbitration awards can be nothing more than a dollar figure awarded
to one party. This can be quite unsatisfactory for the losing party.
2
It should be noted that AAA has been criticized for the inconsistent quality of its panels of arbitrators but has
been working to upgrade its panels.
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ISSUES TO CONSIDER IN SELECTING
ARBITRATION OR LITIGATION
There is an advantage, however, in that the limited right to vacate an arbitration award
gives finality to the process. All too often, litigation goes on for years without resolution
because parties continually appeal adverse decisions. Arbitration, at times, is one solution to this
problem of perpetual litigation.3
G.
Provisional Remedies
Another difference between arbitration and litigation is the availability of provisional
remedies (e.g., writ of attachment, writ of possession, preliminary injunction, temporary
restraining order).4 Arbitrators generally do not have power to render provisional relief. Instead,
parties to arbitration generally have to go to court to seek such relief. States have different rules
concerning the availability of provisional remedies to parties in arbitration. Moreover, there may
be a risk that a party could be said to waive the right to arbitrate by applying to a court for a
provisional remedy.
H.
Summary Judgment and Other Dispositive Motions
Although arbitration is intended to be more streamlined than litigation, there are certain
procedures available in litigation (used mostly by defendants) by which claims can be disposed
of prior to trial. The most common of these procedures is a motion for summary judgment, by
which a judge can grant judgment in favor of one party on the grounds that the other party cannot
present enough evidence in favor of its claim to show that there is a genuine dispute of fact to be
decided by a jury. Parties do not have a right to such procedures in arbitration (and the AAA
rules are silent regarding such procedures), although arbitrators sometimes permit parties to
submit summary judgment motions.
I.
Privacy
Another difference between arbitration and litigation is privacy. Litigation is in a public
forum and court files are public records unless there is some basis for sealing them. If parties are
concerned about their legal disputes being made public, then arbitration may be preferable.
J.
Parties Still Have Freedom of Contract
An overarching principle that should frame this entire discussion is that parties always
have the freedom to agree to whatever contractual provisions they want. For example, an owner
and contractor could use the current version of an AIA contract but omit the arbitration clause if
they prefer to litigate in court. Conversely, if there was no arbitration clause, parties could still
agree to arbitrate disputes. Since arbitration is purely a creature of contract, parties are more or
less free to agree to whatever modifications they deem appropriate. For example, parties can
agree to expand the scope of discovery in an arbitration, or to forgo discovery altogether. Parties
can modify an arbitration clause to allow for summary judgment motions, to require specific
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4
Complex arbitrations, however, have been known to last for years.
Parties to construction disputes often utilize mechanic's lien and stop notice procedures.
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ISSUES TO CONSIDER IN SELECTING
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numbers of arbitrators, or to designate a specific person as an arbitrator. There is almost no limit
to the ways in which parties can agree to resolve disputes.
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