This article was published in the February 2018 issue of ConsensusDocs (Vol. 4, Issue 1). It is reprinted here with permission.
“Arbitration has been proven to be an effective way to resolve disputes fairly, privately, promptly and economically.” So provides the preamble to the Construction Industry Rules of the American Arbitration Association. But construction industry participants have grown wary of arbitrations that are neither prompt nor economical, suffering delays and generating transactional costs that can approach and sometimes surpass those in litigation. The problem is real, and can limit the advantages arbitration brings to dispute resolution in the construction industry.
Arbitration costs and delays can cascade out of control even with skillful and mature counsel on both sides, and an experienced arbitration panel. Experience has shown that two factors can lead to such a result. First, arbitration hearings can proliferate without an experienced judge to control and limit the evidence, leading to evidentiary hearings of unnecessary length. Second, while most arbitration rules provide for some pre-hearing information exchange, that process can devolve into an excessive discovery program, including binding party depositions along the lines of those provided in Federal Rule 30(b)(6) that can become a burdensome examination of contentions, and an expensive exchange of electronically stored information (ESI).
In a recent construction arbitration, protracted hearings and expensive discovery led to attorneys’ fees and costs in the millions of dollars, with a prevailing party award that jeopardized the collectability of the ensuing judgment. A more streamlined arbitration would most likely have yielded a better result for both parties. This article examines the source of this problem, and suggests what parties and arbitrators can do at contract formation time, at commencement of the arbitration, and over the course of hearings to ensure a more cost-effective arbitration.
There Should Be Reasonable Limits on the Receipt of Evidence
Many arbitrators believe that because awards can be set aside by the refusal of the panel to receive evidence, the best way to avoid a reversal is to liberally allow all evidence and discovery or delay a party's requests. But that posture significantly overreacts to the potential risk of vacation of an otherwise proper award. Taken too far, this can undermine the benefits of arbitration to begin with – a prompt and cost-effective dispute resolution.
Some commentators have fostered this notion. See Elkouri & Elkouri, How Arbitration Works, 407 (5th Ed. 1999) ("[T]he more serious danger is not that the arbitrator will hear too much irrelevancy, but rather that he will not hear enough of the relevant."); see also Cooley, John W. & Steven Lubet, Arbitration Advocacy, Second Edition, 124 (NITA 1997) ("Most arbitrators conduct arbitrations with a commonsense notion of what is important to resolve a case. They apply a low threshold for admitting evidence, and they weigh the reliability and importance of the evidence as the hearing continues and issues evolve . . . . Also, many arbitrators liberally admit evidence in arbitration in order to obviate a later court challenge to their awards based on allegations of unfair preclusion of critical evidence.").
The basis for setting aside an award for failure to receive evidence is in fact quite narrow. Under the Federal Arbitration Act, the “court . . . may make an order vacating the award upon the application of any party to the arbitration . . . where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy.” 9 U.S.C.§ 10(a)(3). Section 10(a)(3) "cannot be read, however, to intend that every failure to receive relevant evidence constitutes misconduct which will require the vacation of an arbitrator's award." Newark Stereotypers' Union No. 18 v. Newark Morning Ledger Co., 397 F.2d 594, 599 (3d Cir. 1968). The cases make clear that vacatur pursuant to section 10(a)(3) is warranted only where "the arbitrator's refusal to hear proffered testimony ‘so affects the rights of a party that it may be said that he was deprived of a fair hearing.’” Century Indem. Co. v. Certain Underwriters At Lloyds, London, 584 F.3d 513, 559 (3d Cir. 2009) (citations omitted). "Fundamental fairness" requires that arbitrators provide each party "an adequate opportunity to present its evidence and argument" — but it does not require arbitrators "to hear all the evidence proffered by a party." Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16 , 20 (2d Cir. 1997) (citation omitted).
Arbitration 'Discovery' Should Be Limited
The Rules of the American Arbitration Association guide arbitrators to narrowly tailor information exchange. “The arbitrator shall manage any necessary exchange of information among the parties with a view to achieving an efficient and economical resolution of the dispute, while at the same time promoting equality of treatment and safeguarding each party’s opportunity to fairly present its claims and defenses.” Rule 24(a). The AAA’s addendum for large and complex construction matters cautions against wholesale adoption of litigation techniques into arbitration, rather providing for document exchange, depositions as an extraordinary remedy, and limited ESI discovery.
International arbitration bodies, typified by the ICC, are even more circumspect about adopting discovery techniques. “The arbitral tribunal and the parties shall make every effort to conduct the arbitration in an expeditious and cost-effective manner, having regard to the complexity and value of the dispute.” ICC Art. 22(1). The ICC rules do not explicitly provide for any right to information exchange.
While the Federal Arbitration Act does not set out failure to provide for discovery as a specific ground for vacating an award, it has sometimes successfully been asserted where documentary evidence crucial to the fair resolution of a dispute is in the possession of only one party. Courts have held that "[t]he absence of statutory provision for discovery techniques in arbitration proceedings obviously does not negate the affirmative duty of arbitrators to insure that relevant documentary evidence in the hands of one party is fully and timely made available to the other party. . . . [A] failure to discharge this simple duty would constitute a violation of FAA § 10(a)(3), where a party can show prejudice as a result." Chevron Transport Corp. v. Astro Vencedor Compania Naviera, S.A., 300 F. Supp. 179, 181 (S.D.N.Y. 1969).
The instances in recent years of vacating an arbitration award for failure to receive evidence or permit discovery are rare and present extraordinary facts. For instance, in Tempo Shain, a commercial contract arbitration where each party accused the other of fraudulently inducing the contract, the panel denied a continuance when the only witness available to one party with knowledge on the contract negotiations, and the competing fraudulent inducement claims, became unavailable due to a family illness. The arbitrators suggested that the testimony was cumulative, which the district court accepted at face value, confirming the award. But the Second Circuit reversed. “The question on appeal is whether the panel's refusal to continue the hearings to allow [the central witness] to testify amounts to fundamental unfairness and misconduct sufficient to vacate the arbitration award pursuant to section 10(a)(3) of the Act. We believe that it did, and therefore vacate the court's endorsement of the award.” Tempo Shain, 120 F.3d at 18.
A finding of prejudice is an independent requirement for vacating an award. For example, in Chevron Transport Corp., 300 F. Supp. at 181, in a maritime arbitration, the arbitrators did not order timely production of the port logs, characterized as “perhaps the most important items of documentary evidence in any maritime controversy.” They were only available to one side, who produced only extracts. Full copies were not produced until after the oral hearings were closed, and counsel was faced with having the port logs translated and analyzed during the short time between the close of the hearing and the submission of briefs. While the court made clear that the arbitrators should have ensured the logs were available to both sides, it denied without prejudice the motion to vacate because the allegations of prejudice were conclusory and failed to establish what would have happened had the port logs been disclosed on a timely basis.
Far more common are cases where a losing party in arbitration fails in the argument that misconduct resulted from exclusion of evidence or discovery. Reviewing courts look closely for reasons to confirm awards over such challenges based upon the view that the materials are cumulative, barred by laches, or properly excluded based upon privilege, relevance or materiality. Awards are generally confirmed even though the reviewing court would have found the arbitrator’s legal basis for exclusion to be erroneous.
Parties and arbitration panels can help restore the advantages of arbitration for resolving construction disputes. Reasonable limitations on discovery and presentation of evidence would be a large step in that direction. So would worrying more about inefficiency and less about the risk that an award might be vacated.
First, parties can put limitations on discovery and hearing in the arbitration clause, and any other limitations that would make sense under the circumstances. Parties may, of course, "tailor some, even many, features of arbitration by contract," Hall St. Assocs., LLC v. Mattel, Inc., 552 U.S. 576, 586 (2008). It is much easier for clients to agree on reasonable limits in the abstract before a dispute arises, than afterward when one or both parties might see a tactical advantage in proliferating proceedings. Wholesale adoption of litigation techniques can be excluded by a properly drafted arbitration clause.
Second, at the outset of a dispute, arbitrators should encourage and parties should accept procedural orders containing strict but fair and reasonable limits on the time and effort that goes into an arbitration proceeding. Time limits, chess clocks, and other known case management tools can be used effectively in the right circumstances. Fostering a culture of efficiency in arbitration should be a shared value in the construction bar.
These efforts can pay dividends in a more streamlined arbitration process. Counsel and clients should work to achieve this result so that arbitration meets its lofty goals of efficient dispute resolution.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.