Clients are always looking for ways to manage costs of legal disputes. With tighter cashflows since the recession, many businesses are understandably asking for budgets and working with their attorneys to find strategies that reduce legal fees and litigation costs.
The American Arbitration Association (AAA) has been under the same pressure to limit costs, particularly with respect to construction-related arbitrations. In response to the growing demand for predictability, the AAA released a new set of rules known as the Supplementary Rules for Fixed Time and Cost Construction Arbitration.
The rules were released in June 2014 and are designed to supplement the Construction Industry Arbitration Rules and Mediation Procedures. The Supplemental Rules work best for cases with discrete issues and limited discovery, and where parties and attorneys can agree on many of the procedural issues without involvement of the administrator or arbitrator.
Key Features of the New Rules.
- Maximum total fees. The best part about the new rules is the cap on fees. As long as the parties follow the limitations of the rules, there is absolute predictability as to the total amount of arbitration related fees. The maximum fee includes AAA administrative fees and arbitrator fees. It does not include travel-related expenses incurred by the arbitrator or facility-related expenses.
- Limited parties. The Supplemental Rules apply only to arbitrations involving two parties. The two-party limitation does not apply to a surety, as long as the surety: (a) is represented by the same counsel as its principal; and (b) has not asserted an independent claim against its principal or the other named party.
- One arbitrator. All arbitrations administered under the Supplementary Rules are limited to one arbitrator.
- Meet and confer conference. One of the most significant differences between the Construction Industry Rules and the Supplemental Rules is the meet and confer conference (SR-11), which is designed to allow the parties to agree upon procedural and administrative issues such as: the selection of prospective arbitrators; the time, date, and place of the hearing; the number and allocation of hearing days; and document exchange and discovery. If the parties cannot agree on all of the procedural matters and the arbitrator is asked to resolve them, additional fees are charged for the arbitrator’s time.
- Limitations on duration and hearing days. The Supplemental Rules contain Time/Cost Schedules where the duration of the arbitration and hearing days are limited by the size of the claims. For example, for a claim/counterclaim that is between $500,000 and $1 million, the hearing may not exceed five days and the maximum duration from filing of the arbitration demand to the award is 270 days.
- Limitations on arbitrator time and compensation. The Supplemental Rules also place limitations on the arbitrator’s hourly fees and study time based upon the size of the claim. Maximum hourly fees range from $250 per hour (for claims less than $250,000) to $350 per hour (for claims above $1million).
- No post-hearing briefs. Post-hearing briefs are generally not permitted, except upon approval of the arbitrator or agreement of the parties, but additional fees will be charged for the arbitrator’s time.
- Arbitration award. The arbitrator must issue an award not more than 20 days from the close of the hearings and the award itself is limited to no more than three pages. If the parties request a reasoned award or findings of fact and conclusions of law, the arbitration must be administered under the Regular or Large, Complex Track procedures.
Not Every Case is Right for the New Rules.
If there are multiple legal and factual issues to be addressed or if the dispute involves the use of several fact and expert witnesses on each side, then the new rules should not be used. In fact, even if a case starts as a simple case, but grows in complexity or duration as its proceeds such that the time or hearing days will exceed the maximum, the AAA has the discretion to administrate the arbitration pursuant to the Regular or Large, Complex Case Track procedures, with the standard fees applying.
How to Use the New Rules.
The new rules are optional. Both parties to a dispute must agree to the arbitration being administered under the Supplemental Rules. If you want to use the new rules, or at least want the option to use them in appropriate situations, the best practice is to include an express provision in your contract for the application of the Supplemental Rules to any disputes. This new provision would be added to any existing arbitration provisions, and it would make sense to reference both the Construction Industry Rules as well as the Supplemental Rules.
If you have steered away from using arbitration to resolve disputes because of the escalating costs, now may be a good time to reconsider whether to change your contracts to include an arbitration provision.
If you would like a copy of the new Supplemental Rules or advice on incorporating the rules into your contracts, please click here to email me.