Sarah Biser will be speaking at an IBA Webinar on “Beyond COVID-19: Impact on Construction Contracts and Projects”.  What has changed?  What’s better?  What needs to be improved?  What are the new trends?.

The conference is on 7 December 2021, 1300-1415 GMT; 8:00 to 9:15 Eastern.  Register here: https://www.ibanet.org/conference-details/CONF2078

Dispute Review Boards: Overview

Problems, disagreements and claims arise in most large and complex construction projects regardless of the project delivery method — design-build, design-bid-build, construction manager at risk, construction manager not at risk and integrated project delivery system. These disputes can and do delay and significantly increase the cost of the project. Dispute Review Boards, also known as Dispute Resolution Board, Dispute Board, Dispute Avoidance Board or DRB are often found in large construction projects to assist the parties to minimize, resolve or avoid disputes and mitigate adverse impacts to projects. To date, over $270 billion worth of construction projects have used the dispute review board process to avoid numerous disputes and achieve significant savings.[1]

The DRB process is different than mediation and arbitration because the DRB is convened at the very beginning of the project and conducts regular meetings and visits at the project site throughout the performance of the project — allowing the DRB to discuss, observe and monitor construction, progress, and potential disputes. At these meetings, the DRB members become familiar with many of the facts and acquaint themselves with the jobsite personnel. If a dispute is submitted to them subsequently, the panelists have a great deal of knowledge about the circumstances of the problem to aid them in reaching their recommendations or conclusions. DRBs also have the effect of encouraging open and honest communications among or between the parties during the project, which in turn, encourages avoidance or resolution of disputes before the disputes become formal claims. In short, the DRP process involves real-time discussion of the dispute with highly qualified people who know the particular project from day one and can provide recommendations on how to resolve disputes.

When a dispute cannot be resolved by the parties through negotiation, either party may submit the dispute to the DRB for a formal nonbinding recommendation.[2] Project personnel for each party present their side of the dispute to the DRB – in an informal setting usually without lawyers. If the DRB’s decision is not accepted by the parties, the matter can be referred to arbitration for a binding and conclusive resolution.

 

Reasons to Implement a DRB:[3]

Owners implement DRBs: (i) to avoid claims, particularly massive claims at the end of jobs asserting difficulties from the early project stages, (ii) to minimize impacts on the project schedule due to unforeseen conditions or unanticipated late changes in the scope of the work, and (iii) to maintain predictability over the use of available funds.

The use of a DRB also helps to attract and increase competition because some international infrastructure contractors are hesitant to bid on a project that does not have a DRB. Public owners must ensure that the DRB is within the boundaries of best construction practices and that it would be a prudent expenditure of public dollars. The following are some DRB attributes that are attractive to owners:

  • Effect Future Behavior: Unlike mediation, arbitration, conciliation, litigation, standing neutral and early case evaluation services, DRBs offer the opportunity to impact future behavior on a project. Neither mediation nor arbitration offers the parties this benefit because these processes evaluate past behavior.
  • Elicit Cooperation: DRBs can convert into arbitration panels, either binding or nonbinding, and so, are more effective than traditional partnering programs in eliciting cooperation among the parties and resolving the disputes.
  • All Stakeholders Can Participate: Stakeholders who are not direct parties to the construction contract (i.e., subcontractors, tenants and lenders) can participate in DRB meetings, which enables consensus to be reached with all interested parties in a single forum to benefit the project.
  • Validation of Owners’ Decision: In the context of a hierarchical bureaucracy (which can impose oversight by elected officials, administrative supervisors, auditors, outside funding agencies and Boards) a DRB offers independent, neutral and competent validation of decisions by the owner’s staff to pay for extra work during the progress of the project. An owner’s representative that has considered the input of a DRB is less likely to be accused of unnecessarily folding to a contractor’s demands.
  • Projects are More Collegial: Projects with DRBs have a jobsite ambiance that is more collegial and less adversarial than traditional projects. No owner wants to have a job that the contractor hates to work on.
  • No Surprise Claims: Surprise claims are almost eliminated. Job conditions are discussed regularly, and a Contractor’s failure to raise a significant job condition at DRB meetings can lead to a waiver or abandonment of claims arising from prior impacts it failed to disclose to the owner.

How to Form a DRB

A DRB is formed by contract between the owner and the contractor. This means that there is no statute governing the formation or dispute board proceedings. The dispute board agreement should include provisions that discuss the following:

  • qualifications of DRB members;
  • ethics requirements (neutrality);
  • selection process for DRB members;
  • timing of selection of DRB members;
  • payment of DRB members;
  • timing of site visits;
  • method of referral of disputes to the DRB;
  • prehearing submissions;
  • hearing procedures;
  • DRB recommendations;
  • admissibility of DRB recommendations in future proceedings;
  • informal or advisory opinions; and
  • clarification and reconsideration.

Both the Dispute Resolution Board Foundation (www.drb.org), and ConsensusDocs (https://www.consensusdocs.org/) have sample provisions.[4] The Project Finance and Development Committee of the ABA, Business Law Section will be publishing its own sample provisions in the near future. A discussion of appropriate provisions to be agreed upon by the parties and the agreement to be executed among the DRB members and the parties is beyond the scope of this article.

Types of Dispute Boards:

Generally, there are three types of dispute boards:

  • Dispute Adjudication Boards: which issue binding decisions that must be complied within a certain time frame.
  • Dispute Review Boards: which issue recommendations that are not binding on the parties.
  • Combined/hybrid Dispute Boards: which may issue recommendations or binding decisions.

Composition of the DRB Panel

Usually, a DRB panel consists of three members, although smaller projects (costing less than $10 million) may have a single panelist. There are different ways to select a panel:

(1)       the parties meet and jointly agree on all three members of the DRB;

(2)       each party nominates a board member and the two board members then nominate a third member. All three panel members should be approved by both parties. Typically, the third member serves as chair and all three members of the DRB become neutral upon appointment; and/or

(3)       each party proposes a list of three to five members. Each party selects from the other party’s list, and the two DRB members then select the chair subject to approval by both parties.

Panelists are selected for their personal and professional qualities. They must be sufficiently experienced in the type of work required by the contract so that they bring value to the table as trusted mentors and technical resources for the project team (usually engineers, and sometimes construction lawyers). They should also possess the interest, training and temperament to facilitate a project with humor and calm professionalism. Prospective panelists should commit to be available to convene on the schedule that the project demands and should not be so busy that meetings are delayed or postponed to accommodate panelists’ schedules. Facilitative skills are valuable for the regular meetings, and in the event a formal hearing is needed, administrative management skills will be crucial for DRB members.

The DRB works well only when the parties trust the panel. It is critical that panelists maintain not only impartiality and neutrality, but the appearance of impartiality and neutrality. Ex parte communications are strictly prohibited, including written, electronic and verbal communications. Similarly, and as distinguished from a mediation process, private caucuses with a single party are prohibited.

The DRB members must be objective, impartial, neutral and without conflicts of interest. Prior to selection, prospective panelists disclose past and current relationships that could give rise to perceived conflicts of interest, or indicate a lack of neutrality with regards to members of the project team. These disclosures are similar to those made by prospective mediators or arbitrators. The disclosure must be updated on a regular basis if there is any change.

 

DRB Meetings

The characteristic that distinguishes DRBs from almost every other form of ADR is regular meetings and site visits that take place during the performance of the work. Depending upon what the parties decide, DRBs visit the project monthly, four times a year, or at some other agreed-upon interval.

During the meetings, the DRB and parties discuss the progress of the work since the last meeting, difficulties encountered, schedule status, and potential claims and disputes. The DRB members visit the site to observe the construction, with emphasis on the areas of potential disputes. Conversations that take place during these monthly meetings are often deemed confidential settlement negotiations to encourage an open exchange of information and ideas from all participants, so an optimal plan forward can be agreed upon. At its regular periodic meetings, a DRB may be requested to offer informal oral “advisory” opinions. All affected stakeholders should be invited to attend these monthly meetings, including major subcontractors and tenants.

The regular meetings and site visits serve several important purposes. The DRB can observe the construction issues giving rise to the dispute. As a result of obtaining information in real time, DRB can facilitate or determine the resolution of a potential dispute.

The DRB has the opportunity to meet the jobsite personnel in an informal, non-adversarial setting when there are no disputes. This knowledge of the individuals, gained during the site visits, assists the DRB in evaluating the subsequent presentations to the DRB by the parties. And with all due respect to our readers, the DRB often hears about the disputes before the attorneys have the chance to frame the claims and coach the witnesses.

The presence of the DRB often encourages settlement and resolution of disputes even before formal presentation to the DRB. The parties openly discuss potential claims with each other at each DRB meeting. The DRB facilitates non-adversarial discussions – which facilities negotiation and resolution of the issues. In addition, a knowledgeable and well-regarded DRB usually develops the respect of the parties during the site visits. If so, the parties may be reluctant to present frivolous claims and are more likely to value and adopt the recommendations of the DRB.

It is not advisable to eliminate the DRB’s regular meetings and site visits[5] because otherwise, the DRB will simply become a nonbinding arbitration panel. If the DRB operates as designed, disputes may never need a formal DRB hearing. The written recommendation of the DRB may be binding or nonbinding. The trend in the USA is for written recommendations of the DRB to be nonbinding. The contract may provide that written DRB recommendations are admissible as reports of jointly selected experts, or that the recommendations are inadmissible in subsequent arbitration or litigation proceedings. There is a preference for nonbinding, admissible recommendations.

Removal or Termination of a DRB Member

The effectiveness of a DRB depends upon its ability to persuade the parties to accept its recommendations. If a party does not trust a DRB member, that party is unlikely to be persuaded by the DRB or that member. However, one party’s dissatisfaction with a DRB would allow that party to change the composition of the DRB just because that party was unhappy with the findings and recommendations of a DRB member or any other reason – leading to abuse of the process.

In addition, the new DRB member would not have the benefit of prior site visits, thereby defeating one of the main advantages of the DRB. The dismissal of a member without a substituted appointment, however, could cause serious prejudice.

The DRB Foundation recommends that a party may not terminate a panel member without the consent of the other party or parties. If one party objects to a member and the DRB concludes that the member is a detriment to the DRB process, that member should resign. If the DRB, however, determines that the DRB member is impartial and one party still objects to the member, then the DRB has lost much of its effectiveness and, the entire DRB should offer its resignation — even though this solution is less than adequate.

DRB Hearings

Either party may refer a dispute to the DRB at any time. The parties then submit short, concise position papers and relevant documents. No discovery is permitted, although the DRB members have the right to request information they believe is necessary for resolution of the dispute.

The hearings are dramatically different than hearings in arbitration and litigation. They are informal and nonadversarial — much more like a mediation presentation than an arbitration hearing. The presentations are made by the persons involved in the actual construction. The witnesses are not sworn. Openness, candor and full disclosure are encouraged. Typically, lawyers are not allowed to make presentations, except to address legal issues. While cross-examination is not permitted, the parties may suggest questions to be asked, and the DRB members are allowed to ask questions. Even without cross-examination, the DRB can evaluate credibility because they know the witnesses and the facts from the meetings and site visits.

Findings and Recommendations

            Written Findings / Recommendations

Unlike an arbitration panel or court, the DRB does not issue a decision, verdict or award. Instead, it provides written findings and recommendations that include an analysis to support its conclusions. The findings and recommendations are not binding.

The DRB must persuade the parties that its conclusions should be accepted. The parties typically use the findings and recommendations as a basis to negotiate a final resolution of the dispute. However, some contracts provide that the findings and recommendations become final if not rejected in a timely manner.

DRB findings and recommendations are generally admissible in a subsequent court or arbitration proceeding. The admissibility of DRB’s findings and recommendations in a later proceeding provides a major impetus for the parties to accept them, despite being nonbinding. However, admissible findings and recommendations may cause the parties to treat the DRB hearing more like an arbitration or litigation and seek discovery and other legal protections.

In addition, the admission of the DRB findings and recommendations may have an undue influence on a court or jury, who are likely to accept the DRB’s findings and recommendations because they come from experts in the industry selected by the parties before the dispute, even though the findings and recommendations are based on unsworn testimony and hearsay that is not subject to cross-examination or other procedural safeguards. Keep in mind that DRB findings and recommendations should be based on law and should enforce the contract provisions.

Oral Recommendations

We recommend including an informal or advisory DRB process in the DRB specifications. In this process, the parties typically provide the DRB with concise position papers and documents shortly before a regularly scheduled DRB meeting. Abbreviated oral presentations are made at the meeting. Quantum is usually not addressed unless that is a sticking point.

The DRB deliberates after the presentations and provides an immediate verbal advisory recommendation. The advisory recommendation does not preclude the parties from subsequently pursuing the dispute through the formal DRB process. This informal advisory process provides the parties with a far faster and less expensive method to resolve their disputes, particularly small disputes, and have it occur in real time.

Cost of the Dispute Review Board

The cost of the DRB depends on the frequency of the meetings and the length of the project. While the compensation of a DRB varies from project to project, fees in the neighborhood of $2,000 – $4,000 per day, per member are not uncommon. A DRB holding no formal hearings may cost approximately $40,000 to $75,000 per year. On smaller projects, half-day meetings may be sufficient, at a lower cost.

Each panelist is individually engaged by contract at an hourly or daily rate. Sometimes the cost of regular meetings is shared between the owner and contractor, but often the owner pays all costs of regular meetings, and splits only the costs of dispute hearings, should any be needed. Another option is to include an allowance in the contract for the DRB costs. The engagement should provide that panelists may not be called to testify in any subsequent arbitration or litigation proceeding.

Virtual Meetings

Prior to 2020 and the advent of COVID, it was rare for Dispute Review Boards to meet remotely. Now, the players in a construction project are more willing to accept virtual meetings in order to resolve issues and keep the work moving along on schedule. The basic principles for effective DB proceedings remain in place, despite the logistics. Please refer to the DRBF’s Dispute Board Manual: A Guide to Best Practices and Procedures, for guidance.

The following issues should be considered for virtual DB meetings:[6]

 

  • Who will participate? Seek to ensure the continued engagement of senior executives as well as project personnel.
  • Does the system have capacity limits which require restricting the number of people?
  • Who will host? The DB Chair may do so to ensure maximum control of the meeting, but if a party hosts then the Chair should set some ground rules in order to retain control of the meeting.
  • Prepare a very detailed agenda, including anticipated time allocations. Plan to have breaks at regular intervals, although this may not be set at a particular time in order to preserve the flow of discussions.
  • What reports and documents will be provided in advance and by whom?
  • Ask the parties to provide a brief joint summary in advance.
  • What reports, presentations and/or documents will be provided during the meeting and by whom?
  • DB members should consider having two or more screens, one to see the parties and one or more to view documents.
  • Depending on the platform, consider selecting “Gallery View,” where all participants can all be seen, rather than “Speaker View,” where the person speaking is shown in a larger screen.
  • Some platforms have a capacity for participants to dial in (and not be seen by video and not be identified by name). It is important that the identity of all participants, including those phoning in, be established at the outset of the proceedings.
  • The Chair should identify the participants at the beginning and at the end of each session.
  • Participants should update all software to the latest version.
  • Make sure the best possible internet connection is being used; this may include turning off other devices on the same system to maximize bandwidth. If connection weakens during the meeting, try turning off video to preserve best possible audio.
  • Devices should be fully charged and connected to power.
  • Turn off all notifications on primary and secondary devices to avoid distractions.
  • Shut doors and windows to avoid background sounds and/or visual distractions.
  • Notify others of meeting status to minimize interruptions.
  • Test camera angles, background and lighting. Each attendee’s face should fill 50% of the screen. Some systems allow a virtual background to neutralize the location, or participants may want to adjust location to have a simple plain wall behind them. Lighting should be from the front and not from behind.
  • Test sound (perhaps with others beforehand). Do you need to wear headphones and use a microphone?
  • Position your notes so they cannot be seen by the camera.
  • Wear what you would normally wear to a meeting.
  • Make eye contact with the camera when speaking.
  • Be mindful of the mute button. Use it when you are not speaking and when you are on any scheduled breaks. Remember to “unmute” when it is your time to talk. The DB should remind the participants of this at the outset of any meeting or hearing.
  • Remember each participant is “on show” throughout the proceedings, so it will be obvious if they are distracted by something else.
  • If using screen share or other functions of the online platform, make sure users are properly trained on the technique; view how-to videos online and have a practice session with the administrator.
  • Allow for sufficient pauses when addressing remarks and asking questions. There can be short delays in the technical system, or a pause as someone considers their response.
  • If you will be sharing your screen, be careful to close all other documents or programs so as to not accidentally share confidential or personal information with others.

 

Enforceability of Dispute Board Decision

As discussed above, a Dispute Board may issue either recommendations or binding decisions, which may be revised in arbitration or litigation. In either case, depending upon the rule that the parties have adopted, arbitration is normally pursued if the matter is international. When the losing party fails to comply with an international arbitral award, the prevailing party may need to seek enforcement under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards – more commonly known as the New York Convention – which has been adopted (currently) by 165 of the 193 United Nations member states. The lack of enforceability is a weak link in the Dispute Review Board process, which makes the recommendation or decision of a review board less valuable for the prevailing party than an arbitration award or court decision. Nevertheless, the benefits and the likelihood of success of Dispute Review Boards domestically and internationally weigh strongly in favor of using them as an initial form of dispute avoidance and resolution.

[1]          See the Dispute Review Board Foundation at DRB.

 

[2]          The parties can decide in advance to make the DRB’s recommendation binding under certain circumstances.

 

[3]          The Dispute Resolution Board Foundation (www.drb.org) publishes a Dispute Board Manual and a DRBF Document and Learning Library on-line.  The World Bank, which introduced the requirement for DRBs in 1995, continues to endorse the use of DRBs in the execution of the projects it finances.  The American Arbitration Association published its Dispute Resolution Board Guide Specifications on 1 December 2000, which can be incorporated into any contract.

[4]           The DRBF Practices and Procedures contains a set of guide specifications for use in contracts.  The ICC, FIDIC, the World Bank, AAA, and CIArb have also developed their own set of standard dispute board rules.

 

[5]           In the COVID and post-COVID world, parties may consider virtual site visits – depending upon the issue, the nature of the Project, the size of the dispute, and the cost of convening all parties for a site visit.

[6]          “Best Practice Guidelines for Virtual Dispute Board Proceedings,” 5 August 2020, Dispute Review Board Foundation,

Sarah Biser and Craig Tractenberg will be presenting a webinar on hop topics on international litigation and arbitration on thursday, November 4, 2021 at 12 pm eastern..  You can register .by contacting jseader@foxrothschild.com.

International Arbitration and Cross-Border Insolvency – Common Scenarios Encountered by Practitioners

 

When:
Hosted By:
ABA International Law Section and Russian Arbitration Association
People:
Location:
Radisson Collection Hotel, Moscow

2/1 Kutuzovskiy Avenue Bld. 1, Moscow

The conference will be accessible in person and virtually.  You can register here.

The topic of whether an arbitrator or a court should decide the question of arbitrability has been the subject of long-standing debate among international scholars and practitioners.  In First Options of Chicago Inc. v. Kaplan, the Supreme Court stated the general rule that “[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clear and unmistakabl[e]’ evidence that they did so.”  514 U.S. 938. But what constitutes clear and unmistakable evidence of the intent to arbitrate arbitrability?

The U.S. District Court for the District of Delaware recently provided an example of an arbitration clause that contains such “clear and unmistakable” evidence to delegate questions of arbitrability to an arbitrator. In Nidec Corporation v. Seagate Technology LLC, Civ. Action No. 21-52 (D. Del. July 20, 2021), Nidec Corporation (“Nidec”) brought a patent infringement action against Seagate Technology LLC (“Seagate”) and other defendants.  Seagate, relying on the arbitration clause in the parties’ agreement, moved to compel arbitration.  Seagate argued that the arbitration clause requires the Court to delegate to an arbitrator the decision whether the agreement applies to the claims at issue.  Seagate relied on the following language in the agreement:

If the parties are unable to resolve any dispute, controversy or claim arising out of or relating to this Agreement, including the formation, interpretation, breach or termination thereof, whether the dispute, controversy or claim asserted is able to be arbitrated … then either party will have the option to request that the dispute be finally determined by arbitration in accordance with the JAMS International Arbitration Rules.

Nidec argued that it only agreed to arbitrate disputes that arise under the agreement and Seagate should not be allowed to compel arbitration by declaring that each dispute between the parties is a dispute arising out of or relating to the agreement.     Continue Reading Delaware Federal Court Must Abide By The Parties Decision To Delegate The Arbitrability Of The Dispute To The Arbitrator Even If The Arbitration Agreement Is Irrelevant To The Dispute

Strategies to Collect International Arbitration Awards

One of the problems that parties to international arbitration face is that the opposing party may attempt to move its assets so that if an award it entered against it, the assets will no longer be available to satisfy the award.  Here, we discuss a recent case in which a losing party in an international arbitration allegedly attempted to do just that, and some strategies to avoid such an occurrence.

The Lao PDR Arbitration

In 2019, the Lao People’s Democratic Republic (“Lao PDR”) successfully defended claims in an arbitration before the International Centre for Settlement of Investment Disputes (“ICSID”) and the Permanent Court of Arbitration (“PCA”) brought by two foreign investment companies alleging that Lao PDR failed to afford sufficient protection to their foreign investments, in violation of international obligations arising under two bi-lateral investment treaties.  The ICSID Tribunal awarded Lao PDR $1.9 million in fees, expenses and costs of arbitration, and the PCA Tribunal awarded $1.8 million for similar reimbursement.

In April 2020, Lao PDR filed a complaint in federal court in Idaho to enforce the arbitral awards against James Baldwin and Bridge Capital, LLC, alleging that they were alter egos of the two arbitral award debtors, Lao Holding N.V. and Sanum Investments Ltd.  Lao PDR filed the complaint pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), as implemented by Title 9 of the United State Code, the Federal Arbitration Act.

After Bridge Capital moved to dismiss the complaint for lack of jurisdiction, Lao PDR moved to amend the complaint to add another Bridge Capital entity as a defendant.  After Baldwin moved to dismiss the complaint for lack of jurisdiction, Lao PDR moved to amend the complaint again, seeking to add a fraudulent transfer claim and a new defendant, Coleman, LLC.  Lao PDR alleged that Coleman is an Idaho LLC that is owned by Baldwin, managed by his relatives, and owns real estate in Idaho.

In May 2021, Lao PDR filed a motion for leave to file a third amended complaint and a motion for a temporary restraining order and preliminary injunction, seeking to enjoin the disposal, transfer, or encumbrance of property alleged to be Baldwin’s.  The Third Amended Complaint alleged the judgment debtor was attempting to shield his assets through an elaborate series of transfers, including the sale of a property originally listed for sale at $12 million to entities related or controlled by the judgment debtor for just $5.5 million.  Lao PDR also alleges that the judgment debtor removed certain bank accounts from Idaho, and that the defendant entities in Idaho were alter egos of the judgment debtor.

The U.S. District Court in Idaho granted Lao PDR’s motion for leave to file its Third Amended Complaint in July 2021.  Government of the Lao People’s Democratic Republic v. Baldwin, 2021 WL 3007251 (July 15, 2021).  The Court ruled that Lao PDR had plausibly alleged that the judgment debtor had transferred and encumbered property to put it out of the reach of Lao PDR, knowing the Lao PDR might seek to enforce its arbitral award in Idaho.

Pre-Award Strategies

     Security for Costs

Most arbitrable tribunals have procedural rules that allow orders to establish security for costs as a matter of interim relief, to avoid the kinds of collection issues Lao PDR alleges it has faced.  Aside from the procedural rules of the forum, the tribunals have the inherent power to order an advance payment for security.

     Interim Relief from the Courts or the Tribunal

New York’s Civil Practice Law and Rules provides for a temporary attachment or preliminary injunction against conveying assets in New York as an interim remedy to secure future recovery. CPLR 7502(c) is available for 30 days to secure payment in an arbitration that “is pending or that is to be commenced.”  New York courts expect that the arbitral tribunal will then decide whether that provisional remedy should be continued while addressing the merits of the case.

     Joining an Additional Party in the Arbitration

Tribunal procedural rules also provide for joining additional parties to the arbitration, which made aid in collection of an award. Where conveyances of assets occurs during the arbitration, and the contract giving rise to the arbitration is one of those assets, the successor and assigns provisions of the contract may allow the arbitration to continue against the successor. Using this tool may delay the arbitration as the newly joined party can contest jurisdiction and fairness, but it may also make the tribunal aware of questionable transfers that raise doubts about the credibility and trustworthiness of the counterparty. Often, rather than allowing the tribunal to delve into the questionable transfer, the successor will simply agree to be liable on any ultimate award.

In sum, collection is frequently an issue in any dispute resolution, as the Lao PDR case demonstrates.  But these strategies may help in alleviating such issues.

Objectives and Considerations

The majority of international arbitrations are decided by three-member arbitration panels. Each party selects its “party-appointed” arbitrator, and the president or chair of the three-member panel is selected by the two party-appointed arbitrators, by a neutral authority or by other agreement of the parties.[1] This blog discusses some of the more critical considerations that a party and its attorney should review in the selection of its arbitrator. The importance of an in-depth review and analysis of an arbitrator’s background, experience and ability to work with her co-arbitrators cannot be overstated. Indeed, the selection of an arbitrator may be one of the most critical decisions a party makes.

Predisposition vs. Appearance of Bias

The ideal party-appointed arbitrator is a person who, because of her legal or cultural background, nationality, history and professional and technical experience is likely to be predisposed toward the selecting party’s side. To that end, prior professional positions and relationships, arbitration experience, including prior decisions, and academic writings should be scrutinized. However, a commonality of views with the appointing party cannot override her conscience and professional judgment, undermine her effectiveness and/or violate the governing arbitration rules regarding bias, independence and partiality. She should have not only stature, experience and gravitas, but the credibility to persuade her co-arbitrators of the strength of her party’s position.

The major international arbitration institutions have rules relating to bias, impartiality and/or independence. For example, the arbitration rules of the United Nations Commission on International Trade (UNCITRAL),[2] the London Court of International Arbitration (LCIA)[3] the International Arbitration Rules of the American Arbitration Association (AAA)[4] and the International Chamber of Commerce (ICC)[5] embody one or more of these concepts. There are requirements regarding the disclosure of bias, and there are provisions regarding the potential overruling of an arbitration award if bias can be demonstrated.

Both parties expect to pursue justice in an unbiased fashion. Even if the party-appointed arbitrator may be generally predisposed to the party personally or to its position, the other arbitrators should believe that the appointee will vote against the appointing party if required by the facts and/or law. Although an arbitrator may qualify as non-biased pursuant to relevant rules, a party should avoid selecting an arbitrator who will be perceived by the other arbitrators as biased in favor of the appointing party. A party-appointed arbitrator is expected to vote for the party with the better or more compelling arguments, law and facts, even though the arbitrator may be sympathetic to the appointing party because of a common nationality, shared background, culture or shared legal perspectives ― such as a common or civil law training, view about contract interpretation and summary disposition, and inclination regarding limited or more expansive discovery.

Experience as an Arbitrator

In most cases, it is best to select an individual with multiple experiences in international arbitration, or at least to avoid an individual who has never served as an arbitrator. The lack of experience can undermine confidence in the appointee during deliberations and in crafting an award, and limit the appointee’s effectiveness. Of course, there must be a first time for every arbitrator and there may be times when an individual’s other qualities are compelling enough for the appointing party to give the individual an opportunity, even if he or she lacks experience in arbitrations.

Knowledge/Stature in Field

For similar reasons, it is important to select a person who is knowledgeable or an expert in the area that is the focus of the arbitration and ideally enjoys a level of stature and respect. Knowledge is needed for the arbitrator to fully understand the issues and to participate in a meaningful way in deliberations and the drafting of the award. A reputation in the relevant area adds weight to any arguments that the arbitrator may present to the other arbitrators. For example, in a complex construction matter, many parties are likely to prefer to appoint an arbitrator with expertise not only in construction generally, but in the technical issues critical to the resolution of the dispute.

People Skills

A knowledgeable and experienced person will have little impact on their fellow arbitrators if they lack interpersonal skills or have off-putting personality traits. An arbitrator who is the greatest figure in his field will not be persuasive if he constantly announces himself as such. It is best to select a person who is confident and forceful, as well as collegial and capable of participating in a respectful, meaningful and persuasive discussion.

Availability

Checking the availability of a prospective candidate is a must. Selecting a highly skilled arbitrator who is too busy can be problematic. So it’s best to evaluate this issue and try to get an honest assessment of the arbitrator’s schedule in advance.

Sources of Information

The best source of information to be used in selecting an arbitrator is the appointing party’s or its lawyers’ personal experience with the individual. However, in many cases, the decision will be made in the absence of that direct personal knowledge. In these situations, the decision is usually based on a recommendation from a network of friends and professional connections or an evaluation of the individual’s CV and information that can be garnered from the internet and other public sources of information.

Some private vendors are attempting to develop more detailed, data-driven analytics to aid in a more objective assessment of arbitrators and their professional qualities. For each prospective arbitrator, these vendors obtain a variety of information relating to critical aspects of an arbitration(s) from participants. This data includes:

  • How the arbitrator under discussion administered the proceedings
  • How often the tribunals (on which the arbitrator sat) engaged in an early resolution of issues
  • How satisfied or dissatisfied the parties were with the award.

The vendors then create reports on each arbitrator candidate that include graphs and charts, as well as information regarding how to interpret the data.

Conclusion

A party-appointed arbitrator is selected with the hope that she will be able to persuade the other two arbitrators about the merits and truths of her client’s position. Remember that the opposing party has the same view about its arbitrator. A party-appointed arbitrator with stature, the requisite skills and experience will understand the importance of independence and the appearance of objectivity, which cannot be overstated. The checklist of arbitrator characteristics set forth above is not a guarantee that one’s position will prevail, but the list will help guide a party in the appointment of an arbitrator who can maintain that balance.

[1]           Each arbitral institution has its own rules about the selection of the presiding arbitrator if the parties cannot agree. Those rules are beyond the purview of this blog.

[2]           UNCITRAL Arbitration Rules, Articles 11 and 12.

[3]           LCIA Arbitration Rules, Articles. 5, 10, and 11.

[4]           AAA International Rules, Articles 7 and 8.

[5]           ICC Arbitration Rules, Articles 11, 13, and 14.

For the second time in four years, the U.S. Supreme Court has declined to resolve an arbitration-related issue that state and federal courts have been wrestling with over the last decade:  whether the Federal Arbitration Act (“FAA”) precludes courts from invoking public policy as a ground for refusing to enforce arbitration awards.  While public policy challenges to arbitration awards have a long history, some state and federal courts have interpreted a 2008 Supreme Court decision entitled Hall Street Assocs. v. Mattel, Inc., 552 U.S. 576 (2008), as foreclosing such challenges in arbitrations governed by the FAA.

Last month, the Supreme Court denied a petition for a writ of certiorari to review a decision of the Nebraska Supreme Court holding that, under Hall Street, courts may not vacate awards on public policy grounds in arbitrations governed by the FAA.[1]  The Court declined to review a similar ruling by the Texas Court of Appeals four years earlier.[2]  That means the issue will likely remain a point of contention in state and federal courts.

Congress enacted the FAA nearly a century ago to replace judicial opposition to arbitration with a national policy favoring arbitration and placing arbitration agreements on equal footing with other contracts.  The Act, which applies to all contracts involving commerce, except certain collective bargaining agreements, provides expedited judicial review to confirm, vacate, or modify arbitration awards.  Under Section 9 of the FAA, a court “must” confirm an award “unless” it is vacated, modified, or corrected “as prescribed” in Sections 10 and 11.  Section 10 lists grounds for vacating an award, including where the award was procured by “corruption,” “fraud,” or “undue means,” and where the arbitrators were “guilty of misconduct,” or “exceeded their powers.”

Prior to the Supreme Court’s decision in Hall Street, courts generally permitted challenges to arbitration awards on public-policy grounds, although they interpreted that ground narrowly.  It applied only if an award was contrary to “some explicit policy” that is “well defined and dominant” and ascertained “by reference to the laws and legal precedents.”[3]  The doctrine “derives from the basic notion that no court will lend its aid to one who founds a cause of action upon an immoral or illegal act, and is further justified by the observation that the public’s interests in confining the scope of private agreements to which it is not a party will go unrepresented unless the judiciary takes account of those interests when it considers whether to enforce such agreements.”[4]

In Hall Street, the Supreme Court considered whether parties could contractually agree  to vacate an award on grounds not set forth in Section 10 of the FAA —specifically, by agreeing that a court could vacate an award where the arbitrator’s findings of facts are not supported by substantial evidence or where the arbitrator’s conclusions of law are erroneous.  In a 6-3 decision authored by Justice Souter, the Court ruled that parties could not contractually expand the scope of review in an FAA arbitration.  Rather, the Court held, Sections 10 and 11 “provide the FAA’s exclusive grounds for expedited vacatur and modification.”

Although Hall Street did not address a challenge to an arbitration award on public policy grounds and did not mention that issue, some courts have interpreted its holding that the statutory grounds for vacatur are the “exclusive” grounds permitted under the FAA as foreclosing other judicially created grounds, including the ground that an award violates public policy.  Thus, for example, the U. S. Court of Appeals for the 11th Circuit has held that “our judicially-created bases for vacatur are no longer valid in light of Hall Street.”[5]  The highest courts in Alabama, Florida, and Nebraska have ruled the same way.[6]

In contrast, the U.S. Court of Appeals for the 7th Circuit ruled that Hall Street “did not overrule Eastern Associated Coal or W.R. Grace, both of which recognized a public policy exception to the general prohibition on overturning arbitrator awards.”[7]  Similarly, the U.S. Court of Appeals for the 9th Circuit recently stated that “a court may vacate an arbitration award that is contrary to public policy.”[8]

In light of the fact that Hall Street did not expressly address the issue of public-policy challenges to arbitration awards, parties will likely continue to litigate whether the Court intended to foreclose that previously well-established basis for challenging awards—except in jurisdictions like Alabama, Florida, Nebraska, and the 11th Circuit, where the courts have already decided the issue.  Parties may also argue that such a broad reading of Hall Street conflicts with Section 2 of the FAA, which provides that agreements to arbitrate shall be valid and enforceable, “save upon such grounds as exist at law or equity for the revocation of any contract”—because courts have long held that agreements that are contrary to public policy are void and unenforceable.[9]  The Supreme Court may be unlikely to review the issue, however,

[1]  See Seldin v. Estate of Silverman, 2021 WL 1951803 (May 17, 2021).

[2]  See Parallel Networks, LLC v. Jenner & Block LLP, 137 S. Ct. 2176 (2017).

[3]  Cole v. Burns Int’l Sec. Servs., 105 F.3d 1465, 1486 (D.C. Cir. 1997) (quoting United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29, 43 (1987)).

[4]  United Paperworkers, 484 U.S. at 42.

[5]  Frazier v. CitiFinancial Corp., 604 F.3d 1313, 1324 (11th Cir. 2010).

[6]  See Cavalier Mfg., Inc. v. Gant, 143 So. 3d 762, 768-69 & n.5 (Ala. 2013); Visiting Nurse Ass’n of Fla., Inc. v. Jupiter Med. Ctr.,Inc., 154 So. 3d 1115, 1128, 1132 (Fla. 2014); Seldin v. Estate of Silverman, 305 Neb. 185, 206-07 (2020).

[7]  Titan Tire Corp. of Freeport, Inc. v. United Steel Workers Int’l Union, 734 F.3d 708, 717 n.8 (7th Cir. 2013) (citing Eastern Assoc. Coal Corp. v. United Mine Workers, 531 U.S. 57 (2000), and W.R. Grace & Co. v. Local Union 759, 461 U.S. 757 (1983).

[8]  DeMartini v. Johns, 693 F. App’x 534, 537 (9th Cir. June 7, 2017).

[9]  See United States v. Bonanno Organized Crime Family, , 879 F.2d 20, 28 (2d Cir. 1989) (“[I]llegal agreements, as well as agreements contrary to public policy, have long been held to be unenforceable and void.”).