Substance vs. Procedure

Selecting a third-party neutral is actually two processes: a procedural process and a substantive process. The procedural process focuses on how a neutral is selected by the parties. The substantive process focuses on the person selected.

In October of 2003, this column discussed the substantive process of how to select a mediator (How Should You Select a Mediator? in ohioconstructionlaw.com for October 2003). The process involved in selecting a mediator also applies to selecting any third-party neutral needed for the various forms of dispute resolution available. The information contained in the 2003 column still applies today for determining the substantive process for selecting a neutral. This month’s column will focus on the procedural process of selecting a neutral.

What the Contracts Say

As with many issues on a construction project, the first place to look when trying to determine how the parties select a neutral is to look to the contract. Unfortunately, some contracts fail to address the issue. This can leave the party with a preliminary procedural dispute to resolve before even starting to resolve the underlying substantive dispute about the actual construction.

Some contracts name the neutral in the contract. While this is certainly forward thinking, it is not without its own problems. Many projects are completed without major disputes between the parties that must be resolved with the assistance of a neutral. If disputes arise, they can range widely in subject matter, and the best neutral for a dispute of one kind may not be best for a dispute of another kind. For instance, a neutral who might be perfect to resolve a dispute over defects in the design might not be able to bring the parties to an agreement in a dispute over the cause of project delay.

Between these two extremes is the approach of defining a process to determine how the selection should be made. The construction industry has established a number of standard form contracts. Four organizations tend to dominate the field: The American Institute of Architects (AIA), The Engineer’s Joint Construction Document Committee (EJCDC), the Associated General Contractors (AGC), and The Design Build Institute of America (DBIA).

The four primary standard form contracts address dispute resolution in slightly different ways. For a more detailed discussion on the standard form contracts’ approach to dispute resolution, see Contractual Requirements for Dispute Resolution & a Bit of History (ohioconstructionlaw.com for May 2006).

Selecting Mediators

In each of the four standard form contracts, the selection of a mediator is addressed in the same manner: they refer to the American Arbitration Rules in effect at the time the contract is executed. The appointment of the mediator is currently addressed in Rule M-4:

M-4. Appointment of Mediator

Upon receipt of a request for mediation, the AAA will appoint a qualified mediator to serve. Normally, a single mediator will be appointed unless the parties agree otherwise or the AAA determines otherwise. If the agreement of the parties names a mediator or specifies a method of appointing a mediator, that designation or method shall be followed.

By vesting the appointment power in AAA, this Rule serves to eliminate at least one potential dispute. This does not mean that the AAA will just select the next mediator off their list. Each mediator is carefully selected based on experience and subject matter expertise. Additionally, the AAA rules do prevent any mediator with a potential conflict of interest from serving.

Selecting Arbitrators

The process is different when the parties are required to select an arbitrator. The EJCDC and the AGC standard forms do not address the process for selecting arbitrators. Unless the parties modify the standard form language, the parties will have to agree after the fact on how to select an arbitrator. The AIA and DBIA standard forms also reference the AAA Construction Industry Rules.

The AAA Construction Industry Rules address the selection process in Rule R-12:

If the parties have not appointed an arbitrator and have not provided any other method of appointment, the arbitrator shall be appointed in the following manner:

(a) Immediately after the filing of the submission or the answering statement or the expiration of the time within which the answering statement is to be filed, the AAA shall send simultaneously to each party to the dispute an identical list of 10 . . . names of persons chosen from the National Roster, unless the AAA decides that a different number is appropriate. The parties are encouraged to agree to an arbitrator from the submitted list and to advise the AAA of their agreement. Absent agreement of the parties, the arbitrator shall not have served as the mediator in the mediation phase of the instant proceeding.

(b) If the parties are unable to agree upon an arbitrator, each party to the dispute shall have 15 calendar days from the transmittal date in which to strike names objected to, number the remaining names in order of preference, and return the list to the AAA. If a party does not return the list within the time specified, all persons named therein shall be deemed acceptable. From among the persons who have been approved on both lists, and in accordance with the designated order of mutual preference, the AAA shall invite the acceptance of an arbitrator to serve. If the parties fail to agree on any of the persons named, or if acceptable arbitrators are unable to act, or if for any other reason the appointment cannot be made from the submitted lists, the AAA shall have the power to make the appointment from among other members of the National Roster without the submission of additional lists.

(c) Unless the parties agree otherwise when there are two or more claimants or two or more respondents, the AAA may appoint all the arbitrators.

As with the Rule addressing the selection of a mediator, Rule R-12 is a default provision. It will apply if the parties do not agree otherwise in the contract.

Other Sources of Rules & Neutrals

What if you are not using a standard form contract? The standard form contracts do not have a monopoly on the use of the AAA Rules. It is permissible to reference the AAA Rules in a non-standard form contract.

AAA does not have a monopoly on rules for arbitration and mediation either. There are a number of other organizations that promulgate rules. One difference that distinguishes the organizations is the background of the neutrals.

Where AAA focuses on the subject matter expertise of the neutral, JAMS focuses on the neutral’s dispute resolution skills. Most AAA neutrals are experts in the particular field involved in the dispute and trained in dispute resolution. Most JAMS neutrals are retired judges or attorneys.

Which is better? Within the alternate dispute resolution field, there is a difference of opinion. Some argue that neutrals should have subject matter expertise to understand the dispute. Some argue that neutrals need to be experts in the resolution process. Others argue that it depends upon whether you are selecting a mediator or an arbitrator: a mediator should have expertise in dispute resolution, since the parties are making the decisions, and an arbitrator should have subject matter expertise in order to understand the dispute enough to render a decision.

This is one of the points where the procedural process and the substantive process of selecting a neutral cross. There is not one right answer. You should consider why you are contracting and what type of dispute is likely to occur during the performance of the contract.

While the two processes occur in parallel, determining the appropriate process for each occurs at different points in time. It is very important for the parties to agree on the procedural process at the execution of the contract. Determining the substantive process to be utilized occurs when there is an actual dispute, and the determination may be different for each party.

As with nearly every aspect of construction, when selecting processes for determining a third-party neutral, remember the five Ps: Planning and Preparation Prevent Poor Performance. By addressing the issues before a dispute arises, the parties will be able to focus on the substantive issues of the dispute instead of fighting about procedural issues.