Joinder and Consolidation in Arbitration

LAW
Werner Sabo, FAIA, CSI, and James K. Zahn, FAIA, CSI

It is a fairly common tale: the roof leaks in a newly constructed building, but the owner does not know whether it is a design or construction issue. The contracts with both the builder and the architect contain provisions requiring all disputes be arbitrated. The owner would like to have a single arbitration with both parties.

Up until the 2007 version of the standard American Institute of Architects (AIA) documents, this course of action was specifically prohibited. The owner would need to have separate arbitrations with the architect and contractor, possibly leading to inconsistent results. As of 2007, however, the owner can, by joinder or consolidation, bring in all parties necessary to resolve a dispute. This sounds fair… but is it?

Joinder is the term for adding (i.e. joining) another party to an existing arbitration. Consolidation is similar, but requires there be at least two arbitrations in existence, and those separate arbitrations are ‘consolidated’ into a single arbitration. The result is the same, with more than two parties involved in a single arbitration.

The standard AIA provisions for arbitration incorporate the Construction Industry Arbitration Rules of the American Arbitration Association (AAA). For construction matters, Rule 7 provides that, if the parties to an arbitration matter do not agree as to whether to join another party or consolidate another arbitration, AAA can appoint a special arbitrator to determine whether to allow consolidation or joinder. That arbitrator will not be appointed to hear the actual case, but only the single issue of joinder or consolidation.

This is a perfectly reasonable rule, as long as an arbitrator has not been appointed to hear the underlying arbitration. Generally, this is not a problem, since the issue of whether to add additional parties is usually raised at the outset of the arbitration, well before the appointment of an arbitrator. However, when raised later, problems can ensue.

Potential for problems
Consider the following hypothetical: The owner has a claim against the general contractor. The contractor is not interested in addressing the problem and stalls, hoping the problem will go away. After months of trying to get the contractor to address the issue, the owner—per the contract—files for mediation. To buy time, the contractor insists various subcontractors should be involved in the mediation, since they may have caused some of the problems. The owner is agreeable, but, because the owner has no contract with these subcontractors, cannot force them into the mediation. The contractor could, but claims he is not hearing back from the subs.

Time passes and the owner gets frustrated. The owner gives the contractor a deadline to bring in the additional subs, but the deadline is not met. The owner then initiates arbitration. Again, the contractor stalls, first filing an unsuccessful lawsuit to stop the arbitration, and then, after an arbitrator is appointed, asking to join the subcontractors to the arbitration.

The arbitrator allows this, with a deadline by which the contractor must file the demands for arbitration against the subs. Once again, the contractor blows right past this deadline. Now, the arbitrator rules the subs can no longer be joined, while at the same time setting a date for the evidentiary hearings to start.

One might think this is the end of the joinder debate, but such is not necessarily the case. The contractor files a separate arbitration against the subcontractors. He then invokes Rule 7 and asks AAA to appoint a separate arbitrator to rule on whether the new arbitration should be consolidated with the first one.

One of the subcontractors advises AAA it is agreeable to consolidation, but does not like the existing arbitrator and wants to appoint its own arbitrator as part of a three-person panel. A Rule 7 arbitrator is appointed without agreement of the parties, and a conference call is set for two days before the hearings in the first case are to begin. Without benefit of the contract between the owner and general contractor, this arbitrator rules the cases are to be consolidated and the hearings scheduled by the first arbitrator are not to proceed.

In this hypothetical, which represents an altogether possible scenario, the owner is left with few options. Not only has the owner spent considerable time and expense in preparing for the hearings (much of which will now be wasted), but there is also a real chance the first arbitrator will be removed from the case and replaced with a panel of three—tripling the expense going forward. The contractor also has attained its objective of a substantial delay, as well as the replacement of an arbitrator that had not ruled in the contractor’s favor. One should note there is nothing in AAA Rule 7 that prohibits a contractor from doing this during the hearings or at any time before an award is rendered.

Finding a solution
What can be done to prevent such a situation? One thing is to provide in the agreement that there will be no joinder or consolidation after the appointment of an arbitrator. At least one arbitration provider, the International Chamber of Commerce (ICC), includes this limitation in its rules. Another option is to use the old AIA language and prohibit joinder and consolidation altogether. As the hypothetical example in this article illustrates, joining other parties can hurt owners as much as any other party. The process can be used as a tool to delay and increase the costs of an arbitration, particularly by a contractor who is much more likely to have additional parties to blame for any problems.

Werner Sabo, FAIA, CSI, and James K. Zahn, FAIA, CSI, are architects, attorneys, and partners in the Chicago law firm of Sabo & Zahn. Both are resource members of the American Institute of Architects’ (AIA’s) National Documents Committee. They can be reached, respectively, at wsabo@sabozahn.com and jzahn@sabozahn.com.