Parties to Construction Contracts Should Exercise Caution When Allowing an Arbitrator to Change Hats Between Mediator and Arbitrator

Summer associate, Luke Alba, contributed to this article.

Dispute resolution provisions providing for mediation as a prerequisite to arbitration are standard in AIA construction contracts. Parties may nonetheless mutually agree to eliminate or waive those provisions and proceed directly to arbitration.  Often, however, settlement discussions will ensue during the arbitration as costs begin to mount and evidence becomes available.  In such situations, the parties may agree to enlist the assistance of the arbitrator to mediate the dispute, rather than engage a new mediator who lacks any knowledge regarding the matter.  Although the parties must agree to allow the arbitrator to take on that dual role, the New Jersey Appellate Division recently held that such an agreement need not be reduced to writing.

In Pami Realty, LLC v. Locations XIX Inc., 2021 WL 2961473 (N.J. Super. Ct. App. Div. July 15, 2021), a project owner challenged an arbitrator’s award in favor of a contractor because the arbitrator also served as a mediator without the written consent of the parties.  The contract provided that: “any claim subject to, but not resolved by, mediation” shall be resolved by arbitration.  The parties’ agreement with the arbitrator did not specifically address mediation, but provided in relevant part that (i) each party was not to have private conversations with the arbitrator concerning the arbitration, (ii) each party and/or their representatives must be present at arbitration proceedings to facilitate settlement discussions, and (iii) the parties’ settlement discussions were to remain confidential.

On the afternoon of the second day of arbitration, the parties engaged in settlement discussions—facilitated by the arbitrator—but failed to settle.  The next day, the parties resumed their arbitration for a final day of testimony.  Several weeks later, the arbitrator issued an opinion awarding the contractor damages.  When the contractor moved to confirm the award, the project owner claimed that the arbitrator had “exceeded his powers when he resumed the role of arbitrator after acting as a mediator mid-arbitration[.]”  The project owner claimed that the parties never agreed to expressly waive the conflict of interest inherent in that dual role, and that any such agreement would have needed to be in a writing signed by the parties.

The court considered (1) whether the alleged agreement between the parties to allow the arbitrator to serve as mediator and then return to his role as arbitrator needed to be in writing; and, if it did not, (2) whether an evidentiary hearing was required to determine if any such agreement actually existed.  Citing New Jersey precedent, the court explained that “parties engaged in arbitration must explicitly agree” to permit an arbitrator to resume his arbitration role after participating in settlement negotiations.  Notably, however, the court held that such an express agreement need not be in writing to be enforceable. The court stated that “no doubt, the better course is to put the agreement in writing,” but it ultimately determined that not allowing parties to reach oral agreements in such situations would ignore fundamental contract principles and the public policy in favor of settling litigation.

The court further explained that where there is disagreement between the parties over whether an agreement existed for the arbitrator to mediate the dispute and then continue to serve as arbitrator, the trial court should make such a determination only after holding an evidentiary hearing on that issue.   If it is determined that the parties did not agree to the arbitrator resuming his role as arbitrator after mediation, the arbitrator will be deemed to have exceeded his authority and the arbitration award will be unenforceable.  Such a determination holds true regardless of whether the party challenging the award continued to engage in the arbitration, without objection, after the arbitrator’s mediation involvement.

In light of this decision, contracting parties engaged in an ongoing arbitration should always put any agreement concerning an arbitrator’s role as a mediator into a signed writing.  Although such an agreement need not be in writing to be enforceable, documenting the agreement will save the parties the time, cost and aggravation of potentially litigating over whether such an agreement ever existed.