It’s Not Over … Until The Panel Sings

Jonathan Bank and Matthew Murphy | Locke Lord | November 1, 2019

A federal court in New York recently held that an arbitration panel retained the right to resolve any dispute arising out of an arbitration award.  In Chicago Insurance Company v. General Reinsurance Corporation et al., no. 18-cv-10450, 2019 WL 5387819 (S.D.N.Y. Oct. 22, 2019), Chicago Insurance Company and its reinsurers disputed the reinsurers’ share of a settlement agreement that Chicago entered into with its insured with respect to the insured’s liability arising out of asbestos claims.

The panel rejected Chicago’s billing scheme and in 2017 it issued a final award for the reinsurers.  In the final award, the panel retained the right to resolve disputes arising out of the award.  In 2018, Chicago submitted a new bill to the reinsurers that it claimed was prepared in accordance with the 2017 final award.  The reinsurers rejected the allocation and submitted the issue to the panel to resolve the issue.  A majority of the panel agreed that the dispute arose out of the 2017 final award (Chicago’s party-appointed arbitrator wrote separately that the panel did not have a jurisdictional basis to address the dispute).

Chicago commenced a new, separate arbitration and filed a motion to compel the reinsurers to participate in the new arbitration.  In response, the reinsurers filed a cross-motion to stay the new arbitration seeking a declaration that the 2017 panel had the requisite jurisdiction to resolve the dispute.  The court observed that the issue of whether the 2017 panel’s retention of jurisdiction over disputes arising out of the 2017 final award was an issue for the court to decide.  The court, noting that Chicago claimed that the new bill was prepared in accordance with the protocols set forth in the 2017 final award, agreed with the reinsurers that the 2017 panel expressly retained jurisdiction to resolve dispute arising out of the final award.

The decision is a reminder that if a panel retains jurisdiction to resolve subsequent issues arising out of a final award, courts will not join the chorus, and will instead permit the panel to finish the song.

Appearance by Video Might Be More Convenient for a Nonparty in Arbitration, but It Can’t Be Compelled Under the FAA

Nora Valenza-Frost | Property Casualty Focus | October 25, 2019

You find yourself in an arbitration needing documents and testimony from a nonparty. Your arbitrator issues a nonparty summons, “conveniently” requiring the out-of-state nonparty to appear by video at a hearing and produce documents to the parties and the arbitrator in advance. As it goes, the nonparty objects to the summons, refusing to comply without an order compelling it to do so. So you move to enforce the arbitral summons in the district court in which the arbitration is pending pursuant to 9 U.S.C. § 7, and your adversary (and the nonparty) opposes. What next? The Eleventh Circuit provided its thoughts in Managed Care Advisory Group, LLC v. Cigna Healthcare, Inc., No. 17-13761 (11th Cir. Sept. 18, 2019).

This common scenario recently occurred in the U.S. District Court for the Southern District of Florida. There, the district court determined that it had jurisdiction to enforce the arbitral summons, as it had reserved jurisdiction to enforce the settlement agreement, which was the subject of the arbitration, and that the parties agreed in the arbitration agreement to the jurisdiction of the district court. The district court granted the motion to enforce the arbitral summons, and the decision was appealed.

As to subject-matter jurisdiction, the Eleventh Circuit clarified that although the district court did have ancillary subject-matter jurisdiction over the motion to enforce the summonses because it retained jurisdiction over the subject settlement agreement, it was neither because the district court had appointed the arbitrator nor because the parties agreed to the jurisdiction of the district court in their arbitration agreement.

Turning next to personal jurisdiction, Section 7 of the Federal Arbitration Act allows nationwide service of arbitral summonses. An arbitrator may summon an individual to attend the arbitration as a witness, and if the witness refuses, the district court in which the arbitrator sits may be petitioned to compel attendance “in the same manner provided by law for securing the attendance of witnesses … in the courts of the United States.” Federal Rule of Civil Procedure 45(b) provides that “a subpoena may be served at any place within the United States.” The Eleventh Circuit concluded that nationwide service of arbitral summonses is appropriate.

Looking at 9 U.S.C. § 7 (which permits a court to compel the attendance of a person refusing to comply with an arbitral summons in the same manner provided by law for securing the attendance of witnesses) and Rule 45(d)(2)(B)(i) (which permits a court in the district in which compliance is required to compel), the Eleventh Circuit then concluded that “the plain meaning of 9 U.S.C. § 7 requires that a motion to compel must be filed in the district in which the arbitrators are sitting.”

Next, the Eleventh Circuit determined that the summoned parties did not show that “the inconvenience of traveling in the present case to litigate their objections to the arbitral summonses rises to the level of constitutional concern” under the Fifth Amendment.

The Eleventh Circuit addressed prehearing documentary discovery from nonparties. While Section 7 of the FAA allows an arbitrator to “summon in writing any person to attend before them … as a witness and in a proper case to bring with him … any book, record, document, or paper which may be deemed material as evidence in the case,” the Second, Third, Fourth, and Ninth Circuits have concluded that this language “unambiguously restricts an arbitrator’s subpoena power to situations in which the non-party has been called to appear in the physical presence of the arbitrator and to hand over the documents at that time.” The Eleventh Circuit agreed, rejecting the Eight Circuit’s reasoning that prehearing documentary discovery should be permissible to promote efficiency.

The Eleventh Circuit concluded that because the nonparties would appear on video – and not in the physical presence of the arbitrator located in Miami – the arbitral summons could not be enforced. Moreover, prehearing document discovery is not authorized by the FAA, and thus “the provision of documents prior to the hearing is not the same as appearing in the physical presence of an arbitrator and bringing documents at the time of the hearing.” The district court’s decision was reversed and the matter remanded.

Insurer Must Cover Portions of Arbitration Award

Tred R. Eyerly | Insurance Law Hawaii | August 19, 2019

    The court determined that there was coverage in a construction defect case for portions of an arbitration award. Liberty Surplus Ins. Corp. v. Century Sur. Co., 2019 U.S. DIst. LEXIS 116093 (S.D. Texas July 12, 2019). 

    Descon Construction contracted with the City of Edinburg, Texas, to build a library. Descon subcontracted with McAllen Steel Erectors to install the library metal roof. The roof began to leak within two months of occupancy. The leaks continued for seven years. 

    Edinburg sued Descon. The matter was arbitrated. The arbitration panel found that the library roof was defective, the exterior stucco system was defectively installed and certain work, including fire-caulking, had not been performed. The panel concluded that Descon was liable for breach of contract and breach of warranty. The panel determined that Edinburg was entitled to replacement of the existing roof. Further, McAllen was found to have breached its subcontract with Descon by defectively installing the roof, entitling Descon to recover $762,537 from McAllen. 

    Descon asked Liberty to cover the award, but Liberty refused. Liberty sued the City and McAllen’s insurer, Century, seeking declaratory relief that its policy did not cover the award. Liberty moved for summary judgment. Liberty contended that if it was liable for the award, Century had to pay under its policy with McAllen, which named Descon as an additional insured. The City cross-moved for summary judgment arguing that some of the award damages were covered and no exclusion applied. Century also cross-moved for summary judgment that its policy did not apply.

    The parties agreed that defective roof and exterior stucco installations were “occurrences” under the policies. The question was whether Liberty’s policy covered only: (1) “property damage” caused by the defective roof and stucco, as Liberty and Century argued; or whether the policy covered both (1) “property damage” caused by the defective roof and stucco and (2) the costs of repairing the roof and stucco, as the City argued. 

   Liberty and Century argued that defective work in and of itself was not “property  damage” under Texas law. Because the City sought coverage for the cost of fixing defective work, Liberty’s policy did not cover any arbitration award damages. The City responded that the cost of repairing faulty workmanship was covered if the faulty workmanship resulted in “physical injury” to “tangible property.” The City argued that the defective roof caused interior water damage and Liberty had to cover the award damages for the roof and stucco repair costs. The City also pointed out that the library would continue to sustain water damage until the roof was replaced. Therefore, Texas law required Liberty to pay for the roof replacement costs.         

    The arbitrators found that the library roof and stucco were themselves defective, not that they were damaged or unusable because of other defective work. The court ruled that Liberty’s policies covered the cost of repairing the ceiling tiles, as Liberty conceded, and not the costs associated with repairing or replacing the stucco or the roof. 

    Liberty’s motion was granted to the extent that Liberty was not liable for the stucco or roof replacement costs. The motion was denied, without prejudice, as to Liberty’s liability for ceiling tile damages. The City’s motion was denied on coverage because the policy covered only the ceiling tile damages. Century’s motion was denied as moot. 

Insurer Must Pay Portions of Arbitration Award Related to Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii | August 21, 2019

    The court determined that portions of an arbitration award against the insured contractor based upon faulty workmanship were covered by the policy. Wallace v. Nautilus Ins. Co., 2019 U.S. Dist. LEXIS 122219 (D. N. H. July 23, 2010). 

    Plaintiffs, owners of adjoining homes, hired McPhail Roofing, LLC to replace the roofs of their houses. After installation, the plaintiffs found several problems with their roofs and withheld roughly a third of the agreed-upon contract price from final payments due to McPhail. A roofing consultant found evidence of water leaking through both roofs during rainstorms. Improper installation of the shakes on the roofs allowed rain to seep through to the roof decks (the plywood underneath the roofs) and eventually into the houses. The only way to cure the installation defects was to remove and replace the roofs entirely. 

    Plaintiffs and McPhail went to arbitration. Plaintiffs sought compensation for the damage caused by the leaking and for the replacement costs of the roofs. McPhail sought the remaining payment under the contracts. Nautilus defended McPhail under this CGL policy. 

    The arbitrator issued awards against McPhail, $140,053.50 to one owner and $160,065.62 to the other owner. Pursuant to the parties’ stipulation, the arbitrator also awarded plaintiffs $176,898.95 for attorneys’ fees, expert witness fees and other expenses, including pre- and post- judgment interest.

    Nautilus paid a portion of the award for attic cleaning and re-insulation, repainting, expert witness fees and expenses. Nautilus determined the rest of the award, including replacing the roofs and award of attorneys’ fees, was not covered under the policy. McPhail declared bankruptcy and plaintiffs obtained an assignment of McPhail’s claims against Nautilus, eventually bringing suit against Nautilus. 

    Agreeing that defective workmanship alone was not an occurrence under New Hampshire law, plaintiffs argued that the occurrence here was not the defective workmanship itself, but rather the leaking caused by the defective roofs, which resulted in property damage. The court agreed.

    The damage for the cost of replacing the roofs was not covered, however. The arbitrator found that plaintiffs were entitled to the replacement cost of the roofs because: (1) the roofs were installed defectively; and (2) plaintiffs’ consultant advised them that the only way to cure the installation defects was to remove and replace the roofs. No New Hampshire case held that a CGL policy covered the cost of replacing defective work any time property damage resulted from it. 

    Next, the court turned to whether the policy covered the award of attorneys’ fees. The Supplementary Payments provision included Nautilus’ obligation to pay “costs taxed against the insured.” Plaintiffs argued the phrase was ambiguous and should be construed in their favor. The court noted that several jurisdictions had interpreted the phrase to include an award of attorneys’ fees, but noted that a Hawaii federal district court case held that the phrase excluded attorneys’ fees. CIM Ins. Corp. v. Masamitsu, 74 F. Supp. 2d 975 (D. Haw. 1999). The court went the the majority position, finding that “costs taxed against the insured” in the Supplementary Payments provision included attorneys fees. 

Why Builders Should Reconsider Arbitration Clauses in Construction Contracts

David M. McLain | Colorado Construction Litigation | September 23, 2019

My advice to home builders has long been to arbitrate construction defect claims instead of litigating them in front of juries.  Based on my experience and watching others litigate claims, I have learned that home builders usually fare better in arbitration than in jury trials, both in terms of what they have to pay the homeowners or HOAs and also in what they recover from subcontractors and design professionals.  Because of these dynamics, conventional wisdom has been that builders should arbitrate construction defect claims.  For several reasons, I am now questioning whether the time is right to consider a third option.

First, plaintiffs’ attorneys dislike arbitration and will continue their attempts to do away with arbitration for construction defect claims.  In 2018, the Colorado Legislature considered HB 18-1261 and HB 18-1262.  While both bills were ultimately killed, they showed the plaintiffs’ attorneys disdain for arbitration, and serve as a warning that attempts to prevent arbitration legislatively will continue.  If the legislature does away with the ability to arbitrate construction defect claims, and that is the only means of dispute resolution contained in a builder’s contracts, that builder may find itself in front of a jury.

Second, in rare instances, builders may disagree with an arbitration order to the extent that they want to appeal the decision.  Under the American Arbitration Association rules, once an arbitrator issues an award on the merits, it can only correct clerical, typographical, technical, or computational errors and has no ability to reconsider the merits.  Pursuant to Colorado’s Uniform Arbitration Act, a dissatisfied builder can only challenge an arbitration award in extreme circumstances, for example, if it was procured by corruption, fraud, or other undue means or because of evident partiality, corruption, or misconduct on the part of the arbitrator.  For better or worse, binding arbitration is just that – it is binding, and builders may regret that they have no appellate rights if they find themselves holding the short end of the stick. 

For these reasons, I believe that builders should start looking beyond arbitration clauses in their purchase and sale and subcontract agreements.  At the very least, builders should add language to protect against the legislature making arbitration clauses void as against public policy or otherwise impeding arbitration rights.  This language would say something to the effect that should the arbitration clause be unenforceable, the parties agree to waive a jury trial and to have their case decided by a judge after a bench trial.  A builder could also simply remove references to arbitration and require a bench trial from the outset.

Regardless of the language used, builders should ensure that the language in the purchase and sale agreement and the subcontracts call for the same dispute resolution forum, either arbitration or a bench trial.  In no case do you want to litigate the same issue twice, in two different forums.