Agreement to Arbitrate Assignable, but Subject to Statute of Limitations

Stanley A. Martin | Commonsense Construction Law

Construction of an apartment building was completed in 2005, under a contract with an arbitration clause. The building was sold in 2015, and the seller assigned its rights under the construction contract to the buyer.

In 2018, one or more balconies on the building collapsed. Subsequent investigation showed that waterproofing and flashing for some of the framing members had never been installed.

The buyer started arbitration with the original contractor, and the contractor sought a court injunction against the arbitration. The contractor argued that the right to arbitration could not be assigned absent its consent, and the claim was too late, anyway. The buyer argued, on the other hand, that the right to remedies under the completed construction contract could be assigned without consent, and that the contractor’s “fraudulent” failure to properly perform the work, discovered only recently, resulted in a different statute of limitations analysis.

The trial court held that the right to pursue contract remedies after completion of the project could be assigned. And since that right was subject to an arbitration clause, the buyer/new owner could pursue any timely claim in arbitration.

But the real issue was timeliness of the claim. First, the court held that the allegations concerning the original construction were allegations of breach of contract. Efforts to dress the claim up as one for “fraudulent construction” would not extend the statute of limitations. Second, the statute of limitations for a contract claim (six years) had long since passed. Further, there was some evidence that the original owner knew about water damage to the framing before the property had been sold, and any investigation by the buyer should have uncovered that condition, unless the original owner had already repaired it.

Since the statute of limitations had passed, the court granted a permanent stay against any arbitration between buyer and contractor. The case is Matter of Turner Constr. Co. v Mount Auburn LLC, 2020 N.Y. Misc. LEXIS 25 (Jan. 2, 2020) (subscription required).

The Utility of Arbitration Agreements in the Construction Industry

Brian L. Gardner and Jason R. Finkelstein | Construction Executive

A Look at Epic Systems’ Decision One Year Later

In today’s ever-evolving world of employment law, it is far from an easy task for construction industry employers to operate their business while successfully navigating all of the potential legal potholes that continue to abound and multiply seemingly with every passing day. This is particularly true in the face of the onslaught of claims lodged by current and former employees in recent years for alleged unpaid wages. While there may not be a “sure bet” way of avoiding such claims, one tool that employers should strongly consider in their arsenal are arbitration and class action waiver agreements.

To that end, last year, the United States Supreme Court rendered its ground-breaking decision in Epic Systems Corp. v. Lewis, 584 U.S. ___ (2018). In Epic Systems, the Supreme Court held that arbitration agreements containing class and collective action waivers of wage and hour disputes are enforceable. At the time of the decision, a split of authority existed among courts across the country as to whether such agreements were viable. On the one hand, several courts contended that class waivers unfairly violated employees’ rights to collectively bargain under the National Labor Relations Act. On the other hand, many other courts were finding that such agreements were fully enforceable and supported by the policies promoted under the Federal Arbitration Act. The Epic Systems Court sided with this latter viewpoint, concluding that the FAA’s clear policy promoting arbitration as a dispute resolution mechanism and private parties’ rights to freely negotiate contracts outweighed any potential arguments against such agreements under the NLRA. 

With wage and hour lawsuits being filed against construction industry employers practically daily, the Epic Systems decision is critically important. Construction employers can now freely enter into arbitration and class waiver agreements with their laborers and thereby potentially limit the cost, expense and exposure of fighting such actions in a public forum on a collective or class-wide basis. To be clear, such agreements will not eliminate employees from bringing such wage and hour claims entirely, nor should the use of those agreements signal to employers that they need not make every good-faith effort to comply with their obligations under the Federal Labor Standards Act and/or any applicable state wage and hour laws. But the reality is that arbitration and class waiver agreements can work to avoid tens or hundreds or even thousands of employees from banding together in some of the massive wage and hour lawsuits being filed across the country. Instead, employers can require that those legal battles be conducted by a single plaintiff in a more controlled environment before an arbitrator (or panel of arbitrators). 

As arbitration is typically a more expedited process than litigating in federal court, and parties’ discovery rights are much more restricted, the parties (both employer and employee alike) will presumably incur far fewer legal fees in arbitration than would otherwise be experienced in court. Further, by avoiding the opt-in and/or opt-out class collective/action process that is the hallmark of federal wage and hour lawsuits, savvy construction employers utilizing class waivers may ultimately avoid a significant number of claimants from joining those cases who individually lack meritorious claims, but who have hopes of collecting a portion of the class-wide judgment or settlement amount while doing nothing more than sitting on the sidelines. By forcing each employee to instead commence his/her own arbitration proceeding, that in and of itself may provide a meaningful deterrent against meritless claims while also reducing the already-overburdened court system. Such one-off claimants in arbitration may also be less appealing to certain plaintiff’s lawyers who have created a cottage industry in representing classes in wage and hour cases that often yield significant attorneys’ fees given the class and claim size. 

While there was previously a lack of clarity about whether arbitration and class waiver agreements would be upheld in court, Epic Systems has provided uniformity across the country and the assurance that those agreements will be enforced nationwide if properly drafted and freely executed. While Epic Systems was only decided a year ago, more and more construction employers are integrating arbitration and class waiver agreements into their business practices. And while arbitration and class waivers may not be appropriate in all situations and may not protect against every type of claim depending on the jurisdiction (such as sexual harassment claims, by way of example), it is clear that employers, particularly in the construction industry, should strongly consider requiring their employees to execute such agreements as a condition of employment. As the saying goes, sometimes the best defense is a good offense.

Arbitration Clauses Will Continue to Dominate in Reinsurance Contracts

Michael Knoerzer | Clyde & Co

Insurers to consider arbitration as an effective strategy in 2020.

Insurers and insurance attorneys have a love-hate relationship with arbitration in insurance and reinsurance contracts. Generally, they love arbitration about as much as they love the last result in the last arbitration they had.

Having said that, arbitration is favored over court litigation in reinsurance contracts and we will continue to see this in 2020. One reason for this is arbitration clauses also are more likely than not to be found in insurance contracts where the parties are companies from different countries. Arbitration under a neutral arbitration framework, perhaps with special rules about the neutrality of the arbitration panel, provides comfort to both parties that there will not be a “home court advantage” for either party.

Robust debates often ensue about the pros and cons of arbitration versus court litigation. Those favoring court litigation note that there is no meaningful right to appeal from arbitration awards and that sometimes arbitration panels get it wrong. Those favoring arbitration respond that if you won at arbitration, you are glad that there is no right to appeal, and that courts too “sometimes get it wrong.”

The debates will continue, but it is clear that reinsurers benefit from a well-crafted arbitration clause in its policies, especially a clause which contains language to the effect that no rules of construction will be applied against the insurer, and also provides that the arbitrators have no authority to award punitive or exemplary damages. Looking ahead to 2020, insurers should look to level the playing field and consider arbitration as an effective strategy.

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.