ADR for Construction Disputes During COVID-19: How to Manage Dispute Resolution Before and After the Dust Settles

Albert Bates, Jr. and R. Zachary Torres-Fowler | Pepper Hamilton

Days after the World Health Organization declared the COVID-19 outbreak a global pandemic, governments from around the world scrambled to enact measures aimed at mitigating the spread of the virus. In the United States, cities and states have enacted travel restrictions, issued shelter-in-place orders, and directed nonessential businesses to shutter. While all aimed at mitigating the spread of the virus, these measures will have an immense disruptive impact on businesses and industries around the world — the construction sector included.

As notices concerning force majeure, changes in law, and change orders swirl, parties should prepare themselves for how these disputes will be managed and resolved. The COVID-19 outbreak will rapidly reshape how the construction sector does business. This article offers our insight into just once facet of the construction industry: alternative dispute resolution and how the COVID-19 outbreak has and will affect construction disputes going forward.

Before the Dust Settles – How Will the COVID-19 Outbreak Impact Pending Proceedings

For those parties in the midst of a complex construction arbitration or dispute, the COVID-19 outbreak is likely to have thrown a wrench into the proceedings’ carefully choreographed schedules. Below is a summary of the issues we expect that parties to pending disputes will continue to confront over the coming months.

  • Postponements – The most obvious impact of the COVID-19 outbreak on pending construction disputes is that most in-person hearings will likely have to be postponed. This is true not only for hearings scheduled while state and city restrictions remain in effect, but also for hearings scheduled months from now. Indeed, the disruption caused by current measures aimed at slowing the spread of the virus will inhibit parties from accomplishing the long list of tasks needed to prepare for a hearing, including meeting with clients and witnesses and conducting pre-hearing discovery (e.g., depositions).
     
  • Remote Dispute Resolution –In some cases (particularly in cases of less complex construction disputes), it may be possible for parties manage the proceedings remotely. Specifically, in cases where the number of planned depositions is low or where a relatively limited number of hearing days are required, it might be possible for arbitration proceedings to continue through the use of remote/online technology. However, many lawyers and their clients are skeptical of written testimonial submissions and truncated remote hearings within the context of binding dispute resolution. Further, while the concept of “online dispute resolution” (ODR) has been batted around for years, it is unclear whether ODR is truly ready for prime time. Indeed, early efforts by the D.C. Circuit to host appellate arguments just by telephone have proven difficult.1 Given that many law firms and parties have been forced to shutter their offices and rely on remote–working environments, the high–resolution cameras and broadband connections often required to effectively execute a remote hearing may not be as readily available in home office settings. This consideration may be especially important in proceedings where the subtleties of verbal and nonverbal communication are absolutely critical to assessing credibility. This is not to suggest that ODR may not have a place during these challenging times. Anecdotal reports in recent days suggest that some arbitrators have completed ongoing hearings via remote means to avoid delays, and that counsel and the parties have expressed satisfaction with the process.2 As a result, there may be opportunities to use ODR to minimize delay in appropriate cases, particularly in cases where legal and/or technical issues predominate and the parties agree to the use of written testimonial submissions.
     
  • Increased Mediation and Settlement Rates –One area that will likely be less affected by the limitations of ODR is mediation or settlement negotiations. Indeed, while mediation and negotiation discussions inevitably require the parties to assess the veracity of the other parties’ positions, commercial considerations are typically the driving factor in reaching an amicable resolution. Given the inevitable pressure on parties to resolve disputes quickly — especially in an environment where deteriorating economic conditions may mean that cash-flow requirements take an increasing priority — expect a rise in remote mediation/settlement proceedings. Parties’ access to mediation and settlement negotiations holds promise and anecdotal reports over the recent days suggest parties and mediators are willing to use remote means, such as Skype and Zoom, to successfully mediate disputes.3
     
  • Alternative Procedures for Existing Arbitrations – As mentioned above, parties and arbitrators considering remote hearings should also consider the use of witness statements in lieu of depositions and direct examinations. For parties that prioritize maintaining scheduled hearing dates or minimizing the length of any postponement of hearing dates, eliminating, or at least minimizing the number of, depositions is of great importance. Written witness statements provide ample disclosure of the witness’s proffered testimony, allowing for fair and effective cross–examination. While many practitioners may be uncomfortable with the prospect of giving up the opportunity to depose a witness or forgoing direct testimony, this process is widely used in international arbitration proceedings. Written witness statements enable parties to gather information concerning a witness’s planned testimony, eliminate or minimize depositions, and shorten the total required hearing time (which, in turn, may enable the parties and panel to hold scheduled hearing dates or reschedule hearings earlier than might otherwise be the case).

After the Dust Settles – How The COVID-19 Outbreak May Affect Future ADR Proceedings

When the COVID-19 outbreak subsides, many arbitrators expect a surge of disputes to press forward toward arbitration. Specifically, arbitrators contemplate an increase in the number of new case filings as a result of the impacts of the COVID-19 pandemic on projects that were under construction at the time of governmental actions, as well as projects that were deferred or cancelled due to the economic impact of the pandemic. In addition, many also anticipate that arbitrations currently scheduled to be conducted in 2020 may be postponed. This expected surge in new and existing arbitrations in the immediate aftermath of the pandemic comes with a host of additional considerations.

  • Conditions Precedent – Given the financial pressures on owners, contractors, subcontractors and suppliers, cash–flow considerations may place pressure on contract managers and in-house counsel to push for swift resolution of the disputes. However, many construction contracts include step-up clauses or conditions precedent to filing a demand for arbitration. Negotiations among principals and/or mediation may lead to the prompt resolution of disputes in many circumstances, and parties are cautioned that the urge to file an arbitration demand without first satisfying the conditions precedent may only result in further delaying the ultimate resolution of the dispute.
     
  • Increased Arbitration Caseloads – While much about COVID-19’s impact on the construction arbitration field remains to be seen, as mentioned above, many expect that arbitrators and arbitral institutions will see a significant increase in new case filings. To further complicate the situation, arbitrators will already have to grapple with the backlog of cases that were postponed as a result of the COVID-19 outbreak in the first and second quarters of 2020. As a result, arbitrator availability could become an issue in the 12 to 18 months following the gradual return to the new normal in aftermath of the pandemic. Thus, it is plausible to expect that, over the coming year, arbitration proceedings may take longer to fully resolve than would otherwise be the case.
     
  • Expanded Use of Mediation and Other Forms of Nonbinding ADR – Given the pressures associated with the need to quickly resolve construction disputes and the complications associated with increased arbitration caseloads, parties may begin to consider utilizing other forms of nonbinding ADR. Mediation and executive–level negotiations are the two most obvious candidates for resolving these disputes, but others forms of nonbinding ADR may also become increasingly attractive alternatives for parties seeking to quickly and efficiently resolve their disputes. For example, the expanded practice by mediators to create customized negotiation plans, including the exchange of just enough information to enable parties to make principled business decisions about settlement, has become a hot topic among practitioners. Indeed, Guided Choice Dispute Resolution was formed several years ago to introduce the best mediation practices to a broader audience and help parties and their counsel to create an efficient settlement process designed for the specific dispute at hand.4

Conclusion

We are all operating in unchartered waters, and how the COVID-19 pandemic will shape our society, businesses and ultimately the construction industry is unknown. Construction disputes stemming from the COVID-19 outbreak are inevitable and will continue to disrupt parties’ ability to quickly and efficiently resolve their disputes. Parties should work carefully with counsel to craft a strategy aimed at navigating these challenges and preparing to manage the complications they are likely to face over the coming months.

Above all else, however, stay safe.

Endnotes

1 Law.com – It’s Kind of a Mess – Phone arguments get rocky debut at DC Circuit during COVID-19 Pandemic, https://www.law.com/nationallawjournal/2020/03/20/its-kind-of-a-mess-phone-arguments-get-rocky-debut-at-dc-circuit-during-covid-19-pandemic/.

2 As an example, a press report indicated that hearings in a scheduled two-week ICC arbitration with 70 participants from around the world began in person in Brazil on March 9, 2020. The first week of hearings was conducted in person. As a result of the COVID-19 pandemic, the hearing could not continue in person, and postponing the remaining hearing dates would have been very disruptive. The second week of hearings was conducted remotely using Zoom. (https://exame.abril.com.br/negocios/a-pandemia-na-maior-arbitragem-societaria-do-pais-a-disputa-pela-eldorado/).

3 See generally A. Schmitz, C. Rule, D. Larson, ODR in the ERA of COVID-19: Experts Answer Your Questions (March 23, 2020), https://www.americanbar.org/groups/dispute_resolution/resources/resources-for-mediating-online/odr-in-the-era-of-covid-19-experts-answer-your-questions/.

4 Additional information and a collection of resources on this topic is provided by the Guided Choice Mediation Interest Group (https://gcdisputeresolution.com/).

Ensuring Efficient Arbitration of Construction Disputes Involving Mechanic’s Liens

Robert G. Campbell and Trevor B. Potter | Construction Executive

There may be tension between the enforcement of statutory mechanic’s lien claims when a contractual dispute resolution provision calls for arbitration. Once the parties are in arbitration, it may not be clear whether the arbitrator has authority to make factual determinations regarding amount and validity of mechanic’s liens, and whether courts are bound by these determinations. This uncertainty stems from the fact that in most states a mechanic’s lien can only be enforced by a court of competent jurisdiction. Indeed, many mechanic’s liens statutes define foreclosure as a “judicial process,” and courts generally have exclusive jurisdiction to issue orders foreclosing on real property1.  

The risk for contractors and owners is that they will spend time and money re-litigating factual issues related to proving elements of a mechanic’s lien claim, including the proper lien amount, timeliness and other prerequisites. Without a clear understanding of what issues and elements are arbitrable, the parties run the risk that an arbitrator will rule on certain elements only to find out during post-arbitration lien foreclosure proceedings that the arbitrator lacked authority to make determinations on those elements. Questions therefore arise whether a court will enforce the arbitrator’s determinations and whether the parties must relitigate mechanic’s lien issues creating a further risk of inconsistent rulings. 

These risks can be minimized through arbitration provisions which address these issues, express requests in arbitration demands and by ensuring that arbitration awards contain explicit determinations of mechanic’s liens issues.

The resolution of any mechanic’s lien claim requires factual determinations regarding the amount and validity of a lien. The appropriate amount of a mechanic’s lien is generally the same as the contract balance owed2.  Since construction disputes usually involve breach of contract claims for unpaid amounts, arbitrators will necessarily determine the contract balance owed to a lien claimant during arbitration. It is therefore efficient for arbitrators to determine the appropriate amount of mechanic’s lien claims. 

Lien “validity” refers to whether a lien claimant strictly complied with state law requirements to perfect its mechanic’s lien. Some of those prerequisites include:

  • providing timely pre-lien notice (in California this is referred to as a Preliminary Notice) and post-recordation notice of the lien in proper form with all required information;
  • proper service of the pre-lien notice on all required persons;
  • timely recording of the lien; and 
  • timely filing of a lawsuit to foreclose on the lien. 

As with the amount of mechanic’s liens, much of the evidence relevant to lien validity, including the date work commenced, the date of notice, the project completion date and the timing of any lien foreclosure actions, etc. will likely be presented at arbitration. Since arbitrators typically consider significant evidence relevant to the amount and validity of mechanic’s liens in the normal course of a construction arbitration, it is efficient and proper for arbitrators to determine these elements in arbitration. 

In order to reduce the uncertainty regarding the arbitrator’s authority to make factual determinations regarding the amount and validity of mechanic’s liens, parties should first ensure that the arbitration provision in their construction agreements is broadly worded to encompass “all disputes” related to the project. The scope of arbitrator authority in the AIA A201 General Conditions is tied to the resolution of “Claims”, which include “…any demand or assertion by one of the parties seeking, as a matter of right, payment of money, a change in the Contract Time, or other relief with respect to the terms of the Contract…[and] other disputes and matters in question between the Owner and Contractor arising out of or relating to the Contract.” 

This language arguably empowers the arbitrator to determine the amount and validity of mechanic’s liens, but on its own, it may be insufficient to resolve uncertainty with respect to the arbitrator’s authority. To remedy this, Parties should consider including language in their arbitration provisions which expressly states “To the fullest extent permitted by law, the arbitrator shall determine factual issues concerning the amount and validity of any mechanic’s lien claims asserted by the parties3.”  This language clarifies the parties’ intent for the arbitrator to make factual determinations related to mechanic’s liens in arbitration, and provides courts with a justification to enforce these determinations in a subsequent foreclosure proceeding. 

Addressing uncertainty regarding the arbitrator’s authority to make factual determinations regarding the amount and validity of mechanic’s liens is an important step, but there are other practical steps owners and contractors should take to ensure courts accept and enforce those determinations. 

First, parties should expressly request determinations concerning the validity and amount of mechanic’s liens in their arbitration demands and responsive submissions. If the arbitrator has apparent contractual authority to determine the amount and validity of mechanic’s liens, but the parties do not expressly request these determinations from the arbitrator, the arbitration award may not contain them and issues may later arise in the trial court when proceedings ensue to foreclose on the lien. The parties may be forced to relitigate them in a subsequent lien foreclosure action. 

Second, if the award does not include the requested factual determinations concerning the amount and validity of mechanic’s liens, the parties should move to correct/modify the arbitration award immediately. Courts are very deferential to arbitration awards as a matter of public policy, but the parties must ensure that the award contains all of the mechanic’s lien determinations requested from the arbitrator in order for a court to enforce them. Following these recommendations will minimize the risk of having to relitigate mechanic’s lien issues in post-arbitration lien foreclosure proceedings. 

To be sure, there are aspects of arbitrating mechanic’s lien claims that remain problematic. Since arbitration is a creature of contract, non-parties to the arbitration agreement cannot be compelled to participate in arbitration and may justifiably argue they are not bound by arbitrator determinations. This problem crops up in lien foreclosure proceedings where the priority of the lien vis-à-vis junior liens and other interests in the property will be determined by the court. There is little parties can do to eliminate this phenomenon given that foreclosure of mechanic’s liens and lien priority, as noted above, is typically within the exclusive province of the courts.

Nevertheless, uncertainty regarding the scope of arbitrator authority to determine factual issues concerning the amount and validity of mechanic’s liens and the potential inefficiency associated with that uncertainty can be minimized through express language in arbitration provisions, explicit requests for a determination of these issues in arbitration demands and ensuring that arbitration awards include the requested determinations. Litigating a mechanic’s lien once is painful enough, litigating it twice should be avoided as much as possible.

Contractor Submits $4.5M Claim for Differing Site Conditions, Fed Court Rejects and then Imposes Liquidated Damages for $400K

Brendan Carter | The Dispute Resolver | November 21, 2018

The U.S. Court of Federal Claims shows contractors once again the dangers that can exist when pricing a performance specification and the importance of giving owner’s proper notice for change orders in CKYInc. v. Unites States of America.

In 2012, the Government awarded CKY, Inc. a $6.4M contract to widen and rehabilitate the Urban Presidio Levee located in Presidio, TX.  The work required CKY to excavate existing materials in a series of benches and then infill the benches with new materials.  The contract contained a material testing specification which required the new fill material meet certain requirements.  The existing “benched” materials was further required to meet a performance specification as to moisture content and compaction rates.

During the bid process, the Government released Amendment 003 which contained questions and answers from bidders to the Government.  Within that document, the Government stated:

  •       “Due to contamination in situ and the Contractor’s excavation processes, [the Government] cannot state that excavated material will meet…requirements. The Contractor is required to meet the embankment specification regardless of the source of the embankment material.”
  •     “Question: Will removal and disposal of any unsatisfactory material from the existing levee embankment be paid as a separate item, as it is unknown how much material will be unsuitable for use in the new embankment? Government Response: No.”

Furthermore, the bid documents contained a geotechnical report for the existing ground conditions, but the report included the following disclaimer:  

“The data and report are not intended as a representation or warranty of continuity of conditions between soil borings nor groundwater levels at dates and times other than the date and time when measured. The [Commission] will not be responsible for interpretations or conclusions drawn there by the Contractor.”

During construction, CKY had difficulty achieving the subgrade requirements for moisture and density which resulted in schedule delays. CKY alleged at this time it was directed by the Government to place new suitable materials over the “unacceptable, non-constructible subgrade.”

In August of 2016, CKY filed a complaint in the U.S. Court of Federal Claims claiming costs for: (1) differing site conditions; (2) defective specifications; (3) constructive change; and (4) breach of an oral and implied-in-fact contract.

The Government moved for summary judgement contending CKY’s interpretation of the contract and specification were improper and CKY had not provided adequate notice of differing site conditions. It then filed a counter claim for liquidated damages.

The Court began its analysis by stating the primary issue in the dispute is the suitability of the subgrade material and CKY’s entire claim is based upon its contract interpretation that the subgrade was to be “acceptable and constructible.”

The Court first examined the Government’s assertion CKY’s interpretation of the contract documents and specifications were incorrect.  The Court reviewed the items contained within Addendum 003 and the geotechnical report disclaimer and found that a reliable contractor could not have relied on the subgrade soil to meet the requirements of the specifications.  The Court elaborated that, “When all parts of the contract are assigned meaning and understood in their entirety, CKY’s reliance on its own interpretation of the constructability and suitability of the subgrade material was unreasonable.”

The Court next reviewed the differing site condition claim and CKY’s argument that “constructive notice” had been given to the Government.  The Court noted constructive notice is allowed only if “the Government is not prejudiced by a lack of written notice.” The Court reasoned that since it took CKY over a year to submit a REA for the subgrade materials, the Government was prejudiced because it could have stopped construction to evaluate all options other than a $4.5M change order.

Finally, the Court found that as a result of finding CKY had no basis for a claim and the project being 225 days late, liquidated damages as identified in the contract were appropriate in the amount of $1,885 per day.

In conclusion, the Government was granted summary judgement and awarded $424,125 in liquidated damages.

Concurrent Delay: Surety—Standing in the Shoes of Subcontractor—Is Barred From Asserting Defense of Concurrent Delay Because Subcontractor Failed to Seek a Time Extension as Required by the Subcontracts

Michelle Beth Rosenberg | Pepper Hamilton LLP | November 20, 2018

Fid. & Deposit Co. of Md. v. Travelers Cas. & Sur. Co. of Am., 2018 U.S. Dist. LEXIS 162265 (D. Nev., September 21, 2018)

Clark County School District (“CCSD”) hired Big Town Mechanical (“Big Town”) as general contractor to perform HVAC upgrades at five schools. Big Town in turn hired F.A.S.T. Systems (“FAST”) to complete low-voltage work at the schools. Big Town obtained performance bonds from Travelers Casualty and Surety Company of America (“Travelers”) and FAST obtained performance bonds from Fidelity & Deposit Company of Maryland (“F&D”).

Following FAST’s default on its subcontracts, F&D opted to complete FAST’s work and hired a substitute subcontractor, Perini. In May 2012, Perini notified Big Town that it had “substantially completed” all of FAST’s work. After Big Town refused payment, F&D filed suit against Big Town and Travelers in early 2013. In May of 2013, CCSD rejected Big Town’s final payment application, stating that the project was incomplete and claiming there were significant defects in the work. CCSD then sued Travelers seeking specific performance and liquidated damages for delay. Travelers eventually settled CCSD’s suit but through its counterclaim sought reimbursement from F&D for its settlement plus costs expended to complete the project.

F&D moved for partial summary judgment, asserting that because Big Town contributed to the delays in completing the HVAC work, Travelers—standing in Big Town’s shoes—could not establish that FAST caused the liquidated damages to accrue. F&D argued that any delays attributed to FAST ran concurrent to delays caused by Big Town and therefore FAST was not the “but for” cause of the liquidated damages.

Relying on California Court of Appeal’s decision in Greg Opinksi Construction, Inc. v. City of Okadale, 132 Cal. Rptr. 3d 170 (Cal. Ct. App. 2011), Travelers argued in response that where a subcontractor fails to comply with mandatory subcontract procedures pertaining to requesting an extension of the subcontract time, the subcontractor is responsible for all delay damages and loses the right to assert that others caused the delay. The District Court agreed, finding that FAST’s exclusive remedy for delay was to request an extension pursuant to the subcontracts and that failure to request an extension would act as a waiver of a claim for delay damages. The Court reasoned that this provision was intended to allocate the risk of delay costs. Accordingly, the Court held that FAST’s failure to request an extension of time as specified in the subcontracts precluded F&D from asserting the concurrent-delay defense.

F&D argued that it was not bound by the time-extension provision in the subcontracts because those provisions were in the Big Town-FAST subcontracts, to which F&D was not a party. The Court rejected this argument on the grounds that F&D took over performance once FAST defaulted and therefore stood in FAST’s shoes. F&D then argued that it could not comply with the time-extension provisions because once CCSD declared Big Town in default, the subcontracts were terminated. The Court also rejected this argument because Big Town’s default occurred a year-and-a-half after FAST’s default and a year after F&D’s team declared the work complete.

Construction Law Practice Tip: Certificate of Merit Requirements in Federal Court

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Pierre Grosdidier and Ryan Gardner | Haynes and Boone LLP | November 12, 2018

Under Texas law, a plaintiff must file a certificate of merit in any action for damages arising out of the provision of professional services. A certificate of merit is an affidavit from a third-party professional who is knowledgeable about the defendant’s practice area that essentially gives credence to the plaintiff’s claims. A failure to file a certificate with the first-filed petition will result in the action’s dismissal in Texas state courts. But, federal courts are currently divided on whether plaintiffs must also file a certificate of merit when bringing these claims in diversity. No federal Circuit Court has addressed the Texas certificate of merit statute yet, but several federal district courts have considered the issue both for the Texas statute and other comparable state laws and reached conflicting conclusions. Two Texas district court cases discussed below illustrate this conflict well.

Faced with these conflicting results, construction law practitioners bringing claims against professionals in federal court should consult the case law to determine whether the forum court has decided the issue and how. Even if a district judge has previously held that plaintiffs in diversity can dispense with certificates of merit, it is conceivable that another judge might hold otherwise. Moreover, a district judge’s decision that no certificate of merit is required might be reversed by the Fifth Circuit Court of Appeals. Considering the time required to appeal, a negligence claim against a professional might be well past its limitations by the time the appellate court remands the case and the district court dismisses it without prejudice. Therefore, the best practice might be to always include a certificate of merit with an initial complaint.

In Estate of C.A. v. Grier, the Southern District of Texas held the certificate of merit requirement did not apply to federal diversity cases. The Supreme Court’s seminal opinion in Erie Railroad Co. v. Tompkins along with its more recent opinion in Shady Grove Orthopedic Associates v. Allstate Insurance Co. guided the court’s analysis. Erie held that courts adjudicating diversity-jurisdiction claims must apply state substantive law but federal procedural law to the proceedings. To determine if Section 150.002 was a substantive or procedural rule, the court applied the two-step test set forth in Shady Grove: (1) it determined whether the state law—Section 150.002—conflicted with federal law and, (2) if such a conflict did exist, the court asked if applying the federal rule was valid under the federal Rules Enabling Act, which forbids federal procedural rules from abridging, enlarging, or modifying any substantive rights.

Applying the first step, the court found Section 150.002 conflicted with various Federal Rules of Civil Procedure. The court first found a conflict with federal law because Section 150.002 imposed more stringent pleading requirements than Rules 8 and 9. Specifically, the court found Section 150.002’s requirement that the certificate of merit contain the specific factual allegations, including the action, error, or omission by the professional that formed the basis of the suit, created additional pleading requirements beyond Rule 8’s requirement that a pleading provide a short and plain statement of the plaintiff’s claim. Section 150.002 was, therefore, inconsistent with federal law. The court also found Section 150.002 conflicted with the discretion given to courts by Rule 11 to sanction attorneys for filing meritless claims. The court held the mandatory dismissal requirement took away the court’s Rule 11 discretion except as to whether the case should be dismissed with prejudice. Moreover, it concluded the certificate of merit requirement was inconsistent with Rule 26’s expert disclosure and report requirements by accelerating the federal procedures regarding experts.

Turning to the second step, the court held that applying Rules 8, 9, 11, and 26 in light of Section 150.002 did not affect any substantive rights (and, therefore, did not violate the Enabling Act) because Section 150.002’s “most obvious purposes are procedural.” Specifically, Section 150.002 was a procedural rule designed to inform the defendant of the specific conduct the plaintiff is challenging and to assure the court that the claims have merit.

The court found federal law provided other procedural means to accomplish these objectives, namely those offered by Rules 8 and 26(a). Thus, it held that Section 150.002 did not apply to federal diversity cases and denied the defendant’s motion to dismiss.

In State Automobile Mutual Insurance Co. v. Dunhill Partners, Inc., the Northern District of Texas reached the opposite conclusion when faced with identical arguments. The court found Section 150.002 did not conflict with Rules 8 or 9 because the statute was not about pleadings, facts, or notice but rather about “rooting out professional negligence claims that lack expert testimony.” As to Rule 11, the court found no inconsistency because the Federal rules implicitly mandated dismissal for a procedural deficiency, such as under a Rule 12(b) motion, and because Rule 11 focuses on attorneys, not the claims. The court also found no conflict with Rule 26 because Section 150.002’s concurrent filing requirement did not alter the federal schedule for disclosures or discovery. Additionally, the court found the certificate of merit requirement to be substantive because its dismissal requirement had a direct effect on the ultimate result of the litigation. The Court, therefore, held Section 150.002 should apply to federal diversity cases, dismissed all claims without prejudice, and ordered the plaintiff to file an amended petition within 30 days to avoid dismissal with prejudice.