My Roof, My Rules: Arbitrators May Determine Their Own Jurisdiction When the Parties Delegate that Authority

Amandeep S. Kahlon | Buildsmart | September 20, 2017

An issue that repeatedly comes up in construction disputes is the scope of an arbitration agreement. Courts generally interpret agreements to arbitrate broadly, and, where the arbitrability of a specific claim has been at issue, courts often defer, allowing such questions to be answered by the arbitrator. One recent opinion from the Ninth Circuit followed this general approach.

In Portland General Electric Co. v. Liberty Mutual Insur. Co., an owner contracted with a general contractor to construct a power plant in Oregon. The work started in 2013. In the contract, the parties consented to the exclusive jurisdiction of any federal court in Oregon. The contract also required a performance bond, and the bond agreement included a statement that “any proceeding, legal or equitable, under this bond may be instituted in any court of competent jurisdiction in the location in which the work or part of the work is located.”

In addition to the bonding requirement, the owner also required the contractor to obtain a written guaranty of performance from its parent company. In the guaranty, the owner and parent company consented to submit any disputes in connection with the guaranty to binding arbitration under the International Chamber of Commerce (ICC) Rules. The guaranty also specified that, once the arbitration proceeding was commenced, either party could implead any other entity (with its consent) in, and/or raise any claim against, any other entity provided such claim arose out of or in connection with an agreement with a subcontractor or the guaranty.

On December 18, 2015, the owner terminated the general contractor. In response, the contractor’s parent company filed a demand for arbitration. The contractor claimed it had not defaulted, that the termination was wrongful, and that the owner was due nothing under the guaranty agreement. Shortly thereafter, the parent company impleaded the surety under the performance bond invoking the impleader provision of the guaranty agreement and Article 7 of the ICC Rules. The surety consented and sought relief similar to that of the parent company.

The owner objected to the inclusion of the surety and sought a preliminary injunction in federal district court to prohibit joinder of the surety into the arbitration. The owner claimed that the contractor’s parent company had improperly impleaded the surety as part of a collusive effort to arbitrate claims that the owner and surety had agreed to litigate in Oregon courts. The district court granted the injunction, and the surety appealed.

On appeal, the surety argued that the owner’s election to arbitrate in the guaranty agreement and the ICC Rules left the issue of arbitrability of a particular claim up to the arbitrator and not the district court. The Ninth Circuit agreed with the surety, reversed the district court’s decision, and remanded the question of whether the surety’s claims could be arbitrated to the ICC arbitrator.  The Ninth Circuit noted that “parties may delegate the adjudication of gateway issues such as arbitrability of claims to the arbitrator if they clearly and unmistakably agree to do so.” The court then determined that the incorporation of the ICC Rules into the guaranty accomplished just such a delegation, where the rules expressly set forth in Article 6(3) that the arbitral tribunal had the power and authority to determine its own jurisdiction over a particular claim or question. The court reached this conclusion even though neither the performance bond nor the construction contract provided for any agreement to arbitrate disputes between the surety and the owner.

The Ninth Circuit showed deference to the parties’ agreement to arbitrate, and the court’s decision highlights the importance of dispute provisions in contracts, even when found in exhibits or addenda incorporated by reference (e.g., bond or guaranty agreements). Here, the owner likely did not anticipate addressing any claims under the bonds in arbitration, but, because of the guaranty’s broad impleader language and its incorporation of the ICC Rules, the owner ended up in a disfavored forum. And, although the arbitrator may later determine he or she lacks jurisdiction over the surety’s claims, when give the opportunity, arbitrators often reach the opposite conclusion and find a claim arbitrable. Given that reality, the Portland General Electric case demonstrates that all construction industry participants should be mindful of the deference courts will give to arbitrators when determining the arbitrability of claims.

Claim Barred by Florida’s Construction Defect Statute of Repose? Maybe Not. Florida Court Says You Should Read the Construction Contract More Closely

Troy Vuurens | Butler Weihmuller Katz Craig | August 21, 2017

Claim professionals are often reminded that even the most meritorious claim is worthless if not filed within the applicable statute of limitations or statute of repose. In the world of construction defect claims, Florida law provides for a 10-year statute of repose. Under § 95.11(3)(c), the action must commence within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.

Not surprisingly, the parties do not always agree on the specific date that the countdown clock on the statute of repose commenced running. In a recent appellate decision, Florida’s 5th DCA reversed a trial court’s dismissal of a homeowner’s construction defect claim that was filed just beyond 10 years after the closing date on the property. See Busch v. Lennar Homes, LLC, 219 So.3d 93 (Fla. 5th DCA 2017).

In Busch, the defendant had taken the common position that the plaintiff’s claim was barred by the statute of repose because the Purchase and Sale Agreement, i.e. “the contract,” was completed on the date of the closing on the property, which was the latest date applicable under §95.11(3)(c). Therefore, argued the defendant, the claim expired exactly 10 years later and before the complaint was filed. The trial court agreed with the defendant and dismissed the claim upon determination that the contract was completed on the date of the closing, which commenced the running of the statute of repose.

The 5th DCA reversed on appeal and held that the trial court erred in finding that the contract was completed on the date of closing. The court held that a contract is not completed until both sides of a contract have been performed. The court pointed to the “inspection and punch-list clause” of the contract which stated: “Any remaining items that Seller has agreed to correct will be corrected by Seller at Seller’s sole cost and expense prior to closing or at Seller’s option within a reasonable time after closing.” In other words, the court found that the contract was not completed at the time of closing because there were remaining punch-list items that the Seller was obligated to correct. As such, the clock on the 10-year statute of repose did not start ticking until the contract was completed (i.e. when the Seller completed the punch-list items, post-closing).

In the context of residential construction, the closing date is generally the date when the statute of repose commences. It is typically the date on which the homeowner takes possession, final payment is made, and the contract is completed. However, the 5th DCA’s decision in Busch is a reminder that there are other factors to consider as well, including if there is a contractual obligation to complete any remaining work after the closing, such as punch-list items.

It is also worth noting that the defendant in Busch is a large production home builder who likely built thousands of homes with the same contract language. Other builders may have similar clauses incorporated into their contracts, too. The Busch case is an important new decision because of the sheer volume of homes that were likely built with this language. As such, it stands to reason that Florida practitioners engaged in residential construction defect litigation may begin to see these same issues arise in their cases, too. And in all cases where the statute of repose may become a critical issue, a careful analysis of the contract should be undertaken in order to identify similar language.

The Relevance and Reasonableness of Destructive Testing

David Adelstein | Florida Construction Legal Updates | August 12, 2017

Destructive testing is a routine investigatory procedure in construction defect disputes.   The destructive testing is necessary to determine liability (causation), the extent of damage, and the repair protocol.   Destructive testing is designed to answer numerous questions:  Why did the building component fail?  Was the building component constructed incorrectly?  What is the magnitude of the damage caused by the failure? What specifically caused the damage?  What is the most effective way to fix the failure and damage?  There are different iterations to the same questions, but in many instances, destructive testing is necessary to answer these questions.

 

Claimants sometimes prohibit destructive testing.  Of course, destructive testing is intrusive.  In many instances, it is very intrusive.  But, this testing is a necessary evil.  Without this testing, how can a defendant truly analyze their potential exposure and culpability?  They need to be in a position to prepare a defense and figure out their liability.  This does not mean destructive testing is warranted in every single construction defect dispute.  That is not the case.   However, to say it is never warranted is irrational.

 

Florida Statutes Chapter 558 (the pre-suit notice of construction defects process) addresses the issue of destructive testing when parties are participating in this obligatory pre-suit notice of construction defect process:

 

(a) If the person served with notice under subsection (1) determines that destructive testing is necessary to determine the nature and cause of the alleged defects, such person shall notify the claimant in writing.

(b) The notice shall describe the destructive testing to be performed, the person selected to do the testing, the estimated anticipated damage and repairs to or restoration of the property resulting from the testing, the estimated amount of time necessary for the testing and to complete the repairs or restoration, and the financial responsibility offered for covering the costs of repairs or restoration.

(c) If the claimant promptly objects to the person selected to perform the destructive testing, the person served with notice under subsection (1) shall provide the claimant with a list of three qualified persons from which the claimant may select one such person to perform the testing. The person selected to perform the testing shall operate as an agent or subcontractor of the person served with notice under subsection (1) and shall communicate with, submit any reports to, and be solely responsible to the person served with notice.

(d) The testing shall be done at a mutually agreeable time.

(e) The claimant or a representative of the claimant may be present to observe the destructive testing.

(f) The destructive testing shall not render the property uninhabitable.

(g) There shall be no construction lien rights under part I of chapter 713 for the destructive testing caused by a person served with notice under subsection (1) or for restoring the area destructively tested to the condition existing prior to testing, except to the extent the owner contracts for the destructive testing or restoration.

If the claimant refuses to agree and thereafter permit reasonable destructive testing, the claimant shall have no claim for damages which could have been avoided or mitigated had destructive testing been allowed when requested and had a feasible remedy been promptly implemented.

Florida Statute s. 558.004(2).

 

Under this pre-suit process, if a claimant refuses to permit reasonable destructive testing, the claimant shall have no claim for damages which could have been mitigated or avoided had destructive testing been allowed and had a feasible remedy been promptly implemented.  In my opinion, this has very little teeth as it raises too many factual issues such as 1) was the destructive testing reasonable, 2) what damages could have realistically been mitigated and how do you prove this, 3) what is a feasible remedy and how is one to know whether the defendant would have even proposed or implemented a feasible remedy, 4) is the feasible remedy a remedy that mitigates future damage or fully addresses the root of the problem, and 5) what is the quantum of damages that could have been mitigated or avoided.   Establishing the reasonableness of the destructive testing is likely easy as an expert would support this.  But the same expert would have to establish the other requirements as a basis to establish an affirmative defense that some of the claimed damages the plaintiff is seeking could have been mitigated had the claimant allowed pre-suit destructive testing.

 

Oftentimes, however, a defendant wants to undertake certain destructive testing after a lawsuit has been initiated.  What happens if the plaintiff refuses such testing in this scenario?  In a recent products liability case, Westerbeke Corp. v. Atherton, 42 Fla.L.Weekly D1741c (Fla. 2d DCA 2017), a defendant wanted to perform destructive testing on a gas generator that caused an explosion on a boat.  The plaintiff did not want this testing to be performed.   In support of the testing, the defendant relied on a federal district case that applied four factors to consider whether the destructive testing is warranted:

 

1) Whether the proposed testing is reasonable, necessary, and relevant to proving the movant’s case; 2) Whether the non-movant’s ability to present evidence at trial will be hindered, or whether the non-movant will be prejudiced in some other way; 3) Whether there are any less prejudicial alternative methods of obtaining the evidence sought; and 4) Whether there are adequate safeguards to minimize prejudice to the non-movant, particularly the non-movant’s ability to present evidence at trial.

 

Westerbke Corp., supra, quoting Mirchandani v. Home Depot, U.S.A., Inc., 235 F.R.D. 611, 614 (D.Md. 2006).

 

The trial court did not apply these four factors and denied the defendant’s request to perform destructive testing on the gas generator.  On appeal (through a petition for writ of certiorari), the appellate court reversed.  Unfortunately, the appellate court punted without providing specific guidance as to what standard the trial should follow when granting or denying a request for destructive testing.  The appellate court simply held that the four factors above may provide guidance to the trial court, but are not controlling in Florida.  The appellate court further summarily pointed to the Florida’s Rules of Civil Procedure to address the issue:

 

The Florida law regarding discovery in general provides that a party in a civil case is entitled to discover evidence that is relevant to the subject matter of the case and that is admissible or reasonably calculated to lead to admissible evidence. Fla. R. Civ. P. 1.280(b)(1); Allstate Ins. Co. v. Langston, 655 So. 2d 91, 94 (Fla. 1995). In addition, “[a]ny party may request any other party . . . to inspect and copy, test, or sample any tangible things that constitute or contain matters within the scope of rule 1.280(b) and that are in the possession, custody, or control of the party to whom the request is directed.” Fla. R. Civ. P. 1.350(a)(2). “The discovery rules . . . confer broad discretion on the trial court to limit or prohibit discovery in order to ‘protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense.‘ ” Rasmussen v. S. Fla. Blood Serv., Inc., 500 So. 2d 533, 535 (Fla. 1987) (citing Fla. R. Civ. P. 1.280(c)). We conclude that the trial court departed from the essential requirements of the law in failing to apply the proper discovery standard…..

 

 

The four factors outlined above are reasonable factors that comport with Florida law – whether the testing is relevant to the subject matter of the case. The factors provide guidance as to how to determine relevancy of destructive testing during the course of a lawsuit.  Plus, the court can always impose limitations or restrictions to reduce any intrusion and protect the claimant’s interests while allowing testing to be performed.   By the appellate court punting and not even ruling on whether the destructive testing would be relevant in the underlying action, the court is simply inviting another appeal.

Court Finds That Split in Underground Storage Tank is Not a Covered Collapse

Christopher Kendrick and Valerie A. Moore | Haight Brown & Bonesteel LLP | July 5, 2017

In Tustin Field Gas & Food v. Mid-Century Ins. Co. (No. B268850, filed 7/3/17), a California appeals court ruled that a split in an underground storage tank, caused by the tank sitting on a rock for years, was not a covered “collapse” as a matter of law.

Tustin Field owned a gas station in Palm Springs. The installer of the underground storage tanks did not follow the manufacturer’s instructions to bury them in pea gravel or crushed rock. Instead, the installer just dug a hole, placed the tanks into that hole, and then covered them with “native soil” containing rocks, boulders and other debris.

The tanks were double-walled, steel with a fiberglass sheath. Sixteen years after installation, testing revealed that the fiberglass sheath on one tank was no longer intact. The tank was excavated and the fiberglass sheath was found to be cracked from the tank sitting on a nine-inch boulder. The insured paid to have the crack repaired and made a claim for the cost of excavating and repairing the tank.

The Mid-Century policy generally excluded collapse, but provided “Additional Coverage for Collapse” as follows:

“[Mid-Century] will pay for direct physical loss or damage to Covered Property, caused by a collapse of a building or any part of a building insured under this policy, if the collapse is caused by one or more of the following:… (b) Hidden decay;…(d) Weight of people or personal property;… (f) Use of defective material or methods in construction, remodeling or renovation if the collapse occurs during the course of the construction, remodeling or renovation. However, if the collapse occurs after construction, remodeling or renovation is complete and is caused in part by [an enumerated] cause of loss…, [Mid-Century] will pay for the loss or damage even if use of defective material or methods in construction, remodeling or renovation, contributes to the collapse.”

The subsection also specified that “Collapse does not include settling, cracking, shrinkage, bulging or expansion.”

Mid-Century denied coverage and in the following bad faith lawsuit, the trial court granted summary judgment to the insurer while denying the insured’s cross-motion for summary judgment.

The trial court concluded that there was no covered cause of loss because there had been no “collapse.” The court ruled that the insured had to show an “actual” collapse, but had failed to submit evidence that the tank “suffered a complete change in structure and lost its distinctive character as an underground storage tank.” The insured had shown, at most, that the tank was no longer usable under storage tank law because its outer sheath had been breached, but “a mere impairment of [the tank’s] structural integrity did not constitute an actual collapse.”

The appeals court affirmed. First, the court rejected the argument that if a structure is not usable it has necessarily collapsed. (Citing Sabella v. Wisler (1963) 59 Cal.2d 21 and Doheny West Homeowners’ Assn. v. American Guarantee & Liability Ins. Co. (1997) 60 Cal.App.4th 400.)

The Tustin Field court also rejected the argument that “substantial impairment of structural integrity” of a building constitutes collapse: “This is incorrect…. California law specifically holds to the contrary, at least where, as here, a policy excludes from collapse ‘settling’ and the like.” (Citing Doheny West, supra, and Stamm Theatres, Inc. v. Hartford Casualty Ins. Co.(2001) 93 Cal.App.4th 531.)

The Tustin Field court went on to reject a claim that ambiguity from the lack of a specific definition for collapse in the policy mandated interpretation in the policyholder’s favor, as well as rejecting the insured’s appeal to public policy.

The Tustin Field court distinguished Doheny West, supra, Stamm Theatres, supra, and Panico v. Truck Ins. Exchange (2001) 90 Cal.App.4th 1294, as all involving a broader meaning of collapse:

“[B]ecause the [Mid-Century] Policy excludes collapse from its definition of Covered Causes of Loss, and then creates a more limited ‘exception to the exception’ that re-extends coverage for collapse-related damage, but only ‘for direct physical loss or damage to Covered Property, caused by a collapse of a building or any part of a building insured under this policy, if the collapse is caused by one or more’ enumerated reasons. Because this revival of coverage for collapse does not include ‘risks of’ collapse (just collapse itself) and because the Policy nowhere covers damage ‘involving collapse,’ the broader definition of collapse discussed in Doheny West, Panico, and Stamm Theatres is inapplicable.”

The Tustin Field court also dismissed the insured’s use of expert testimony as inadmissible for the purpose of contract interpretation, and ruled that even if causation posed a factual dispute, it was not material to the result.

This document is intended to provide you with information about insurance law related developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

Thinking Beyond the Dispute Resolution Provision in Construction Disputes

Benjamin Pollock | King & Spalding | June 5, 2017

When parties cannot resolve a claim during a major construction project, the contracts dispute resolution provisions do not always need to read as step-by-step instructions. To the contrary, the situation may warrant a different approach that can be negotiated after the dispute arises. While agreement certainly is required to deviate from the contractual obligations which themselves reflect the parties prior and current agreement other options can be considered and proposed whenever they would be beneficial to the Project or parties needs. This article discusses alternative methods by which a resolution to a construction dispute concerning costs or delays can be found in ways not necessarily proscribed by the contracts dispute resolution provisions.

Contracts Do Not Predict Every Situation

As an initial point, by no means is this article suggesting that the contract should be ignored or disregarded. Indeed, the contract provisions should be the embodiment of the good faith negotiations of the parties, often hard-won through sophisticated bargaining. But this does not mean that one size fits all, and the individual situation and claims should be considered when an actual dispute must be managed.

This can be particularly true when circumstances change between the parties, or when the companies develop a business relationship outside of the one specific project. To be sure, the contracts dispute resolution provisions establish the original framework by which the parties are to resolve disputes arising from construction of that individual project. But the realities can change when those companies subsequently enter into additional contracts regarding multiple projects, or agree to an Operation and Maintenance Agreement that binds them to each other at the same site for multiple years following completion. Suddenly, the prospect of filing for arbitration over the one construction dispute can become a challenging or unacceptable option. Indeed, preserving the relationship and maintaining peace may prove more valuable than escalating a dispute to a jury or an independent panel. And with arbitration or litigation seen as a last-ditch option, the parties may do well to think beyond the contracts instructions in order to get the dispute resolved.

Conditions Precedent Can Be Mutually Waived or Changed

In many ways, a contracts dispute resolution provision can be seen as the designation of the ultimate deciderarbitrator, judge, or juryand a series of conditions precedent that must be followed before reaching the final stage. These conditions serve various purposes, like promoting party communication in an attempt to avoid costly litigation, or ensuring notifications are being effected internally at appropriate levels of management. These interim steps can include formal notice, a mediation or other non-binding proceeding, various waiting periods, and/or a meeting between management personnel. When a particular dispute reaches impasse, however, these actions may not always serve their intended purpose. In such scenarios, the contract provisions do not always need to be strictly adhered to, but instead should be evaluated for their perceived effectiveness under the circumstances. When it serves both parties or the Project to take different action, consider seeking a mutual agreement to waive or adjust certain of these conditions.

Take waiting periods. It is not uncommon for a contract to mandate that arbitration cannot be filed until a certain number of days after a formal notice letter is served (or other triggering event). But what if the dispute is impacting critical path activities, and a quick resolution would allow the parties to mitigate the impact or at least would provide the parties more certainty regarding the risks of a situation already affecting cost and schedule? As an initial matter, the owner may do well to instruct the contractor to continue working, or enter into a temporary agreement that maintains Project progress while the claim is addressed. But in this scenario, both parties may wish to consider waiving the required waiting period and submitting the dispute on an expedited schedule. Similarly, both sides may benefit from adding strict time limits on the selection process of nominating one arbitrator eachwho then nominate a chairpersonor even forgoing this timely process in favor of selecting a single fact-finder.

Another example is mandatory meetings between managers. Sometimes it may be patently obvious that certain disputes will not be resolved at such meetings. Perhaps the representatives designated by the contract have personality conflicts, the parties positions are extreme and irreconcilable, or the contemplated meeting would present other challenges that may actually exacerbate the situation. If the parties are entrenched in their positions, more might be at stake than a waste of time and resources: ill will can result if one party believes the other is not participating in good faith. In certain circumstances, a discussion by the designated persons about the dispute can do more harm than good.

Agreeing not to hold such a meeting is an option, although generally speaking, parties engaging in discussion before launching litigation is a good thing. If the contract requirements do not create an environment for success, they can be tweaked. Notwithstanding contractual restrictions on attendees, the parties can agree to select personnel best suited to attend, usually so long as there is someone present with decision-making authority. The presence of a mediator, expert, or third party neutral to facilitate discussions and offer opinions can be considered, regardless of whether the contract requires such a presence. And rather than meeting to discuss the merits of the disputewhich likely is encapsulated already in opinionated change documentation and argumentative claims letterscommercial settlements can be discussed instead. Indeed, such proposalsbonus milestones, additional resources, overtime, changes to the payment schedule, etc.may resolve the dispute without having to discuss, much less decide, the contentious issues, and can also benefit project progress itself. In these ways, parties can still hold the required meeting but tailor it to best position themselves for success.

Conclusion

A dispute resolution provision identifies the final arbiter of a dispute and contains other requirements meant to facilitate discussion and negotiation so that litigation can be avoided. Sometimes, however, the specific provisions will not best serve those purposes. In these situations, prudent parties will study the contracts requirements but also consider options that might more effectively resolve the particular dispute at issue, get the project back on track, and improverather than harmthe business relationship. Rather than view the various required stages as items on a checklist, parties can agree to waive or alter certain provisions and thereby adopt a procedure that may better facilitate resolution the specific dispute.