Initial Discovery Disaster Litigation Protocols Are Established

Chip Merlin | Property Insurance Coverage Law Blog | February 27, 2019

Rene Sigman from Merlin Law Group’s Houston office was invited to work with a panel of judges to determine a set of pretrial procedures designed to resolve cases efficiently, quickly, and fairly. Their work has finished and have published a set of protocols that most of us will follow during future disaster litigation.

Here is part of the introduction to the protocols:

Disaster relief cases arise out of arduous circumstances, and for the litigants on both sides, the resolution process itself can also be arduous. For the increasing numbers of those victims who end up in court in an effort to recover damages, the process can be protracted and complex. Courts are quickly overwhelmed by the volume and complexity of the cases, and these challenges quickly frustrate the litigants before the court on both sides. Through the following Initial Discovery Protocols for First-Party Insurance Property Damage Cases Arising from Disasters (Disaster Protocols), IAALS, the Institute for the Advancement of the American Legal System, is trying to expedite this recovery process for everyone involved—the victims seeking recovery, the insurance industry, and the legal system.

The Disaster Protocols provide a new pretrial procedure for cases involving first-party insurance property damage claims arising from man-made or natural disasters. They are designed to be implemented by trial judges, lawyers, and litigants in state and federal courts. As described in the Disaster Protocols, their intent is to “make it easier and faster for the parties and their counsel to: (1) exchange important information and documents early in the case; (2) frame the issues to be resolved; (3) value the claims for possible early resolution; and (4) plan for more efficient and targeted subsequent formal discovery, if needed.

Rene Sigman worked very hard to represent policyholder interest on the panel and debated with insurance lawyers about the pre-trial discovery which should take place immediately. Our hats are off to her and the work of this committee.

The Devil’s in the Details: Dispute Resolution and Attorney’s Fees Contract Clauses

Kent B. Scott | Babcock Scott & Babcock | December 13, 2018

            If you are a business owner, a property owner, or you work in the real estate industry, you have undoubtedly signed, drafted, reviewed, or negotiated many contracts. At their most fundamental level, written contracts are nothing more than the memorialization of the parties’ agreement, and more importantly, the allocation of risk. Much of that risk shifting is often intended to limit each party’s exposure to lost time and money in the future. Considering that, and in an effort to reduce your exposure to risk, there are two key clauses that should be considered in every contract you sign: a dispute resolution clause and an attorney’s fee clause. In this article I will briefly discuss both of those clauses and how they can eliminate uncertainty in business and real estate transactions.

 

Dispute Resolution Clause

 

            Unfortunately, a fact of contracting life is the inevitability of disputes, disagreements, and differing opinions. Even with existing clients or customers with whom you have a good working relationship, disputes undoubtedly arise. Knowing that such disputes are not only foreseeable, but inevitable, if you sign a written contract without any type of clause that addresses a process for resolving those disputes, then you are exposing yourself to the unnecessary risk of a lengthy and expensive legal battle. So, we must first start with the premise that every contract you sign should provide some mechanism for resolving disputes. Unfortunately, little if any time is devoted to the drafting of dispute resolution clause which is the first clause you run to when a dispute does arrive. After all, isn’t everything going to work out just as you planned them? With that in mind, an effective dispute resolution clause will typically address resolving disputes in a graduated manner from the approach you have the most control over, and is least expensive and time consuming, to the approach where you have the least control over, and is most expensive and time consuming. That framework usually follows three general categories: negotiation between the parties, then mediation, then arbitration or litigation.

 

Negotiation. When a dispute arises between contracting parties, the easiest, least expensive, and usually preferable method of resolving that dispute is to get the decision makers in a room together or on the phone and negotiate a solution. At this stage of a dispute, both parties have complete control over the outcome and usually have complete ability to craft whatever solution will make the most business sense for themselves or their companies. They are not beholden to a third-party decision maker (like an arbitrator or a judge) and they are not bound by any formal rules that might limit or affect their decision (like the rules of arbitration or civil procedure). So, in your dispute resolution clause it is wise to state that when a dispute arises, the parties must first make a good-faith attempt at negotiating a solution.

 

Mediation. If negotiations fail, then it is also wise to requires parties take the second step in your dispute resolution procedure: mediation. Mediation is nothing more than non-binding, formalized negotiations with a neutral third party. In other words, in a typical mediation, the parties mutually agree upon a third party (ideally a former judge or an experienced attorney in the applicable area of law) who will meet with the parties together and help both sides understand the pros and cons of their positions with the intent of facilitating a settlement. With few exceptions, there are usually no formal rules or other requirements of how a mediation is conducted, other than the personal preferences of the mediator. Mediation is a consensual, confidential and creative process. Nothing happens in mediation without the consent of both parties. Most mediations end successfully with the parties moving on with their lives having saved some time and money on legal fees. Investing in the resolution rather than the litigation of a commercial dispute benefits all parties. Including a contract provision that requires mediation can go a long way to reducing a lengthy and expensive legal dispute.

 

Arbitration. The final category of dispute resolution to address in your contract is either arbitration or litigation, both of which are generally the more time consuming, expensive, and uncertain methods to resolve disputes (though, in some cases, they may be the best option). Arbitration is more formal than mediation, but less structured than going to court (i.e., litigation). Arbitration is similar to mediation in the sense that the parties get to select who the arbitrator is and, to some extent, the parties get to choose the rules that govern the proceeding. However, Arbitration differs from mediation because typically the parties agree to vest decision making power in the arbitrator and the parties usually agree to be bound by the decision. Arbitration can be an effective method of resolving disputes, but it does take some autonomy away from the parties and it is generally a more expensive and time-consuming process than mediation.

 

Litigation. The other, more involved, option for resolving disputes is litigation in court. To be sure, keeping litigation as an option for dispute resolution may be a wise choice, depending on the type of contract and the parties to that agreement. But, litigation is generally the most expensive and time-consuming option. And it’s also the option where the litigants have the least amount of control over the process: you don’t pick your judge, you don’t pick the rules, and you don’t set the schedule. Nevertheless, the judicial system in the United States may provide certain benefits that you want to have available such as the option of a jury trial. So, depending on your circumstances, you may want to either keep litigation open as an option, or keep it off the table entirely.

 

By including a dispute resolution clause in every contract you sign, and by understanding the pros and cons of each method of resolving disputes, you can be better equipped to evaluate the risks you face with foreseeable disputes, and the risks you are comfortable with regarding the resolution of those disputes.

 

Attorney’s Fees Clause

 

In our system of jurisprudence. the “American Rule”, both parties to a lawsuit pay their own way, no matter who wins. There are reasons for this rule. For one, we as a society do not want to discourage individuals from bringing meritorious claims for fear of having to pay the other side’s attorney’s fees. Related to that is the possible benefit society may lose if the party with a meritorious claim did not bring that claim because it did not want to risk paying the other side’s attorney’s fees. Whether we agree with these reasons is a debate for another day. But whatever the reason, the rule means that a plaintiff can file a lawsuit against a defendant, which the defendant may spend tens of thousands of dollars to successfully defend, and the defendant will be required to pay all of its own attorney’s fees.

 

There are two exceptions to the American Rule that each party is responsible for their own attorneys’ fees. The first is the statutory exception. This exception is that a prevailing party can recover its attorney’s fees (i.e., make the losing party pay for them) if a statute allows for it. For example, Utah’s mechanic’s lien statute states that the prevailing party on any action to foreclose a mechanic’s lien is entitled to an award of the reasonable attorney’s fees it incurred to prevail in that action. There are many statutes that similarly provide for attorney’s fees, but the problem is those statutes are out of your control. In other words, your situation may or may not fall within a governing statute, which is why the second exception should be your default approach.

 

The second exception is that a prevailing party can recover its attorney’s fees if a contract says so. This exception is entirely within your control, which is why, if you are concerned about being liable for another party’s attorney’s fees, you should seriously consider whether every contract you sign should state that the prevailing party in any lawsuit or dispute that arises out of that contract will be entitled to be paid its attorney’s fees by the losing party. To answer that question—whether it is in your best interests to include an attorneys’ fee clause in your contract documents—we recommend that you discuss this matter with legal counsel. Cases may vary depending upon the nature of the contract relationships involved and the particular business interests of the parties.

 

 

 

Conclusion

 

A fact of life in the world of construction, real estate, or owning a business involves inherent risks. There are risks that you will end up in a lengthy and expensive dispute with the party you contracted with. Also, there is the risk that you will prevail in a lawsuit, but still be stuck with a legal bill that far exceeds anything you gained by prevailing in that suit. By recognizing these foreseeable risks and ensuring that every contract you sign has a dispute resolution clause and addresses attorney’s fees to address your company’s needs, you will significantly reduce your exposure to these all-too-common risks, which should help you continue to survive and thrive in an uncertain industry.

 

Kent Scott is a shareholder in the construction

Law firm of Babcock Scott & Babcock. He may

Be reached at kent@babcockscott.com

Rethinking the Boilerplate: Alternative Dispute Resolution Procedures in Construction Contracts

Robert Alfert, Jr. and Edward R. Philpot | Nelson Mullins Riley & Scarborough LLP | November 2, 2018

“Litigation is a basic legal right guaranteeing every corporation its decade in court.” Attributed to David Porter, Executive Vice President of Microsoft.

Most courts and juries are ill-equipped to handle complex business and technical litigation matters, yet most construction contracts fail to address dispute resolution and do not have provisions customized to the subject matter and unique needs of the parties. Unlike litigation, ADR allows parties to define nearly all aspects of their dispute resolution process. Overall, only ADR allows parties the full right of self-determination over the resolution of disputes, while litigation often exposes business parties to greater risk, costs, delays and uncertainties.

Taking full advantage of ADR means understanding each available process – whether mediation, arbitration, dispute review board or a combination – and the options for customization before executing a contract.

MEDIATION

Although success, and finality, are never guaranteed with mediation, it allows for control over the final settlement. Parties can craft a settlement otherwise impossible through trial verdict, as the parties can specify customized non-monetary terms. But, even if no settlement is reached, early mediation adds value. Through mediation, parties learn more about the strengths and weaknesses of various positions to move forward.

Mediation does not have to be a one-off. Most complex construction disputes will mediate more than once, and, if suit is initiated, most courts will order mediation regardless. Likewise, private arbitration services encourage mediation before a final hearing. If the parties engage an active mediator, it is also typical for that individual to continue to serve as a conduit for settlement talks, and to explore settlement possibilities throughout the course of the dispute.

Although mediation is driven by each party’s willingness to participate, the process is customizable. The mediation provision can specify a timeframe, identify a particular mediator, require exchange of claim and defense information and reaffirm confidentiality requirements.

ARBITRATION

Arbitration offers the most finality and control of ADR. In contrast to mediation, in which the third party is merely a facilitator, arbitration places the decision in the third party’s hands. In most circumstances, the court’s only role is to confirm the arbitrator’s decision or award, on an exceptionally deferential standard.

Final arbitral awards in less than one year are not uncommon, whereas trial to verdict in less than one year is exceptionally uncommon. A well-crafted arbitration provision and parties who treat arbitration like arbitration, rather than litigation, will ensure a faster and more cost-sensitive result.

Like mediation, the arbitration provision can specify the timeframe, a decision maker, confidentiality, discovery and other procedural characteristics. Parties can specify each to ensure that disputes are quickly and efficiently handled. With the active presence of an arbitrator, compliance with procedural requirements is mandatory. For example, discovery may be limited to written discovery and depositions, saving a large amount of time and cost – or may be more expansive, for costlier, more complicated projects – the parties control these parameters, which will be enforced by the arbitrator and respected by the court.

DISPUTE REVIEW BOARD

DRBs offer a middle ground between mediation and arbitration, providing recommendations in a manner akin to arbitration, but with the goal of assisting the parties to resolve a dispute themselves like mediation. This particular ADR process has been employed on billions of dollars’ worth of infrastructure projects in the United States, including, the Big Dig in Boston and the South Terminal program at Orlando International Airport.

DRBs usually consist of panels of neutral, seasoned construction professionals who render nonbinding recommendations to assist contract parties in resolving disputes. DRB members tend to be empaneled for the duration of a project and are familiar with the work and issues that arise. The DRB’s recommendations may be accepted by the contract parties, resolving the dispute, or may offer the starting point for negotiations.

One of the primary benefits of the DRB process is its availability to resolve disputes as they arise, versus when parties are already headed to litigation. The DRB process may be customized for the project and the parties. Additionally, the parties may specify submission and hearing requirements, procedures for acceptance and rejection of DRB recommendations, the admissibility of DRB-related materials in later legal proceedings and payment structures of DRB members.

Underscoring the flexibility of the processes described above, each may be used individually, or in combination with the others. In all cases, the parties design the process and exercise control in a manner not afforded to them in court.

Given the panoply of options available, it is incumbent on the construction executive to carefully negotiate the mode of ADR specified in each contract, and to customize it to the needs of the parties and the project. No two projects are alike.

A Word to the Wise: The AIA Revised Contract Documents Could Lead to New and Unanticipated Risks – Part II

George Talarico | Construction Executive | September 18, 2018

Part I addressed general conditions, revised insurance terms, revisions that affect owner’s required insurance and revisions that affect contractor’s required insurance.

REVISIONS THAT AFFECT DISPUTE RESOLUTION

A seemingly minor but noteworthy change is to the definition of “Claim.” Under Section 15.1 a “Claim” is defined to:

  • include a request for a modification of contract time; and
  • exclude any requirement that an owner must file a claim to impose liquidated damages.

Notably, any request relating to contract time must be brought within the specified time period for Notice of Claim1 and in the prescribed manner2. There are at least two traps for the unwary. First, even though email is regularly used for communications among the parties, the revised contract documents do not recognize email as an acceptable form of delivery of a Notice of Claim. Second, an unwary contractor may wrongly assume that an owner’s failure to assert a claim for LDs means that LDs will not be imposed. This may lull the contractor into failing to timely assert its own claim for a time extension and thereby waiving its ability to do so.

There have not been any major revisions to the arbitration provisions of Section 15.4. Other changes, however, will influence dispute resolution. As before, a condition precedent to commencing Mediation and thereafter a possible arbitration or litigation, Claims must first be submitted to the Initial Decision Maker3. The IDM is normally the architect as the architect is designated as the default IDM4. The 2017 revisions, however, now include strong exculpatory language protecting the IDM from liability “for results of interpretations or decisions rendered in good faith5.” This broad protection from liability could place the architect (acting as IDM) in an uncomfortable and possible conflicted position if, for example, the Claim infers liability on the part of the architect (such as improper or defective design). Moreover, it raises possible struggles to ascertain the meaning of ‘good faith’ in the context of the architect’s actions6.

REVISIONS THAT AFFECT SUPERVISION AND CONSTRUCTION PROCEDURE

In circumstances where the specifications do not prescribe construction means and methods, these remain the responsibility of the contractor. It appears, however, that the contractor is now being burdened with some of the architect’s design responsibilities, in circumstances where the specifications and/or drawings “give specific instructions concerning construction means, methods, techniques, sequences or procedures7.” Previously, if the contractor determined that the specified means, methods, techniques, sequences or procedures were unsafe, the contractor was required to provide the architect with timely notice and then stop the work it deemed to be unsafe, while awaiting further written instructions8. Now the contractor does not have the right to stop work and it is incumbent upon the contractor and not the architect to propose alternate means, methods, techniques, sequences or procedures9. The architect’s role has been diminished and is only required to review the contractor’s proposal, solely for “conformance with the design intent for the completed construction10.”

REVISIONS THAT AFFECT SHOP DRAWINGS

Another change which could shift some design responsibility from the architect to the contractor is contained in the section on Shop Drawings. On one hand this section adds an assurance that in preparing Shop Drawings the contractor is “entitled to rely upon the adequacy” of the architect’s design criteria, yet on the other hand it removes the language stating that “[t]he contractor shall not be responsible for the adequacy of the” design criteria contained in the Contract Documents11. This modification could be interpreted to mean that through submittal of Shop Drawings, the contractor is taking on responsibility for design criteria.

REVISIONS THAT AFFECT CONTRACT TERMINATION

Another deletion that could prove troubling for the contractor involves contract termination by the contractor. Both the prior and current versions are consistent in that each allows the contractor to terminate the contract if work is stopped for 30 consecutive days, for certain specified reasons, i.e. court order. The difference is that the prior version limited this option only to circumstance where the delay was not caused by the contractor, a subcontractor or “entities performing portions of the Work under direct or indirect contract with the contractor12.”The latest version deletes the underlined words and therefore implies that the contractor has no right to terminate if the delay is caused by any party performing work on the project regardless of whether or not the contractor has any control over that party.

In instances where the owner terminates ‘for convenience’ the contractor will no longer be permitted to receive payment for overhead and profit on work that the contractor performed as a result of the termination unless the contract otherwise provides. Since the contractor is entitled to a termination fee included the contract13, it is important that a contractor negotiate for inclusion of overhead and profit in its calculation for a termination fee.

While many of the 2017 revisions to A201 appear to be stylistic in nature, there are some changes which could affect the liability of the architect, owner and the contractor (including its subcontractors). In order to prevent unpleasant surprises, the parties need to recognize those revisions that:

  • effect the claims process;
  • increase and/or limit costs;
  • shift liability; and
  • change deadlines.

This will allow them to negotiate around the revisions, i.e. included overhead and profit in termination fee) and/or perform the contract in a manner that anticipates the impact of the revisions, i.e. filing a claim for contract time extension without awaiting the owners claim for LDs.

1 “Claims by either party under Section 15.1.3.1 shall be initiated within 21 days after occurrence of the event giving rise to the Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later.” A201-2017 § 15.1.3.1.

2 Pursuant to A201-2017 § 1.6.2 Notice of Claims must be delivered by registered or certified mail or by courier.

3 Note that there is no requirement that Claims submitted after the correction of work period be submitted to the IDM. A201-2017 § 15.1.3.2.

4 A201-2017 § 1.1.8.

5 Id.

See, e.g., MECO Systems, Inc. v Dancing Bear Entertainment, Inc., et al., 948 SW2d 185, 1997 Mo. App. LEXIS 1191 (the architect’s “actions raise genuine issues of fact regarding the architect’s partiality and good faith.” where the architect failed to demonstrate its compliance with contract provisions on timeliness and the contractor raised claims that construction delays were caused by the architect).

7  A201-2017 § 3.3.1.

8  Id.

9  Id.

10 Id.

11  A201-2017 § 3.12.10.1.

12  A201-2007 § 14.1.1 (emphasis added).

13 A201-2017 § 14.4.3.

Strategy for Enforcement of Dispute Resolution Rights

Whitney Judson | Smith Currie | May 21, 2018

Arbitration and litigation each offer their own benefits and drawbacks to litigants looking to resolve a construction dispute. A careful analysis of these benefits and drawbacks may be helpful in determining whether to avoid or pursue either dispute resolution process. Arbitration is oftentimes regarded as the more economically feasible dispute resolution option and is therefore attractive to many construction dispute litigants. Although arbitration may prove to be less expensive than litigation in the long run, some litigants may prefer to file a case in court because the upfront filing fees in litigation are less expensive than the filing fees of arbitration.

Litigants may also prefer the decision makers of one process for dispute resolution over another. Arbitrators in a construction dispute oftentimes have a background in the construction industry, whereas a judge or jury may not. Strategy may dictate whether the preferable decision maker should have experience within the construction industry or be free of any construction industry knowledge and possible biases. The finality of decisions may also be a reason to strategically choose one dispute resolution process over another. Arbitration decisions are overturned only under very narrow and specific circumstances. The losing party in litigation however, has a right to appeal decisions to a higher court and has more options for recourse when the findings of the court are not supported by the evidence or the law.

Jurisdiction and the Enforcement of Agreements to Arbitrate

Construction contracts oftentimes contain arbitration clauses where the signatories agree to resolve certain disputes through arbitration proceedings. Parties may disagree, however, on whether any given dispute falls within the scope of the arbitration clause. They may further disagree as to whether a judge or an arbitrator should have the power to rule on this issue. When one of these disputes presents itself, at least one party may insist that the issue of jurisdiction be decided before any arbitration proceedings can begin. The first step in either enforcing or avoiding an arbitration agreement may therefore be answering the preliminary question of who should rightfully decide whether claims in dispute belong in litigation or arbitration.

The United States Supreme Court has held that, in general, courts have the sole power to decide whether claims fall within the scope of an arbitration agreement, unless the parties have clearly and unambiguously decided to submit such questions to an arbitrator. The rationale behind this general rule is that an arbitration cannot be forced upon any party who has not agreed to participate. Parties that have not agreed to arbitrate are entitled to resolve their disputes in court. If a party prefers to participate in arbitration and have arbitrators decide issues of jurisdiction, it is important to clearly and unambiguously express these preferences within the contract. Additionally, parties that contractually elect to be governed by the American Arbitration Association Rules have agreed to empower arbitrators to decide issues of jurisdiction. The AAA Rules state: “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim.” Rule R-7, AAA Commercial Rules.

Incorporation and Waiver

Construction contracts, in particular, oftentimes incorporate other documents. For example, a subcontract may not contain any agreement to arbitrate, but it may incorporate a prime contract that contains an arbitration clause. The arbitration clause that is referenced or incorporated from the prime contract may be enforceable against the subcontractor, even if the parties to the subcontract have not signed an agreement to arbitrate. Enforceable incorporation language in a contract will work to the advantage of a party that prefers arbitration and seeks to enforce an arbitration agreement. While this is the general rule, a minority of courts have held that broad language of incorporation may not be sufficient to incorporate an arbitration agreement.

Even when an agreement to arbitrate exists, a party may avoid its enforcement by arguing that the opposing party has waived its right to arbitration. When one party behaves in a manner that is inconsistent with its known arbitration rights—especially when this inconsistent behavior causes prejudice to the opposing party—arbitration rights may be waived. Actions that are inconsistent with arbitration rights include, but are not limited to, filing motions in court, conducting discovery in court, delays in filing motions to compel or stay arbitration, or otherwise substantially invoking rights and powers in litigation prior to filing an arbitration demand.

Motions to Compel Arbitration

If litigation has been initiated by one party in court, a party opposing litigation and seeking to enforce its arbitration rights may choose to file a motion to compel arbitration. A motion to compel arbitration uses the litigation process to require a party to arbitrate claims in accordance with the arbitration agreement. A party that has not agreed to arbitrate, however, cannot be compelled to do so.

A motion to compel works as a shield to parties who wish to avoid litigation because if a motion to compel is granted, the parties must seek legal remedies through arbitration. A grant of a motion to compel can either be accompanied by a dismissal of the court case, or a stay of the court case. If the case is dismissed, the court’s decision is immediately appealable to a higher court, as it is a final decision on the merits. If any party chooses to appeal a final decision on the merits with respect to a motion to compel, both parties will then be required to invest additional time and expense in litigation in a higher court. This can be especially frustrating for a party wishing to pursue its rights to arbitration and avoid litigation.

If a motion to compel is granted and the case is stayed, the decision is not appealable, as it is not a final decision on the merits. Under these circumstances, the parties are required to take the dispute to arbitration, and the litigation of the case in court is effectively paused pending the outcome of arbitration. In terms of filing a motion to compel, a stay of the court case is the most desired outcome for a party seeking to enforce its arbitration rights. Such a party may even be more direct in its enforcement of arbitration rights by filing a motion to stay litigation pending arbitration.

Conclusion

Parties must balance the benefits and drawbacks of various options for dispute resolution. Despite an agreement to arbitrate, parties may initiate litigation in court based upon reasonable arguments of waiver, that a particular dispute falls outside the scope of any arbitration agreement, or that the arbitration agreement itself is unenforceable against a particular party. Parties who believe they have a legitimate right to arbitration however, are able to enforce their rights through motions to compel arbitration, motions to stay legal proceedings pending arbitration, and by ensuring that the contract designates that an arbitrator is to decide any issues of jurisdiction.