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.

2 Dispute Resolution Choices For Construction Contracts

Stacy La Scala | JAMS | May 7, 2018

It was the best of provisions; it was the worst of provisions, crafted by the wise
and well-meaning alike. For years, construction documentation has been
primarily sourced from the American Institute of Architects. The AIA provided
guidance through the publication of contractual provisions involving many
aspects of the construction process, including alternative dispute resolution, or
ADR. It has been observed that the documentation provided by the AIA generally
favored both owners and architects, whose forms, as used by contractors,
typically required amendment and modification. So much so that in 2007 a group
of owners, contractors, subcontractors, designers and sureties came together
and published their own set of construction contract documents called
ConsensusDocs, and updated it in 2017.

For construction practitioners, serious consideration must be paid to the ADR provisions up front, as a failure to understand and allocate the tail risk can have dire consequences; hence, a tale of two approaches to ADR.

ConsensusDocs — ADR

The ConsensusDocs ADR provisions provide a multi-step process by which party representatives are initially required to negotiate with one another. Failing resolution, senior executives are then required to meet in good faith to attempt resolution of the dispute. The ADR path in the ConsensusDocs then forks depending upon the needs of the parties at the time of contracting. One path sends the parties a mitigation procedure involving a nonbinding finding by either a project neutral or a dispute review
board, whose determination may be introduced in subsequent litigation.

If the parties did not choose to go through the mitigation procedure at the time of contracting, the second path leads to mediation. The mediation option includes the ability to select mediators from AAA, JAMS or a body of the parties’ choosing. The provision provides that the parties choose mediation through one of the following:

• The current Construction Industry Mediation Rules of the American Arbitration Association, or AAA, administered by the AAA
• The current Mediation Guidelines of JAMS, administered by JAMS
• The current rules of [_____] administered by [_____]

If the mediation or mitigation processes fail to resolve the dispute, the ADR paths merge, sending the parties to binding arbitration or litigation. If arbitration is selected, the parties are given the option to determine which rules will be applied to their dispute. Article 12.5.1.2 provides that the arbitration shall use one of the following:

• The current AAA Construction Industry Arbitration Rules administered by the AAA; AAA Construction Fast-Track Rules shall apply to all two-party cases when neither party’s disclosed claim or counterclaim exceeds $250,000. If arbitration is selected but no rules are selected, then this subsection shall apply by default.
• The current JAMS Engineering and Construction Arbitration Rules and Procedures, administered by JAMS
• The current Arbitration Rules of [_____] administered by [_____]
• AIA ADR

Like the ConsensusDocs ADR provisions, the AIA ADR provisions were also updated in 2017. Of particular interest in the new AIA ADR provisions are new time restrictions, which, if not followed, may severely restrict a party’s rights, including a potential waiver.

In contrast to ConsensusDocs, there are no requirements that the parties meet in order to resolve the matter. Instead, the AIA ADR provisions have two separate dispute resolution paths determined by the time that a claim arises. Claims are defined broadly to include all disputes and matters in question between the owner and contractor arising out of or relating to the contract.

For claims that arise prior to the first year following substantial completion, the owner and contractor are required to submit their dispute to an initial decision-maker, or IDM, “within 21 days after occurrence of the event giving rise to such claim, or within 21 days after the claimant first recognizes the condition giving rise to the claim, whichever is later.” The AIA form, by definition and default, designates the architect of record as the IDM.

If a dispute remains following the IDM’s decision, there is a demand-shifting procedural step, new to the 2017 form, that gives either party the power to compel the other party within 30 days to proceed to mediation. Failure to timely proceed to mediation signifies a mutual waiver of rights for that claim.

For claims that arise after the first year following substantial completion, the parties go directly to mediation. This new demand-shifting provision appears once again in the mediation provisions. Should the matter fail to resolve at mediation, either party may demand, within 30 days following mediation or 60 days following the demand to mediate, that the other party proceed with arbitration or litigation. Should the party receiving the demand fail to file a demand or suit, then both parties waive their rights
to proceed to arbitration or litigation.

It should be noted that, where neither party triggers the demand-shifting provisions contained within the AIA ADR provisions, there is apparently no waiver of the right to proceed to future mediation, arbitration or litigation. Of course, this does not foreclose later arguments that known claims may be barred by shortened statute of limitations periods.

Comments and Considerations

The new AIA ADR provisions appear to build upon case law enforcing modified and “agreed upon” time-bar limitations of actions between the owner and contractor. In particular, in Brisbane Lodging LP v. Webcor (2013), limitations on the “delayed discovery” rule[1] were upheld in the 1997 version of the AIA standard form agreement between the owner and contractor. The same provision found enforceable in Brisbane has been renumbered as Section 15.1.1 and relocated within the ADR provisions
of the 2017 form. In conjunction with the broad-based definition of claim, and the new “demand shifting” provisions discussed above, there appears to be a clear intent by the AIA drafters to further identify and restrict potential future claims among the contracting parties.

Parties considering the use of either ConsensusDocs or AIA forms need to understand that each set of construction documents requires thoughtfulness and upfront risk assessment. The decisions at the time of contracting will have a significant impact on both the timing and resolution of any future dispute.

——————————————————————–

Stacy L. La Scala is a mediator and arbitrator at JAMS.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] prior Section 13.7
[2] Section 15.1.1

California Supreme Court Holds that the Right to Repair Act is a Homeowner’s Exclusive Remedy for Damages Arising from Construction Defects for New Residential Construction

Robert Nobel | TLSS Construction Law Blog | February 15, 2018

In McMillin Albany LLC et al. v. The Superior Court of Kern County (Van Tassel) [Case No. S229762], the California Supreme Court held that California Civil Code §§ 895 et seq. (the “Right to Repair Act”) provides the exclusive remedy for construction defect claims for economic loss and resulting property damages arising from new residential construction. The Supreme Court also held that homeowners are required to engage in the pre-litigation notice and cure procedures under the Right to Repair Act.

The long-awaited holding in McMillin resolved a split in authority among the California Court of Appeals, and effectively overruled the holdings in Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC [(2013) 219 Cal.App.4th 98 (“Liberty”)] and Burch v. Superior Court [(2014) 223 Cal.App.4th 1411 (“Burch”)], to the extent inconsistent with McMillin. In Liberty and Burch, the California Court of Appeals held that the Right to Repair Act is not the exclusive remedy for construction defect lawsuits that allege  resulting property damage arising from new residential construction. Homeowners were thus not required to engage in the pre-litigation notice and cure procedures under the Right to Repair Act because such lawsuits could be maintained as common law claims.  As to construction defect lawsuits where resulting property damage had not occurred (i.e. pure economic loss), such claims are barred by the holding in Aas v. Superior Court [(2000) 24 Cal.4th 627] unless they can be brought under the Right to Repair Act.

In McMillin, a construction defect lawsuit was brought by the purchasers of 37 new single-family homes from McMillin Albany LLC. The homes were purchased at various times after January 2003, thus implicating the Right to Repair Act. In 2013, the homeowners initiated the lawsuit against McMillin Albany LLC alleging numerous construction defects in their respective homes. The complaint included common law causes of action for negligence, strict products liability, breach of contract and breach of warranty, as well as a claim for violation of the Right to Repair Act.

In the trial court, McMillin Albany LLC moved for an order staying litigation to allow the parties to engage in the pre-litigation notice and cure procedures under the Right to Repair Act. The trial court denied the motion, relying upon the California Court of Appeals holding in Liberty.  McMillin Albany LLC appealed the trial court ruling.

On appeal, and disagreeing with the holdings in Liberty and Burch, the California Court of Appeals ruled that the parties must follow the pre-litigation notice and cure procedures because the Right to Repair Act is the exclusive remedy for construction defect claims where property damage has occurred.  The Court of Appeals observed that “the Legislature intended that all claims arising out of defects in residential construction involving post-2003 sales of new homes be subject to the standards and requirements of the Act.”

The California Supreme Court affirmed the ruling of the California Court of Appeals.  In its analysis, the Supreme Court looked to the language of the Right to Repair Act and its legislative history to determine whether the common law had been supplanted where construction defect claims resulted in property damages.  In this regard, the Supreme Court recognized that Section 896 states the Right to Repair Act applies to “any action” seeking damages for construction defect.  This section also states that “claims or causes of action shall be limited to violation of” the functionality standards set forth in the Right to Repair Act and apply only to “original construction intended to be sold as an individual dwelling unit.”

Moreover, Section 944 identifies what damages may be recovered under the Right to Repair Act by a homeowner, which covers the kinds of damages recoverable in a construction defect lawsuit, and Section 943 establishes that such damages may only be recovered under the Right to Repair Action, absent an express exception. The damages recoverable under the Right to Repair Act include pure economic losses, unlike a common law claim.

Furthermore, the Supreme Court recognized that “the creation of a mandatory pre-litigation process and the granting of a right to repair, would be thwarted if we were to read the Act to permit homeowners to continue to sue as before at common law, without abiding by the procedural requirements of the Act, for construction defect claims involving damages other than economic loss.”

Accordingly, the Supreme Court held the Right to Repair Act shows a legislative intent to modify the common law and effectively “provides that construction defect claims not involving personal injury will be treated the same procedurally going forward whether or not the underlying defects gave rise to any property damage.”  Therefore, “claims seeking recovery for construction defect damage are subject to the Act’s pre-litigation procedures regardless of how they are pleaded.”

Dispute Resolution: Arbitration – A Better Option for Resolving Construction Disputes

Kent B. Scott | Babcock Scott & Babcock

This is the third installment in the series of articles on Dispute Resolution.

Arbitration has long been favored as a means of resolving construction disputes.  Many standard construction contract documents provide for a mandatory binding arbitration of all disputes arising under or related to the contract.

Arbitration Statutes

Both Federal and Utah law, like virtually every other state, favor arbitration as a cost-effective and timely means of resolving disputes.  Consistent with these policy considerations, both statutory law and case law support judicial orders compelling arbitration when required by statute or contract. The current Utah law is most commonly referred to as the Revised Utah Uniform Arbitration Act as set out in Utah Code Ann. §78-31a-101 through 131 (“RUAA”).  Utah’s RUAA is patterned after the Revised Uniform Arbitration Act that was approved by the National Conference of Commissioners of Uniform State Laws.  The Federal law is found in Title 9 U.S.C. §1 et seq.  This statute is known as the Federal Arbitration Act.

Commencement of Arbitration and Selection of Arbitrator(s)

Arbitration is initiated by a demand for arbitration.  The most common arbitration clause found in construction contract documents requires arbitration to proceed in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association (“AAA”).  A demand for arbitration pursuant to the AAA’s rules in a very simple document, requiring only a general and brief statement outlining the nature of the claim and a sum representing the damages sought.

The method for the selection of arbitrators is found in the AAA’s Construction Industry Rule or the Federal and Utah state statutes.  The method of selection can also be defined in the parties’ Agreement.

Case Management

The arbitrator will generally schedule, through the AAA, a preliminary hearing wherein the arbitrator and parties’ council will discuss the parties’ claims, scheduling, discovery, motions, witnesses, exhibits, the evidentiary hearing and form of award.

Discovery and Motions

In most instances, the type, amount and time frame for discovery is left to the arbitrator’s discretion.  Most arbitrators try to get the parties to agree on reasonable limits on discovery, especially depositions, but will impose such limits where the parties fail to agree.  Within this same authority, the arbitrator usually has the authority to issue subpoenas and subpoenas duces tecum upon third parties as allowed by the Rules of Civil Procedure.

In theory, arbitrators have always had authority to summarily dispose of all or portions of the claims submitted for arbitration.  Because of the limited avenues of appeal available in arbitration organizations like the AAA have discouraged summary disposition of claims except in the clearest cut of cases.

The Arbitration Hearing

At the evidentiary hearing, the procedure is in form very similar to that encountered in litigation.  It is, however, considerably less formal, particularly as to evidentiary matters.  Simply stated, the rules of evidence do not apply in arbitration.  In fact, both the AAA’s rules and most arbitration acts require the arbitrator to receive and consider evidence material to the dispute.  In short, the test by which evidence is judged in arbitration is materiality, not admissibility.

The Award

Once the arbitrator is satisfied that all other evidence is in, he or she will close the hearing and begin deliberations to the end of making an award.  Historically, arbitration awards have been extremely brief, consisting essentially of a net award of damages in favor of one of the disputants and perhaps an award of attorney’s fees and/or arbitration costs.  Currently, many arbitrators, as well as organizations such as the AAA will provide either a detailed or reasoned award upon request by the parties.

A detailed award must specifically list the arbitrator’s award as to each component of each party’s claims and culminate in a net award as to damages, attorney’s fees, arbitration costs and interest. If a contractor’s claim is comprised of a changed conditions claim, a constructive change order claim and an acceleration claim, the arbitrator must make a specific award as to each claim.  A reasoned award takes the process one step further, requiring the arbitrator to provide at least a minimal written explanation for each component of their award.

Under the AAA rules, an arbitrator must issue their award within 30 days from the date they closed the hearing.  Neither the Utah Arbitration Act nor the United States Arbitration Act has established any such time frame.

Modification of Award

Under the Utah Arbitration Act and the AAA rules, a party has twenty days from the date the AAA transmits the arbitrator’s award to the parties to seek modification of the award to correct any clerical, typographical, technical or computational errors.  The arbitrator has no authority to re-determine the merits of the award but may correct calculations or descriptions of persons or property in the award. Under the Federal Arbitration Act a motion to modify may be filed at any time within three months after the award has been filed or delivered.

Motion to Vacate Award

A motion to vacate the award under the AAA rules or the RUAA must be filed within twenty days from the receipt of the award. Under the Federal Arbitration Act, a motion to vacate may be filed at any time within three months after the award has been filed or delivered.

Once an award has been issued, it may become subject to efforts to vacate by a dissatisfied party. Reversal of an arbitrator’s award can only be done by a court.  Under both the Federal and Utah Arbitration Statutes, an arbitrator’s award will be vacated if it appears that:

  1. The award was procured by corruption, fraud.
  2. The arbitrator is guilty of misconduct.
  3. The arbitrator exceeded its powers.
  4. There was no arbitration agreement.

Again, courts have traditionally deferred to arbitrator’s awards and have been reluctant to revisit them when challenged by a dissatisfied party.  However, the Buzas decision seems to indicate that given improper circumstances, a Utah court may explore further propriety and basis for an arbitrator’s award, then one might expect by simply reading the terms of the RUAA.

Conclusion

The construction industry has used arbitration as an alternate form of dispute resolution for several years. Arbitration as a method of dispute resolution will continue to grow.

Is California’s Right to Repair Statute Really the Exclusive Remedy in Construction Defect Litigation?

Elizabeth D. Beckman | Kramer deBoer & Keane, LLP

Approximately fifteen years after California Governor Grey Davis signed into law Senate Bill 800,1 and much related judicial dispute, the California Supreme Court is set to resolve the legal standard for handling of construction defect claims in the matter of McMillan Albany, LLC v. Superior Court.2 The matter has been fully briefed and awaiting oral argument.

At present, California has different binding appellate court decisions in four of California’s six appellate districts with conflicting but nonetheless valid legal authority, and the uncertainty created by such is adversely affecting a wide range of cases at the trial court level statewide. At issue is whether SB 800 is the exclusive remedy for construction defect claims, or if homeowners may also recover damages under common law claims. The California Supreme Court has accepted the McMillan Albany, LLC matter for hearing, and we should have a final answer in the near future.

As background, SB 800, also known as California’s Right to Repair Act, was intended to establish a pre-litigation protocol for residential properties built after January 1, 2003. This included setting forth applicable standards for home construction, statute of limitations, burden of proof, and certain obligations on the part of the homeowners. SB 800 was intended to effectively reverse parts of the “Economic Loss Doctrine” and therein establish rights and procedures which would allow a homeowner to recover for construction defects in new construction even when there is no actual property damage other than the defective product or work itself.

After SB 800 became law, the Fourth Appellate District found that SB800 was not the exclusive remedy for homeowners in the case of Liberty Mutual v. Brookfield Crystal Cove, LLC.3 Specifically, the Fourth Appellate District found that, for alleged defects that have not yet resulted in actual property damage, a homeowner may elect to proceed under the Right-to-Repair Act and that, for alleged defects which have manifested actual property damage, a homeowner may elect to proceed under traditional common law causes of action. This rule was later adopted by the Second Appellate District in a case this firm was involved in (Burch v. Superior Court4), wherein the Court ruled that SB 800 does not preclude a homeowner from pursuing common law claims for construction defects that have caused actual property damage.

The conflicting line of authority first came from the Fifth Appellate District, who rejected the holding in Liberty Mutual and Burch. The Fifth Appellate District held that SB 800 was the exclusive remedy for homeowners asserting construction defects for both actual and anticipatory damages in the case of McMillan Albany, LLC v. Superior Court. 5 The Third Appellate District thereafter ruled similarly in Elliot Homes v. Superior Court.6

Consequently, California currently has two conflicting viewpoints in four of the State’s six appellate districts, all of which are valid legal authority. Because of this conflict, the California Supreme Court has accepted the McMillan Albany, LLC v. Superior Court matter for hearing. As of the present date, the matter has been fully briefed, including all amicus briefs. The next step is for the Supreme Court to set a date for oral arguments. This means that sometime in the near future the Supreme Court should resolve the standard for handling of construction defect claims in California, as was intended by the passing of SB 800 in the first place.

While we cannot predict with certainty how the Supreme Court will rule, it is likely that a ruling which affirms the Liberty Mutual and Burch line of cases will result in parties litigating both statutory and common law tort claims concurrently. Presumably this would result in more extensive litigation because more evidence is require to establish a liability claim for general negligence than for an alleged SB 800 violation alone. Furthermore, because general negligence is often more difficult to establish than an alleged SB 800 violation, pretrial settlements may be more limited, which could force more of these cases to trial.

On the other hand, if the Supreme Court were to uphold the McMillan and Elliot Homes line of cases, presumably the scope of construction defect litigation in cases involving SB 800 claims would be limited to establishing statutory violations. Such claims are often more easier for property owners to establish, which may make pretrial settlements more desirable and thereby curtail the need for trial in many instances.

1 SB 800, codified as California Civil Code Section 895, et seq. went into effect on January 1, 2003.

2 McMillan Albany, LLC v. Superior Court (Supreme Court Case No. S229762.

3 Liberty Mutual v. Brookfield Crystal Cove, LLC, 219 Cal. App. 4th 98 (2013).

4 Burch v. Superior Court, 223 Cal. App. 4th 1411 (2014).

5 McMillan Albany, LLC v. Superior Court, 239 Cal. App. 4th 1132 (2015).

6 Elliot Homes v. Superior Court, 6 Cal. App. 5th 333 (2016).