Monthly Archives: January 2016

Third Circuit Rules that Courts, not Arbitration Panels, Have Final Word on Class Action Arbitrability

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Rebekah Byers Kcehowski, Sharyl A. Reisman and Darren K. Cottriel | Jones Day | January 15, 2016

In Brief

The history and proceedings of the Third Circuit’s recent decision in Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, No. 15-1275, 2016 U.S. App. LEXIS 42 (3d Cir. Jan. 5, 2016), are a precautionary tale suggesting that companies should expressly state key “rules of their game” in arbitration provisions. This includes whether claims such as class actions are subject to arbitration and, in the event of a dispute, where the issue of arbitrability will be determined.

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Contracts containing agreements to arbitrate often provide for arbitration pursuant to the rules of an arbitration service provider such as the American Arbitration Association (“AAA”). It is not unusual, however, for such clauses to incorporate little (or no) detail regarding the arbitration process, decision-makers on disputed jurisdictional issues, or the availability of class, collective or other group claims. In just such a context, on January 5, 2016, the United States Court of Appeals for the Third Circuit held that it was for a court—not an arbitration panel—to decide whether classwide arbitration could proceed in an oil and gas royalty dispute. But before the Third Circuit ruled, another federal district court interpreted the exact same clause otherwise, as did an arbitration panel of three retired federal judges.

The Procedural History

In Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, No. 15-1275, 2016 U.S. App. LEXIS 42 (3d Cir. Jan. 5, 2016), plaintiff Scout Petroleum (“Scout”) brought suit against Chesapeake Appalachia, LLC (“Chesapeake”) alleging that Chesapeake underpaid royalties under lease agreements. Scout brought its claims as a classwide arbitration action before a AAA panel, based upon the following arbitration provision contained in the leases at issue:

ARBITRATION. In the event of a disagreement between Lessor and Lessee concerning this Lease, performance thereunder, or damages caused by Lessee’s operations, the resolution of all such disputes shall be determined by arbitration in accordance with the rules of the American Arbitration Association.

Chesapeake Appalachia, 2016 U.S. App. LEXIS 42 at *3.

Chesapeake then filed a declaratory judgment action to stop the class arbitration in federal court, arguing that it had not consented to class arbitration. Id. at *9. While the federal action was pending, the arbitration panel—consisting of three retired federal judges—examined the arbitration agreement and ruled that “‘the arbitration contract in this case clearly and unmistakably authorizes [the panel] to make the decision about arbitrability.'” Id. at *10. The panel thus concluded, based on the clause’s incorporation of the AAA rules, that the panel was empowered to determine whether class arbitration was available per the terms of Chesapeake’s leases. The panel ultimately decided that class arbitration was appropriate.Id. But Chesapeake then sought and received an order from the federal district court vacating the arbitrators’ ruling. The court held that the arbitrators lacked authority to decide whether class arbitration was appropriate. Id. at *11.

The very next day, however, another judge in the same district entered an opinion concerning the same arbitration language in a different oil and gas lease and reached the opposite result. That judge concluded, as the AAA arbitration panel had, that the arbitration agreement clearly authorized the arbitrators, not the court, to resolve the question of arbitrability of the class claims.[1] Just a few months later, judges in two other cases filed in a neighboring state’s federal district court—again addressing the same arbitration language in other oil and gas leases—agreed with the first federal court. They reserved the question of classwide arbitrability to the court.[2]

The Third Circuit’s Decision

In the wake of these conflicting results, Scout sought appellate review of the district court’s original decision in Chesapeake Appalachia, asking that the court defer to the arbitration panel’s decision regarding arbitrability. On appeal, the Third Circuit reaffirmed Opalinski v. Robert Half Int’l, Inc., 761 F.3d 326 (3d Cir. 2014), a recent opinion in which the court had assessed whether it is courts or arbitrators who appropriately address “question[s] of arbitrability,” i.e., the “narrow range of gateway issues” respecting matters as fundamental as whether the parties have actually agreed to arbitrate.Chesapeake Appalachia, 2016 U.S. App. LEXIS 42 at *22-23. The court held that “the availability of class arbitration is a ‘question of arbitrability’ for a court to decide unless the parties unmistakably provide otherwise.” Id. at *26 (citing Opalinski, 761 F.3d at 335-36).

The court next turned to the specific lease agreements at issue to determine if the parties had “unmistakably” given authority to a panel of arbitrators to decide whether class arbitration was available. Chesapeake Appalachia, 2016 U.S. App. LEXIS 42 at *28. CheCScout argued that reference to the AAA’s rules in the lease agreements incorporated all of the AAA’s standards, including the Commercial Arbitration Rules and the Supplementary Rules for Class Arbitration, which purport to allow an arbitrator to determine whether the parties have agreed to class arbitration. Id. at *35-37. The court disagreed, finding mere reference to the AAA’s rules insufficient to constitute the “clear and unmistakable evidence” required to pass authority from the court to the panel of arbitrators. Id. at *37-38. The court acknowledged that no “special ‘incantation'” is required to give the arbitrator control over questions of arbitrability, id. at *29-30, but it deemed the incorporation of the AAA’s many rules by reference insufficient to overcome the heavy presumption in the Third Circuit in favor of judicial decision on classwide arbitrability:

We … agree with Chesapeake that this case implicates “a daisy-chain of cross-references”—going from the Leases themselves to “the rules of the American Arbitration Association” to the Commercial Rules and, at last, to the Supplementary Rules. Having examined the various AAA rules, we believe that the Leases still fail to satisfy the onerous burden of undoing the presumption in favor of judicial resolution of the question of class arbitrability.

Id. at *37-38.

The Third Circuit then affirmed the district court’s order vacating the arbitrators’ decision as to the availability of class arbitration based upon the fact that the parties had not given the arbitrators the authority to make that decision. Id. at *51. The court’s opinion was limited to the “who decides” inquiry; the court did not conduct its own assessment of the parties’ agreement respecting class arbitration, presumably leaving that decision to the district court. See id. at *34.

Contrast to Bilateral Arbitration Provisions

With its holding in Chesapeake Appalachia, the Third Circuit joins the Sixth Circuit as the only federal appellate courts to consider and decide the impact of references to general arbitration rules on the question of who decides whether the parties have agreed to classwide arbitration. Id. at *17. While “‘[v]irtually every circuit to have considered the issue'” in the bilateral arbitration context has held that incorporation of the AAA’s rules by reference constitutes “clear and unmistakable evidence that the parties agreed to arbitrate arbitrability,”[3] only the Third and Sixth Circuits have assessed whether the same standard applies to the availability of classwide arbitration. Chesapeake Appalachia and its counterparts in the Sixth Circuit[4] have both said no: While incorporating the AAA’s rules into a contract gives an arbitrator the authority to determine whether the parties have agreed to bilateral arbitration, a general reference to the AAA rules is not sufficient to allow an arbitrator to determine whether the parties have agreed to classwide arbitration. Other Courts of Appeal have not yet spoken on the issue.

Conclusion

Chesapeake Appalachia serves as notice of potential pitfalls to parties who do not memorialize their expectations for arbitration. Simple reference to the AAA’s—or another entity’s—rules may have unintended consequences if, and when, those rules are amended, edited, or otherwise changed between the contract’s execution and the date of arbitration. Further…

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Insurance Coverage Issues for Hotel and Apartment High-Rises Damaged by Fire

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Joseph D. Jean, Alexander d. Hardiman and matthew F. Putorti | Pillsbury Winthrop Shaw Pittman LLP | January 19, 2016

Just before fireworks exploded across the sky to usher in 2016, a massive fire engulfed the Address Downtown Hotel in Dubai. At nearly 1,000 feet tall, this five-star hotel and luxury apartment building —with about 200 hotel rooms and 600 residential units—suffered significant damage, and a number of people were injured.

This is not the first high-rise fire in Dubai’s recent history. In February 2015, a fire damaged over 100 luxury apartments in the Marina Torch tower, and back in 2012, a fire destroyed the thirty-four-story Tamweel Tower.

These fires—in tall, luxury buildings that may have mixed hotel, retail, and residential spaces, and that have been sprouting up in cities like New York, London, Paris, Berlin, and Hong Kong—pose a number of complicated questions about how best to maximize insurance recovery. Here are some tips of what to do and to look out for in the immediate aftermath of a fire.

1. Review Your Insurance Policies and Calendar Deadlines.

Understanding both your available coverage and your obligations requires a thorough review of all potentially applicable insurance policies to determine what coverages may apply. Where the high-rise has mixed hotel, retail, or residential spaces, this review will entail unraveling the potentially complicated web of overlapping coverages and obligations arising from the various insurance policies that insure all or parts of the building. For example, the building owner, the hotel operator, the personal residences, and the retailers might all have different policies.

When reviewing insurance policies, calendar any deadlines and set reminders several weeks before the deadline. Initial deadlines typically include the date by which you must give notice, file a sworn proof of loss, and file suit if you disagree with the insurance company’s coverage determination.

Because understanding your policy and obligations can be challenging, and because missing deadlines can be fatal to an insurance claim, retaining an experienced insurance coverage lawyer during these initial stages might be a good idea. Counsel may work in the background without revealing their involvement to insurance companies (note that insurance companies typically do the same thing).

2. Place All Insurance Companies on Notice.

After a fire, you should immediately give notice to any insurance company under whose policy you might conceivably seek coverage. Fire and property insurance are the most obvious source of coverage, but do not overlook commercial general liability, auto, pollution, and other types of policies. Do not forget about liability policies either, particularly for those facing potential third-party claims, such as from hotel guests who were injured or lost property. Even if you have not yet identified all of your losses, or are unsure whether you have coverage under a certain policy, seriously consider providing notice to all potentially applicable policies. Do not rely on coverage advice from brokers or assume your policy is not applicable. Notice need not, at the initial stage, be very detailed or specify the cause or extent of your loss, so there is no reason to delay in providing notice. Be sure to precisely follow the directions in each insurance policy regarding notice, and be aware that notice instructions might differ from policy to policy.

3. Assess All Possible Coverages.

With respect to fire damages, a threshold question is whether and to what extent the policy insures against the peril of fire. Under all-risk policies, fire is covered except to the extent there is an applicable sub-limit or exclusion. Even when fire is not an insured peril, there may be coverage when another, covered cause (such as a construction defect or faulty workmanship) precedes, contributes to, or causes the loss.

In addition to property coverage, businesses might also have business interruption and contingent business interruption coverage. Business interruption coverage reimburses the policyholder for, among other things, lost profits during the time that the business was interrupted because of a certain event (here, the fire). Contingent business interruption—which applies even when the policyholder’s own property is not physically damaged—provides coverage when the policyholder sustains losses as a result of damage to third-party property (such as the property of critical suppliers of goods and services, utility providers, or the policyholder’s landlord, customers or employees) that prevents the supplier or customer from supplying or accepting the policyholder’s goods or services.

These coverage extensions are often poorly understood and are therefore a common source of disagreement with insurance companies. Furthermore, policyholders should be aware that these coverages and extensions might be subject to certain sub-limits. But sub-limits do not end the analysis. For example, various sub-limits may be “stacked”—that is, applying two or more limits for a single occurrence or claim. Additionally, some courts have held that time element coverage is not subject to or is in addition to certain sub-limits. See, e.g., Fed.-Mogul Corp. v. Ins. Co. of the State of Pennsylvania, No. 12-12005, 2015 WL 5999658 (E.D. Mich. Oct. 15, 2015); Northrop Grumman Corp. v. Factory Mutual Ins. Co., 805 F. Supp. 2d 945 (C.D. Cal. 2011); Hewlett-Packard Co. v. Factory Mutual Ins. Co., No. 04 Civ. 2791, 2007 WL 983990 (S.D.N.Y. Mar. 30, 2007). Because the results are often dependent on policy language, applicable case law and jurisdictional specifics, engaging an insurance coverage attorney can be helpful.

4. Document and Mitigate Your Losses.

Carefully documenting losses, especially before you undertake any cleanup efforts, is critically important for evaluating the loss. This includes not only property damaged during the fire, but also any property rendered unusable in the days following the fire—for example, inventory exposed to smoke or water damage. Take notes and photographs. Keep a log of all actions taken. Track expenses for professional fees and mitigation and cleanup costs. Establish separate accounts to track losses. Save all repair receipts and other records of additional expenses made necessary by storm-related damage.

You may also have an obligation to preserve and protect the property from further losses, including mitigating additional damage. Because such steps may be required, the mitigation expenses may be covered, particularly under property insurance policies. Additionally, the insurance company may have salvage rights to damaged property and stock, so it is important to preserve any salvageable property to the extent possible.

5. Engage Experts.

In addition to having an experienced insurance coverage lawyer, it is usually prudent to engage professional claim consultants, such as forensic accountants, particularly where there is business interruption loss. Additional experts may be needed to model the unique financial aspects of your business.

Experts typically take into account past years’ performance to help calculate the business interruption loss. This can be particularly challenging where, as here, the buildings are new and so do not have much data from past years on which to base financial models. This issue further supports the need for qualified experts.

Their professional fees and other mitigation expenses are frequently covered under property policies, subject to sub-limits. Usually, public adjuster fees and fees charged by lawyers are not covered. Cooperate with the insurance company adjuster, but do not forget that the adjuster works for the insurance company, not for you. If you need an advocate, hire your own.

6. Avoid Fire Hurdles and Pitfalls.

Fires in high-rise, mixed-space buildings pose a number of unique hurdles to insurance recovery. Being aware of them from the outset helps you to avoid them:

  • Insurance companies frequently minimize fire losses. Policyholders should not simply settle for minimum payments.
  • Smoke can be as damaging as the fire itself. Insurance companies might try to classify smoke as a “pollutant” to exclude it under a pollution exclusion. A standard insurance policy, however, should not exclude this loss.
  • Water from sprinklers causes very significant damage. In certain climates, mold can begin to grow almost immediately. Insurance companies often try to exclude damage caused by mold either in the insurance policy itself or as an endorsement.
  • Good-faith efforts to save property from a fire might be covered by insurance against fire.
  • When a fire destroys a hotel or apartments, owners might incur expenses for relocating and housing the guests. The owners, therefore, should seek insurance coverage for those expenses as well.
  • Luxury apartment owners who rent out their apartments might be required to have leases in place in order to recover for lost future rent if the apartment is destroyed or rendered uninhabitable. This condition might depend on the specific language of the policy. Leasehold interest and fair-rental losses are often highly contested.

Building owners, hotel and retail operators, and apartment owners should be well versed in what to do if a fire damages the building. These tips can help to maximize that recovery and minimize disputes.

To Be or Not to Be in Arbitration? That is the Question

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Tony Byler and Daniel E. Fierstein | Construction Law Signal | January 14, 2016

Arbitration has become a very common and effective way to resolve construction disputes in lieu of traditional litigation, and it is easy to understand why:

  • The parties can select arbitrators with construction expertise who speak their language and are more likely to understand complex construction issues than a general court of law.
  • Arbitrations are characteristically speedier from inception to award.
  • Discovery (the parties’ exchange of information and taking of depositions) is often more truncated and can, therefore, be less costly.
  • Arbitrator awards are typically binding and not normally subject to an appeals process that tends to add more time and cost to the outcome.

We would be remiss, however, if we did not mention that arbitration is not for everyone.  Parties are often required to pay filing and other administrative fees that are considerably more expensive than the cost of court filings, and they must also pay the arbitrators, who typically bill by the hour (feel free to insert your own generic lawyer joke here).  In the construction context, we find that owners, developers, and public entities often will elect litigation over arbitration.

The finality of the award cannot be overstated.  This article about a recent federal court decision – in which a party discovered after the award that one of the arbitrators failed to disclose a number of serious charges that included the unauthorized practice of law – drives the point home.  Under the Federal Arbitration Act, courts may only vacate an arbitration award under very limited and extreme circumstances:

  • the award was obtained by corruption, fraud, or undue means;
  • there was evident partiality or corruption in any of the arbitrators;
  • the arbitrators were guilty of misconduct for refusing to hear evidence relevant and material to the dispute; or
  • the arbitrators exceeded or imperfectly executed their powers.

In other words, a court will not disrupt an arbitration award simply because the arbitrators may have “gotten it wrong.”

It can be strange and counterintuitive to think about how a dispute should be resolved when signing a contract.  Most parties to a construction contract are…

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Indemnity, Duty to Defend, and Timing

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Stan Martin | Commonsense Construction Law LLC | January 20, 2016

The concept of indemnity gets a lot of press. With good reason, since an indemnity is one tool in the risk management shed. As a recent court decision shows, however, a duty to defend is different than an indemnity. And a party who seeks to establish either one early on a lawsuit may just be spinning its wheels if there are critical facts still unresolved. That was the situation in a Connecticut decision recently issued.

The city of Westport, CT installed a series of new sewer line connections, using pumps supplied (and perhaps installed) by Environment One. One family had an unfortunate discharge of sewage into their home when some element of the new system failed. The homeowners sued both the city and the contractor, and the city filed a cross-claim against the contractor seeking an indemnity and a defense from the homeowners’ claims. Early on in the lawsuit, when some but not all facts were on the table, both the city and the contractor filed motions against each other, seeking summary judgment relative to the duties to defend and to indemnify. The end result? Certain claims were dismissed for lack of jurisdiction – being premature – and the motions were otherwise denied.

The underlying facts included claims that a hose clamp on the contractor’s pump failed, and that the city was told to install backflow preventer valves but failed to do so. The city’s cross-claim was for (a) contractual indemnity and defense, (b) breach of contract for failing to indemnify and defend, and (c) common law indemnification. And the city filed an early motion seeking a court determination on these cross-claims. The contractor filed its own countering motion, arguing that the claims under (b) and (c) were premature or barred by law, and the claim under (a) should be denied as there were issues of fact not yet determined.

The court acknowledged that a duty to defend is typically broader than a duty to indemnify; the former can be triggered by mere allegations, while the latter is ultimately based on the final facts. So the city’s argument about a defense had some merit on paper, since the homeowners’ complaint included allegations that would point to the contractor. But the city failed to read its own indemnity rights, which did not include a duty to defend. Thus, the early move for a defense was shot down. And the court noted that two countering facts – the potential clamp problem and the lack of recommended backflow valves – prevented a summary determination at this stage of the lawsuit.

Readers wanting more detail…

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Tips on Pursuing and Defending Complaints Against Contractors

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Rick Erickson | Snell & Wilmer |  January 18, 2016

The often staggering cost of litigation has prompted an equally staggering amount of regulatory complaints against contractors in recent years. Why? Because filing a complaint against a contractor may not cost a complainant anything but time. And any litigation expenses are mostly borne by the contractor/respondent, who is anxious to defend and protect their license and reputation (i.e. their livelihood).

Here are some tips for pursuing or responding to a complaint and getting the best out of your state’s contractor regulatory agency (in Arizona, the Registrar of Contractors):

(1)        Respect the Registrar. Your regulatory agency is probably understaffed and overworked. It does no good to blame them for your predicament. Show proper courtesy, and you’ll be better off for it.

(2)        Be Timely. Deadlines set by the regulatory agency are not suggestions. If you miss a deadline, you may be admitting to issues raised in the complaint, or your complaint may be dismissed and closed.

(3)        Engage regularly with the assigned Investigator. The agent investigating your complaint will typically prioritize complaints in the order received and assigned. If you need to update information and keep the Investigator informed about your complaint or response, call or email accordingly. All of these updates will be added to the file.

(4)        Document attempts to reach a resolution. Complainants often have exceedingly high expectations, and contractors sometimes take complaints personally. If one side is being unreasonable and thwarting legitimate opportunities to settle, the best way to memorialize this is in writing to the Investigator. Being unreasonable will inevitably affect the outcome.

(5)        Support your position with credible evidence. Appreciate that your Investigator is probably very experienced at distinguishing frivolous vendettas from genuine complaints about bad construction. Provide photographs, repair estimates and opinions by experts to support claims of unworkmanlike construction or to demonstrate that the work meets applicable building codes or regulatory standards. Quality, not quantity, is the key.

These are just a few tips to assure that your position is fully and fairly considered. Keep in mind, however…

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