The Camel’s Nose: Incorporating Commercial and Construction Arbitration Rules

Jackson Hill, IV | Bradley Arant Boult Cummings | Construction and Procurement Law News | March 23, 2016

There is an old proverb that states, “If the camel once gets his nose in the tent, his body will soon follow.” Stated differently, one should not let the camel’s nose inside unless he or she is prepared to accept the whole camel. Within the arbitration context, this proverb is an important reminder for construction businesses to think carefully when entering contracts incorporating the rules of an arbitration administrator such as the American Arbitration Association (“AAA”); otherwise, they may be agreeing to more than they initially realize.

A recent Alabama Supreme Court decision, Fed. Ins. Co. v. Reedstrom , provides a good illustration of this lesson. In Reedstrom, a company held an insurance policy which protected company officers from loss for actions committed in the course of their employment with the company. The company fired its executive director, resulting in a lawsuit where the executive director and the company each filed claims against one another. The executive director gave the insurance company issuing the policy notice of the claims asserted against him and requested coverage per the policy’s terms. The insurance company denied his claim, prompting the executive director to file a separate action against the insurance company alleging breach of contract.

The insurance policy at issue contained a provision stating that any dispute or claim relating to coverage issues had to be submitted to binding arbitration. Furthermore, the provision specified that all arbitration proceedings would be conducted “pursuant to the then-prevailing commercial arbitration rules of the [AAA].”

The insurance company sought to compel arbitration. The executive director argued that such action was barred as (1) the insurance company had waived arbitration, and (2) the executive director was not bound by the arbitration provision as he had never signed the insurance policy. The Alabama Supreme Court noted that while both of these issues are typically resolved by a court of law, there is an exception where “the subject arbitration provision clearly and unmistakably indicates that those arguments should instead be submitted to the arbitrator.” In this case, the arbitration provision incorporated the commercial AAA rules, one of which, Rule 7(a), states, “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 or counterclaim.” Accordingly, the Court held that the question of the arbitration provision’s enforceability must be submitted to an arbitrator per the commercial AAA rules incorporated within the policy.

Beyond questions of enforceability and jurisdiction, incorporated commercial and construction arbitration rules can control many aspects of disputed matters. For example, within both the AAA Commercial and Construction Rules, there are specific rules which govern discovery procedures, Rules R-22 and R-24 respectively. Such rules could present issues for parties planning to rely on traditional discovery to assess the strength of their positions and engage in settlement discussions. Furthermore, both sets of AAA rules establish a specific timeline ranging from the filing of the demand to the scheduling of the final hearing to resolve the dispute at issue. This timeline has the capacity to affect the manner in which parties prepare their claims and defenses and could play a substantial role in their strategic decisions.

The decision whether to commit to binding arbitration has many impacts on the dispute resolution process. It can undoubtedly be beneficial for purposes of certainty and case administration, but it is important to remember the potential impact that these short, seemingly innocuous provisions can have on disputes arising from your agreement. So…

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Setting Aside Appraisal Awards: One Sauce for the Goose and One Sauce for the Gander

Patrick McGinnis | Property Insurance Coverage Law Blog | March 23, 2016

In Texas the general rule seems to be that either the insurance company or the policyholder may invoke the appraisal clause (before or after suit is filed). After the award both parties are generally bound by the award, unless they can prove the award was arrived at as a result of fraud or some other recognized basis for challenging the award. It is very difficult to set aside an award.1 I was recently asked by a policyholder about setting aside an unfavorable award in Oklahoma. The rules are different in Oklahoma because the appraisal award is only binding on the party who invoked appraisal. This rule was discussed in an interesting case out of the Oklahoma Supreme Court, Massey v. Farmers Insurance Group,2 where the Court answered a certified question from the U.S. Court of Appeals for the Tenth Circuit.

Massey was insured by Farmers. Massey suffered a fire at their home. Massey and Farmers could not agree on the amount of damages. Massey filed suit and then Farmers invoked appraisal under the appraisal clause in the policy.3 The Massey’s did not agree with the award, went to trial and got a verdict very much in excess of the appraisal award. Farmers appealed arguing that the award was preclusive as to damages. In other words, Farmers argued that the damages were capped at the appraisal award. The Tenth Circuit certified the issue to the Oklahoma Supreme Court.

First the court looked at prior cases, which indicated that appraisal awards are binding on both parties. However, the court pointed out those cases were decided before Oklahoma law mandated the inclusion of the appraisal clause. The court saw a difference between non-mandated and mandated appraisal clauses because the mandated appraisal clause is “imposed on both parties by statute and neither party can negotiate its inclusion or exclusion.”4 Relying on an Oregon case, the court pointed out that appraisal is “permissive” to the party invoking it because they have chosen to invoke it. However, for the other party appraisal is “mandatory” because they are compelled to submit whether they want to or not. The court further reasoned and held that the appraisal award is binding on the party who invoked it because appraisal is permissive to him and he chose the appraisal tribunal as his forum. However, appraisal is not binding upon the party who did not invoke it because the binding nature of the appraisal award would violate that party’s constitutional right to trial by jury. Amazing!

Why shouldn’t this analysis be used in all appraisal contexts, regardless of whether appraisal clauses are imposed by the legislature of various states? As I said before, even in states where appraisal clauses are not mandated by the legislature, they are no less mandatory for the policyholder. They are contracts of adhesion. The policyholder has no right to negotiate any provision of the policy. It is a myth that the policyholder “negotiated” the appraisal clause into his insurance policy. When the carrier invokes appraisal, especially after the policyholder has filed suit and invoked his right to trial by jury, the policyholder is forced to go to an appraisal he doesn’t want. Isn’t it a violation of his constitutional right to trial by jury if a bad award comes back and he is stuck with it? In states where appraisal clauses are not mandated, but the insurance company inserts an appraisal clause into the contract, then the insurance company has permissively inserted that clause. As such, the insurance company should never be able to walk away from an award in favor of the policyholder, even if the policyholder invoked appraisal.

I suggest…

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Litigating Construction Defects in Community Association Property: Part IV

D. Brad Hughes | Jimerson & Cobb PA | March 22, 2016

Recap of Part III

This article is Part IV of a four part series. Part I was meant to inform the Board of a Condominium or Homeowners Association of some basic steps that should be taken when significant latent construction defects are discovered. Part II was meant to inform the Board about the process of retaining an expert witness and serving a Notice of Claim. Part III was meant to inform the Board about common insurance coverage issues, whether to bring a direct claim against the subcontractors and whether the Board can be forced to arbitrate the claim. This article will discuss how to quantify damages and will discuss the mediation process.

Quantifying Damages

Once all of the necessary parties have been added to the proceeding and some basic discovery has been conducted, the Board will need to prepare for significant settlement discussions. Up to this point, the Board likely knows there are significant defects but likely doesn’t have a real concrete understanding of what is causing the problem or have an accurate estimate of damages. Unless the Board is going to make all of the repairs prior to resolving the claim, the Boards damages will be based on a very extensive estimation of repair costs.1 This means that the expert will need to identify common problems and extrapolate the findings. As the litigation process begins, the expert almost always starts with a small sample size. This sample size will grow as the expert does more work and learns more about the construction defects initially discovered. Eventually, destructive testing will be performed to confirm some of the expert’s theories about the exact nature of the defects. Once the destructive testing is completed, the expert will likely prepare repair protocols, which will direct a general contractor as to the exact nature of the necessary repairs. It is at this point that the repair protocols are submitted to the general contractor (or in the case of a bid multiple general contractors) to determine the repair costs.


Mediation is the process in which the parties pay a mediator (who will be an attorney experienced in the area of construction) to help them find common ground and resolve their dispute. Mediators typically communicate with each and every party in an effort to fully understand each parties’ respective positions and concerns. In a construction defects case there are often more than thirty (30) parties to the action. As you can imagine, speaking to each one of the thirty (30) parties separately would take a very long time. For this reason, it is extremely important that your attorney help you choose a mediator that has extensive experience mediating large multiparty disputes. Every mediator handles a mediation slightly different but most that handle these large multiparty disputes will break the parties into groups and meet by group instead of individually. By way of example, the mediator may meet with groups based on the type of work they performed (i.e. roof, stucco, etc…). It is generally preferable to have the Board’s expert present at mediation and perform a presentation which communicates the nature of the defects. Hopefully, the Board’s expert will be able to demonstrate what caused the leaking, or whatever other problem there is, and tie in how the construction defect doesn’t just damage the work that particular subcontractor performed but also damaged the work of other subcontractors. It is also preferable to demonstrate how repair of the faulty work will require ripping and tearing up of other subcontractors work. These two insurance coverage concepts (resulting damage and rip and tear damage) will help the mediator demonstrate to the insurers that the claims are covered (or primarily covered) and will help to maximize the settlement value of the case.

So if mediation concludes without a settlement then the Board is at a place in which a very significant budget has been expended on attorneys and expert witnesses. It may seem that there is little value to this expense because the Association has not yet received money in return on its investment. However, the mediation process, even if unsuccessful, typically benefits the case because all of the subcontractors and the insurers have been educated about the nature of the defects. It is also beneficial because the subcontractors will be introduced to the Board’s testifying expert witness and will hopefully understand that you hired someone that is very good and going to make defense of the case very difficult. At this point, there should generally be a push for trial as quickly as possible. As trial approaches, settlement talks are often reopened. Many cases that don’t settle at mediation settle shortly before, and even during, trial. By the time trial approaches the Board will have been through enough to know the value of their claim and will not require a trial unless the settlement offers are wholly inadequate. Trial of these types of cases can take weeks and are a significant investment of Association funds.


Reading all four parts of this article will provide a general understanding of how a construction defect claim proceeds from discovery of defect until trial. Although…

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Arbitration 201: Drafting the Arbitration Clause for the Arbitration you want

Erika Birg | Inside Counsel | March 24, 2016

The parties are close to completing their negotiations on every point in the deal, but there is one aspect left: dispute resolution. It is admittedly difficult when putting together an agreement to look ahead to how it may fall apart in the future, but that is an important component to protecting your rights and interests. Negotiate it now or regret it later.

Do you want arbitration at all? In most commercial disputes, it is favored for its confidential nature, and the timeliness of a resolution saves real money. For example, for commercial disputes, the current average time from initiation to award at the American Arbitration Association (“AAA”) is 7.3 months. Compare that with the time to resolution for most court cases, and arbitration has a clear advantage.

You may decide that arbitration is proper for some types of claims, but not for others. In that case, you can carve out specific claims from arbitration, but you need to do so very carefully. In addition to identifying which claims you want in court and which you want in arbitration, identify who will decide the meaning of the carve-out—the court or the arbitrator? This can be particularly important if the contract being drafted involves the possibility of a class action; there is a diversity of opinion based on a variety of factual scenarios as to enforceability of multiple-plaintiff claims being carved out from arbitration clauses. If multiple-plaintiff cases are to be avoided, consider who would decide the enforceability and interpretation of the carve-out and where the arbitration will be brought (this is generally permissible forum-shopping in advance of any claim arising in a commercial context, but you should check for the current status on class-wide claims involving consumers in your chosen jurisdiction, given the ever-evolving state of the law).

If you expect to seek injunctive relief, there are methods for seeking such relief in arbitration. To ensure a mechanism to enforce, however, it is wise to initially go to court for the preliminary injunctive relief, until an award is issued and you can return to court for confirmation. Arbitrators lack the enforcement mechanisms of courts, including contempt. If that is a procedure you want to employ, say so in clear and unmistakable language. Otherwise, you could be receiving a motion to compel arbitration and perhaps not receiving the requested court relief.

Do you need a specific type of arbitrator? Someone with real estate experience, an electrical engineering background, or an accountant to work through post-closing matters? To the extent you can identify the type of person you are looking for to decide the dispute now, add it now so you do not have to fight about it later. Also, choosing the right administrator will assist in determining who will be available to you to resolve the dispute.

How many arbitrators do you want? This is often a cost question, but many believe that a three-arbitrator panel is more likely to come to the right result because of the balancing influences. Just be sure to factor in the cost of paying three people to decide your dispute. Also, scheduling the arbitration hearing becomes exponentially more complicated because you now have to work around more schedules.

Where do you want your arbitration hearing to take place? Considerations for deciding locale are: (1) location of the parties; (2) location of good arbitrators for your dispute; (3) location of the witnesses; (4) neutrality of location; and (5) cost. Among these factors, the parties will decide what is the most pressing for them. Sometimes neutrality of the location outranks the cost, but the location of the witnesses must be considered because arbitrators may be able to subpoena documents across state lines (subject to some disputes). In general, however, you cannot subpoena witnesses beyond state lines. Accordingly, if the project involves non-parties that may be essential, you may wish to designate the location of the project as the location of the arbitration to make sure you have access to crucial witnesses. Alternatively, leaving the location silent allows the administrative agency to decide whether the claim is brought in the proper jurisdiction. Most rules allow the administrator to change the locale chosen by the Claimant under certain circumstances. And, in some states, mechanisms for enforcement, modification or vacatur for an award vary, so it is also helpful to understand what will be involved after the award is rendered.

Do you allow for discovery and if so, what mechanisms? Arbitration administrators have different rules on discovery, but the parties can make their own rules as well. In some instances, where confidentiality is the driving reason for arbitration, parties choose to incorporate the Federal Rules of Civil Procedure and Federal Rules of Evidence into their clause. That eliminates many of the benefits of efficiency and economy that arbitration is meant to provide, but may serve the ultimate goal of having a more in-depth examination of the issues than might be expected in arbitration, where depositions can be rare and interrogatories unheard of.

Once you have the major points, here are a few more to consider:…

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Early Mediation of Insurance Coverage Disputes

Bruce A. Friedman | JAMS ADR Blog | March 24, 2016

Mediation of insurance coverage disputes prior to the filing of a lawsuit is becoming more common.  In part, this trend is the result of ADR provisions in insurance policies that require that the policyholder and insurer mediate coverage disputes prior to engaging in litigation.  Some of these provisions provide that the mediation shall continue until the mediator declares an impasse.  Others have a cooling-off period after the mediation that preclude either party from filing suit for a period of time (90 days) from the date of a failed mediation.

While early mediation and resolution of disputes is a laudable goal, saving the parties the time and expense of protracted litigation, the question is whether early mediation can result in a resolution of the dispute.  There are a number of things that the parties can and should do prior to the mediation to enhance the possibility of success, which include the following:

  1. At least a month before the mediation, counsel for parties should discuss what they need to know in order to enhance the possibility of settlement. This may require an information exchange phase of the mediation.  Once you have set up your mediation, the parties can exchange documents and information under the mediation privilege with an agreement to return the documents at the conclusion of the mediation.  The information could include the production of the underwriting and claim file if the coverage dispute arises in the third-party liability insurance context; documentation of the extent of the loss; documentation of the financial condition of policyholder if the issue of collectability is raised by the dispute.  These examples are only illustrative to spark your thinking on what you may need to see in order to evaluate the risk and value of the case.  In some cases, early consultation with experts and an expert report may be very helpful and persuasive.
  1. Mediation briefs must be exchanged as early as possible in order for each side to evaluate the positions of the other. It is too late to wait for the mediation to learn all of the arguments of the other side in order to give the issues the proper consideration.  Exchange of briefs also enhances the meditation process by allowing the parties to directly address each other rather than relying on the mediator to be the sole interpreter and communicator of the positions of the parties.  It educates the opposing side to the issues raised by the case.  Exchange briefs at least a week before the mediation to allow time for counsel to discuss the issues with their clients and to hopefully arrive at some objective evaluation of the prospective lawsuit.
  1. Assuming that the parties are serious about the early mediation and want to attempt to settle the matter, then each side needs to come to the mediation with settlement authority. By that I mean taking off your advocacy hat in the preparation for the mediation and analyzing the likelihood of success.  I suggest that counsel discuss the issues with a colleague in the office who is not involved in the case who may provide a more objective view.  After all, while the mediator is not going to decide the case, a settlement is going to reflect the strengths and weaknesses of each sides positions and an objective evaluation of the issues is crucial to arriving at a settlement.  Other factors in early resolution such as the cost of money, the saving of litigation expenses, and business reasons for resolving the dispute are all fair game for discussion and evaluation of the settlement value of the case, but they are not substitutes for objective risk assessment and the money necessary to get the matter resolved.

One more issue that needs to be considered in connection with the early mediation of insurance coverage disputes arising in the third-party liability insurance context is…

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