Try Med-Arb as an Alternative to the Typical Alternative Dispute Resolution

Brian Gaudet | Kilpatrick Townsend & Stockton

An alternative to traditional alternative dispute resolution called med-arb, a combination of mediation and arbitration, should be strongly considered in small and uncomplicated cases.

Alternative dispute resolution in the construction context typically means arbitration and mediation. Dispute review boards and executive negotiations are some others, but those are far less frequently used. There are alternatives to traditional alternative dispute resolution (hi low arbitration, baseball arbitration, med-arbs, neutral case evaluation, and other creative variations of trying to figure out who gets what from whom). One such method that I would ask folks to consider is the med-arb, a combination of mediation and arbitration. The parties first try to mediate the case to resolution and in the event the mediation is unsuccessful, the mediator turns into an arbitrator and renders a decision. Depending on the facts and complexity of the case, there may be nothing more needed after the mediation in order for the arbitrator to make a decision. Occasionally, additional documentation or witness testimony is required. A variation (called arb-med) is having a short arbitration first with the arbitrator putting a decision in a sealed envelope; the arbitrator then tries to mediate the parties to a mutually agreeable resolution in lieu of the decision. If the case is resolved in the mediation, then the arbitrator simply throws away the proposed award.

Med-arb should be strongly considered in small and uncomplicated cases. Parties usually do a pretty good job of setting out their position and the law during a mediation. With several back and forth trips of the mediator, the dispute is usually fairly well understood. After investing half a day talking about the facts and legal issues, it seems wasteful to repeat that process in court or an arbitration. A med-arb should start with the parties exchanging a position paper rather than a confidential mediation memo so that the mediator/arbitrator (“facilitator”) and the other party have an opportunity to understand the other sides position on the pertinent facts and the law.

One concern of the facilitator is whether the parties have agreed going into a mediation that it will be a med-arb. There may be reluctance to turn a mediation into a med-arb at the end of the day. Accordingly, this should be discussed in advance. The main criticism of the med-arb is the idea that parties may not be candid with the mediator during mediation (i.e. especially in disclosing weaknesses in their case), thereby preventing the mediation process from working appropriately and making an arbitration result much more likely. Theoretically that is possible, but one must question how vulnerable and candid parties become during a construction mediation to begin with. One criticism of mediation is sometimes parties do not attend with the intention of trying hard to resolve the case at mediation, but rather to find out more about the opposing parties case or to try to set up a resolution down the road. The benefit of the med-arb is that the parties last chance to resolve the matter themselves IS during the mediation… there is no tomorrow or later. The med-arb can be useful in making sure both parties are committed to trying hard to resolve the case in that moment. When the dollar amounts are lower and the issues are not complex, significant efficiencies in resolving the matter can be gained by trying a med-arb.

I have participated in a number of med-arbs as a party representative. In all but one case a mediated settlement agreement was reached. In the one instance it went to arbitration, the facilitator did not require any additional information from the parties and rendered a decision that was reasonable based on the evidence presented. Admittedly, there was some evidence not gathered that could have helped inform the decision, such as a site visit that would have taken a full day and/or several depositions. If the parties engaged in those activities, a mediated settlement would not have been a possibility, and the outcome of the arbitration may have differed. Or it may not have, but in either event both parties would have spent significantly more in legal fees than what the value of the dispute supported. In this instance, the legal expense was relatively low, the dispute was over even though the process was a little imperfect, and, in that sense, both parties got a great outcome overall.

Servotronics, Inc. v. Rolls-Royce PLC: What the U.S. Supreme Court’s Upcoming Decision on 28 U.S.C § 1782 Means for International Construction Arbitration

Hailey Barnett and Zach Torres-Fowler | Forum on Construction Law

On March 22, 2021, the U.S. Supreme Court announced that it would consider the hotly contested issue of whether 28 U.S.C. § 1782 (“Section 1782”) grants parties to international commercial arbitrations seated outside the United States the right to seek U.S.-style discovery from the federal courts. The Supreme Court’s decision in Servotronics, Inc. v. Rolls-Royce PLC will ostensibly put to rest a matter that has roiled the international arbitration community for the last several years and may have profound implications for modern international arbitration practice.

Given the role international arbitration serves in connection with international construction projects, construction practitioners and industry representatives should pay close attention to the Supreme Court’s upcoming decision. The following article seeks to introduce the current debate to construction practitioners and offer some insight into what the Supreme Court’s decision may mean for the field of international construction arbitration.

28 U.S.C. § 1782 and the “Foreign or International Tribunal”

Section 1782 is a procedural device that permits an applicant to petition the U.S. courts to order document disclosure or compel testimony “for use in a proceeding in a foreign or international tribunal.” As a result, Section 1782 is a potentially powerful tool to gather evidence in the United States for use in a proceeding located abroad. This is particularly true for international arbitration proceedings where document exchange practices are significantly more constrained than in U.S. discovery.

Importantly, Section 1782 does not define the phrase “foreign or international tribunal” and the question of whether the statute applies to international commercial arbitral tribunals seated in jurisdictions outside the United States has caused a circuit split.  Specifically, case law dating back to the late 1990s from the Second and Fifth Circuits answered this question in the negative and remained unchallenged for two decades.  However, in 2019 the Sixth Circuit reached the opposite conclusion in the case of Abdul Latif Jameel Transp. Co. v. FedEx Corp., 939 F.3d 710 (6th Cir. 2019) and held that the phrase “foreign or international tribunal” in Section 1782 encompassed private commercial arbitral tribunals seated abroad.

The latest iteration in this saga arrived in March 2020 and September 2020 when the Fourth and Seventh Circuits, respectively, reached opposite conclusions on precisely the same set of facts in the case of Servotronics. As explained below, the Fourth and Seventh Circuit’s inconsistent holdings only broadened the circuit split and almost necessarily required the Supreme Court to review the matter.

Servotronics, Inc. v. Rolls-Royce PLC

Servotronics arose from a fire that occurred during a ground engine test of a Boeing 787 in Charleston, South Carolina. (In re Servotronics, Inc., No. 18-CV-7187, 2019 WL 9698535, at *1 (N.D. Ill. Apr. 22, 2019), aff’d sub nom. Servotronics, Inc. v. Rolls-Royce PLC, 975 F.3d 689 (7th Cir. 2020), cert. granted, No. 20-794, 2021 WL 1072280 (U.S. Mar. 22, 2021).) Rolls-Royce, the engine manufacturer, settled with Boeing and then sought indemnity from Servotronics—the entity that manufactured an engine valve that Rolls-Royce alleges caused the fire. (Id.) Accordingly, pursuant to an arbitration agreement between Rolls-Royce and Servotronics, Rolls-Royce initiated arbitration in London under the arbitration rules of the Chartered Institute of Arbitrators (more commonly referred to a CIArb). 

In connection with those proceedings, Servotronics filed an application under Section 1782 in the U.S. federal district court for the District of South Carolina seeking testimony from Boeing’s employees that resided in South Carolina. In addition, Servotronics also sought document discovery from Boeing pursuant to Section 1782 through a separate ex parte application in the U.S. federal district court for the Northern District of Illinois. (Id. at *2.)

The federal district court for District of South Carolina initially denied Servotronics’s application. (Servotronics, Inc. v. Boeing Co., 954 F.3d 209, 211 (4th Cir. 2020).) However, on March 30, 2020, the Fourth Circuit Court of Appeals reversed the lower court’s decision. After reviewing the language and legislative history of Section 1782, the Fourth Circuit concluded that Congress intended the phrase “foreign or international tribunal” to encompass private commercial arbitral tribunals seated abroad and applied the broader interpretation of Section 1782 espoused by the Sixth Circuit. (Id. at 216.)

In the Northern District of Illinois, the court initially granted Servotronics’ application, but later vacated its decision after Rolls-Royce and Boeing intervened in the case. (2019 WL 9698535 at *3.) The district court concluded it lacked the authority to grant Servotronics’ request because the London-based arbitration proceeding between Servotronics and Rolls-Royce was not a “proceeding in a foreign international tribunal” within the meaning of Section 1782. (Id.) Servotronics subsequently appealed the decision to the Seventh Circuit court of appeals.

On September 22, 2020, the Seventh Circuit affirmed the lower court’s decision.  In doing so, it rejected the conclusions the Fourth Circuit reached on the very same set of facts just sixth months prior.  The Seventh Circuit made two significant findings.

First, according to the Seventh Circuit, neither the plain language nor the statutory context underlying Section 1782 supported an interpretation that “foreign or international tribunals” included foreign commercial arbitral tribunals. Instead, according to the Seventh Circuit, Section 1782 the term “foreign or international tribunal” only encompassed foreign courts and quasi-judicial agencies. (Servotronics, Inc. v. Rolls-Royce PLC, 975 F.3d 689, 695 (7th Cir. 2020), cert. granted, No. 20-794, 2021 WL 1072280 (U.S. Mar. 22, 2021).)

Second, the Seventh Circuit raised concerns over a potential conflict with the Federal Arbitration Act. (Id. at 695–96 (7th Cir. 2020).) Specifically, the Federal Arbitration Act only permits arbitration panels—but not parties—to seek third-party discovery. By contrast, if Section 1782 were read to apply to foreign private arbitrations, litigants in a foreign arbitration proceeding as well as any other “interested persons” (as set forth in Section 1782) would have access to much more expansive discovery than would otherwise be the case in U.S. seated arbitrations governed by the FAA. (Id. at 695.)

Implications of a Supreme Court Decision

Given the circuit split, and with similar cases pending in the Third and Ninth Circuits, the Supreme Court’s decision to consider the issues presented in Servotronics is not surprising. However, depending on whether the Supreme Court sides with the Fourth and Sixth Circuits or Second, Fifth, and Seventh Circuits, the decision could broaden the otherwise narrow document exchange practices commonly used in international arbitration proceedings.

One of the defining features of international arbitration is its relatively narrow approach to document exchange and similarly limited access to third-party discovery. Should the Supreme Court follow the Fourth and Sixth Circuits, it seems likely that the U.S. courts will become ripe for Section 1782 discovery requests. Moreover, given that applications made under Section 1782 are governed by the discovery standards set out the Federal Rules of Civil Procedure, parties to international arbitration proceedings may very well may gain access to U.S. discovery practices that would not otherwise be available in international arbitration. As a result, construction practitioners may have to rapidly adjust how they procedurally and strategically approach international construction arbitrations going forward. 

Ultimately, the future of Section 1782 practice is far from certain. Even if the current legal framework associated with Section 1782 shifts as the result of a Supreme Court decision, the U.S. courts and international arbitral tribunals will retain significant discretion over the breadth and viability of document requests under Section 1782. As a result, notwithstanding the current focus on the Supreme Court, much remains to be written about Section 1782 in practice. In the meantime, international construction arbitration practitioners should pay careful attention to the Supreme Court in Servotronics and consider what strategic implications the Court’s decision in that case may have on the current international arbitration practices.

Putting Your Best Foot Forward in a Remote Arbitration

Stephanie L. Noble | Vinson & Elkins

At the beginning of 2020, arguing hearings and trying cases in a completely remote environment seemed like science fiction. Now, just a year later, courts and litigants have adapted to our new virtual litigation environment. While virtual jury trials are still few and far between, one trend has become quite active over the last few months: remote arbitration hearings.

In a lot of ways, this development makes sense. Arbitration proceedings are more amenable to transitioning to a remote setting because there are typically fewer people involved – no court staff, no jury, no public participation. The parties also have increased level of control over the process and can agree to arrangements that make remote proceedings run even more smoothly.

While remote arbitration proceedings may have become more common, that does not mean they are without their challenges. Technical issues are inevitable, as are delays due to interruptions occurring in the various locations from which all of the participants are broadcasting, such as dogs barking, unwitting delivery drivers, and even the occasional curious toddler. But there are ways to set you and your team up for success at the outset and put your best foot forward in remote arbitrations. Below we have summarized a few of the challenges inherent in virtual hearings and provide some advice and best practices for your next remote arbitration hearing.

Challenges inherent in virtual proceedings

  • Competing with distractions (phone, computer, nosy pets) and maintaining the audience’s attention.
  • “Are you on mute?” – The possibility of the dreaded mute slip-up and inserting unintended commentary into the proceeding.
  • Technology issues. Wavering internet connectivity and issues with cameras or microphones can slow things down.
  • Communicating with your team. If everyone on the team is in different locations, it can be tricky to communicate and provide important feedback in the heat of the hearing.

Best practices

  • Set yourself up for success (literally). Position your desk so you do not have to look down at your notes and can look directly to the camera as much as possible. Consider a set-up that allows you to stand during any argument.
  • Use technology to your advantage. Use the share-screen function to show documents and tell a compelling story that will keep your audience engaged. Consider the use of interactive demonstrative exhibits that make the participant feel connected to your narrative.
  • Ask another team member to assist with pulling up documents and screen share, so the attorney arguing or examining the witness can remain focused on the task at hand.
  • Work out logistics of witness examination with opposing counsel and the arbitrator(s) in advance. Will the witness be alone in the room during examination? How will the witness access documents? Will there be someone nearby to assist with any technical issues? All of these questions need to be considered ahead of time.
  • Preparation is key. Maintaining interest and focus in remote proceedings can be a challenge, so promote engagement by looking directly at the camera and avoiding pauses during the examination or argument.
  • Assemble the team. If possible, gather the trial team in a central location (where appropriate safety measures can be implemented).

Important Changes to International Arbitration Procedures

Carly Miller and Katherine H. Blankenship | Buildsmart

To all our friends with international projects, partners, or contracts, please take note of some significant changes to one of the potential sets of procedures and rules that may govern or apply to your international dispute. The International Centre for Dispute Resolution (ICDR) recently amended its Dispute Resolution Procedures (including its Arbitration and Mediation Rules), which became effective on March 1, 2021.

The general thrust of these changes was to increase efficiency and cost-effectiveness. The updated rules also seek to address important current issues and dynamics, including, most notably, the ongoing COVID-19 pandemic. These amendments are the result of a year-long effort by the various arbitration experts around the world who make up the drafting committee.

In terms of efficiency and cost-effectiveness, the updated rules encourage the consideration of early disposition of issues, emphasize and incorporate the use of mediation, raise the ceiling amount for expedited arbitration procedures, and expand the applicability of these procedures.  After almost a year of navigating international disputes in a world with very little travel or face-to-face interaction, the ICDR drafters worked to address the ever-changing dynamics of the COVID-19 world, including the increasing role of video and virtual communications. Finally, there are other issues and developments addressed by the amendments, including the rise of third-party funding; the duty to discuss cybersecurity, privacy and data protection; transparency regarding ICDR decision-making; joinder and consolidation; arbitral jurisdiction and arbitrability; and the use and role of tribunal secretaries.

In addition to amending the Arbitration Rules, the ICDR also amended its Mediation Rules, including changes to address the procedure for the appointment of a mediator, guidance regarding the mediation process, and potential enforcement of settlements under the Singapore Convention on mediated settlements.

If you do business in the international arena or with businesses around the globe, take note of these key changes as they may very well alter the way international disputes are adjudicated. And, as always, remember the importance of the primary set of rules that govern your project or dispute: the contract.

When Is an Arbitration Clause Unconscionable? Not Often

Christopher G. Hill | Construction Law Musings

Here at Construction Law Musings, I have discussed the pros and cons of various forms of Alternative Dispute Resolution (ADR), including arbitration.  I am a fan of most ADR, but less of one for arbitration than for mediation.  However, where the arbitration can be done under a good set of cost-containing rules and with an arbitrator that is experienced in construction, arbitration can help with the resolution of construction claims.  Of course, arbitration provisions in construction contracts are routinely upheld by the courts of Virginia with limited exceptions.  One of these exceptions is where the arbitration clause is unconscionable and therefore unenforceable.  A recent case out of the Western District of Virginia, Marroquin v. Dan Ryan Builders Mid-Atlantic LLC, shows how high a hurdle it is to get a court to invalidate an arbitration provision.

In this case, the Marroquins purchased a new construction home from the Defendants.  As is often the case in such purchase transactions, Defendant provided a limited warranty agreement (in this case provided by Quality Builders Warranty Corporation (“QBW”)) that along with the sales contract contained a mandatory arbitration provision.  The parties executed the limited warranty and the sale proceeded with the Marroquins taking possession.  Over the next year or so, the County inspector’s office issued several correction orders to Defendant, and the Marroquins, through counsel, identified numerous defects in construction, many of which they alleged to remain unremedied.  Needless to say, they sued for breach of statutory warranty and for breach of the limited warranty.  Defendant removed the case to Federal District Court and then moved to compel arbitration.

The main arbitration clause at issue, found in the QBW Warranty, stated that after a 4 step resolution process is completed:

disputed items shall be submitted for binding arbitration by QBW to Construction Arbitration Program, administered by DeMars & Associates Limited (CAP-Home), or such other independent arbitration service as may be designated by QBW, for resolution in accordance with the rules and regulations for home warranty disputes of CAP-Home or such other service.

The Marroquins contested the Motion to Compel Arbitration on the grounds that the arbitration clauses taken together were unconscionable and therefore unenforceable because QBW retained the sole right to designate the arbitration service and could therefore theoretically require arbitration anywhere in the U. S. thus effectively pricing them out of a remedy.  They further argued that the warranty provision was a contract of adhesion that held such an inequitable tilt of power to QBW that the arbitration provision was unenforceable.  The Court disagreed.

After determining that, absent unconscionability, the claims made by the Marroquins were subject to arbitration and the Federal Arbitration Act, the Court set out the test under Virginia law for an “unconscionable” contract provision:

Under Virginia law, a contract is unconscionable if it is “one that no man in his senses and not under a delusion would make, on the one hand, and as no fair man would accept, on the other.” The substantive terms of the contract must be so grossly inequitable that it “shocks the conscience.” The party asserting unconscionability of a contract has the burden of proving that the contract is unconscionable by clear and convincing evidence.  At the hearing, plaintiffs argued that the clauses are unconscionable because the clauses could have been drafted to be more fair to plaintiffs. That, however, is not the applicable standard. (citations omitted)

The Court then stated that the provision was not so grossly inequitable as to “shock the conscience.”  The Court also pointed out that the relevant arbitration provision allowed for the arbitration to be held at the Plaintiffs’ home and that the Marroquins did not provide any evidence at the hearing of grossly unequal bargaining power.

In sum, even where one party clearly has to consent to certain arbitration provisions and where the other party holds all of the cards, the only way to show such clauses are unconscionable is to show that only the deluded would enter into such an agreement.

As always, I recommend that you read the opinion in its entirety and let me know if any of this analysis is off base. I also highly recommend that you work with a qualified Virginia construction attorney to help evaluate the arbitration clauses in any contracts that you plan to execute.