AAA Releases Discovery Best Practices for Construction Arbitration

Patrick McKnight | Forum on Construction Law

The American Arbitration Association (“AAA”) recently released an important new document, “Discovery Best Practices for Construction Arbitration: Recommendations for AAA Construction Advocates and Arbitrators.” These best practices are intended to “educate advocates and arbitrators to better manage pre-hearing exchanges of information in construction disputes.” 

Generally, the seven-page document seeks to promote the speed and efficiency of resolving construction disputes through arbitration. While observing that construction disputes are often very document-intensive, the best practices note that the format of arbitration does not allow for unlimited discovery:

Therefore, arbitrators should, consistent with their authority, manage arbitration proceedings to achieve the goal of providing a simpler, less expensive and more expeditious process, and discovery decisions should be proportional to the size and complexity of the matter being heard. The arbitrator should stress how, due to the number of documents, discovery in a construction dispute is different than in a typical commercial dispute.

These best practices were developed in conjunction with the AAA’s National Construction Dispute Resolution Committee (“NCDRC”), advocates, arbitrators and construction industry professionals. The guidance and suggestions in the best practices are recommended for use in all construction cases administered by the AAA under the Construction Industry Arbitration Rules or Commercial Arbitration Rules. It is important to note that these best practices are in no way intended to replace the Rules.

Document Exchange

The best practices suggest filing a detailed statement of claims and defenses as early as possible. This can help narrow the focus of discovery, identify critical documents, and avoid disputes. Whenever possible, “the scope of documents should be narrowly tailored and proportionate to the disputes at hand.” Further, a scheduling order can be an effective tool to establish deadlines and avoid delays.

The best practices also address the growing importance of e-discovery. Today’s construction disputes commonly involve a high-volume of emails, drawings, submittals, and other electronically stored information (“ESI”). The new guidance suggests addressing e-discovery during the pre-hearing conference. The size and complexity of the dispute should be the driver of the ESI protocol. In situations where the cost to produce electronic documents appears excessive, arbitrators are encouraged to consider requiring the party demanding that production to pay for the costs.

Site Inspections

Site inspections can play an important role in resolving construction disputes. They can also be expensive and time-consuming. The best practices suggest arbitrators carefully weigh the benefits of agreeing to a site inspection and establish a protocol in advance. Likewise, arbitrators are encouraged to consult photographs of the site prior to a visit to help become familiar with the project. Any tour of the project site should be conducted without attorney commentary.

Disputes and Sanctions

Discovery disputes happen. Parties should make a good-faith effort to meet and confer to resolve these disagreements. If these consultations are unsuccessful, arbitrators are encouraged to schedule a telephonic conference. Hopefully many of these disputes can be precluded from arising in the first place through appropriate planning and communication.

It is important to remember that arbitrators have the authority to order sanctions. Courts may uphold these sanctions when sufficient cause exists. Arbitrators can choose to order sanctions either immediately at the time of the action, or they can choose to wait to do so in the final award. However, precluding proof should only be considered in the most extreme circumstances.

Other Considerations

The new AAA guidance suggest that depositions be used only when there are clear and compelling grounds to demonstrate they will contribute to the speed and efficiency of the arbitration process.

Third-party discovery can be a complicated and thorny issue in an AAA arbitration. Courts have reached different conclusions as to whether Article 7 of the Federal Arbitration Act allows for an arbitrator to subpoena a third-party to produce documents prior to a hearing. In any event, third-party discovery should be limited to the largest, most complex cases.

Conclusion

These best practices seek to balance the almost inherently complex nature of construction disputes with the efficiency offered by AAA arbitration. This new document is a valuable resource for arbitrators, attorneys, and construction professionals. The summary contained in this article discussed only a few of the highlights and is not meant as a comprehensive survey.

Parties interested in more information on AAA construction arbitration rules and procedures are encouraged to visit adr.org/construction.

It’s My Construction Contract, I Can Arbitrate Where I Want

Patrick Lindmark | Taft Law

“[W]hen parties agree to arbitrate all questions arising under a contract, the [Federal Arbitration Act] supersedes state laws lodging primary jurisdiction in another forum, whether judicial or administrative.”[1]

Subcontractors know all too well that out-of-state prime contractors and owners often include clauses in construction contracts that require all disputes be resolved in, and subject to the laws of, a state different from where the project is located. These “choice of law” and “forum selection” clauses are often relegated to the ends of contracts and most subcontractors lack the bargaining power necessary to negotiate these terms. This ability to force a smaller subcontractor to fight a lawsuit in another state provides a “home court advantage” and oftentimes presents a hardship to the subcontractor, which ultimately may deprive that party of its “day in court.”

Not only do these provisions make it costlier and more difficult to pursue or defend a lawsuit, but they can also complicate the subcontractor’s work during construction. Issues such as indemnity, prompt payment, mechanic’s liens, limitations of liability, cost shifting, and statutes of limitations vary by state and can materially affect a subcontractor’s rights and remedies. A subcontractor that does not understand the nuances of a different state’s laws and the effect of those laws on its work will be in for a rude awakening should a problem arise during construction. For instance, a construction contract subject to the laws of the state of Texas will allow for an aggrieved party to recover attorneys’ fees if it prevails on a breach of contract claim regardless of what the contract says about fee shifting.[2] A subcontractor unaware of this statute might mistakenly believe that each party would have to bear its own attorneys’ fees in a legal dispute regardless of which party ultimately prevailed. 

In an effort to equalize the playing field, and protect in-state contractors from having to fight a lawsuit in a distant jurisdiction, approximately 28 states have enacted some type of home-court statute. These “anti-forum” statutes typically provide that regardless of what contractual choice of law and venue the parties selected, a contract that is principally for the construction or repair of an improvement to real property is subject to the laws of that state and any dispute regarding the project must be venued in that state. Provisions in the contract to the contrary are void as against public policy. 

Despite the best efforts of these state legislatures, contractors do have at least one potential avenue available to make certain the forum selection provision — and possibly choice of law — in the contract is enforced regardless of the project state’s statutory scheme — arbitration.

Several courts have held that the Federal Arbitration Act (FAA) preempts an otherwise applicable state anti-forum statute. Those courts hold that the forum selection provision in the contract forms part of a binding agreement to arbitrate, even if different from the jurisdiction in which the project is located.[3] Section 2 of the FAA provides that:

A written provision in any…contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.[4]

According to the Supreme Court, this “primary substantive provision” of the FAA “is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” Moses H. Cone Mem’l Hosp. v. Mercury Construction Corp., 460 U.S. 1, 24 (1983). In addition, the Supreme Court has also held that the parties’ contractual choice of forum should be enforced except in the most unusual cases, and that the party resisting the forum-selection clause (i.e., the plaintiff who filed in a different court) has the burden of establishing that public interests disfavoring transfer outweigh the parties’ choice. Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas 571 U.S. 49 (Dec. 3, 2013).

A number of lower court decisions have also found that a properly drafted agreement to arbitrate preempts a state’s anti-forum statute under the FAA. See, e.g., Bell Prod., Inc. v. Hosp. Bldg. & Equip. Co., 2017 WL 282740 (N.D. Cal. Jan. 23, 2017);  R.A. Bright Construction, Inc. v. Weis Builders, Inc., 930 N.E.2d 565 (Ill. App. Ct. 3d Dist. 2010); LaSalle Group, Inc. v. Electromation of Del. County, Inc., 880 N.E.2d 330 (Ind. Ct. App. 2008); M.A. Mortenson/The Meyne Co. v. Edward E. Gillen Co., 2003 WL 23024511 (D. Minn. Dec. 17, 2003);and Cleveland Construction, Inc. v. Levco Construction, Inc., 359 S.W.3d 843 (Tex. App. Houston 1st Dist. 2012). In addition, the American Arbitration Association rules also provide that, when the agreement selects a locale for the arbitration, “the locale shall be that specified in the agreement.” R-12, AAA Constr. Indus. Rules.

Arbitration has long been a favored forum for dispute resolution in construction projects because of its speed, potential for reduced costs, ability to have an expert in the industry decide the case, and the private nature of any decision. As the popularity of anti-forum statutes continues to rise, the enforcement of forum selection provisions — and possibly choice of law — can now be added to that list of benefits. Although it remains to be seen whether every state will enforce venue selection in arbitration agreements despite the existence of an anti-forum statute, a well-drafted arbitration agreement clause that triggers the FAA preemption will go a long way towards ensuring the terms of the contract remain enforceable.

______________________________________________________________________

[1] Preston v. Ferrer, 552 U.S. 346, 359 (2008).

[2] Tex. Civ. Prac. & Rem. Code § 38.001.

[3] Although not addressed by the cases cited in this article, it is also possible that the FAA might preempt any state statute dictating that the contract is subject to the laws of a state different from what the parties selected in the contract.

[4] 9 U.S.C. § 2.

Highlights from the AAA’s New Publication on Discovery Best Practices

R. Thomas Dunn and David Fitzpatrick | Pierce Atwood

The American Arbitration Association (“AAA”) released recommendations for AAA Construction Advocates and Arbitrators with regard to best discovery practices and tips for Construction Arbitration.  See American Arbitration Association Discovery Best Practices for Construction Arbitration (“Best Practices”).  Through the AAA National Construction Dispute Resolution Committee, our own John Bulman played a key role in drafting these guidelines.  The 7-page guideline provides a bullet point, practical summary of information exchange in arbitration.  It is a helpful resource to counsel, clients, and arbitrators to understand the ground rules in an arbitration proceeding.  In this post, I summarize some of the key takeaways from the Best Practices.

Document Exchange

Generally, parties are entitled to examine an opposing parties documents; however, “the scope of documents should be narrowly tailored and proportionate to the disputes at hand.” To achieve this goal, parties should each submit detailed statement of claims and defenses as early as possible to narrow the issues, identify critical documents, and limit or avoid any disputes over document production.   The parties should be encouraged to exchange such information candidly.  Additionally, a scheduling order should establish deadlines for exchanging documents and can and should be strictly enforced absent good cause to deviate.

Site Inspections

While site inspections can be beneficial in a construction dispute, arbitrators should consider whether the current condition of the project is such that an inspection would help understand and resolve the issues in the dispute. As an example, in the instance where faulty workmanship is alleged, but the work has since been remediated, a site inspection may not prove all that helpful and a more reasonable and cost effective option for the arbitrator is to review photographs of the faulty work.  If a site visit is necessary, the practice tips for arbitrators include reviewing project photographs to familiarize with the issues and having the parties conduct the tour without attorney argument or commentary.

E-Discovery

Due to “the growing use and sheer volume of email, CAD drawings and scheduling information in construction projects,” documents that are maintained and stored electronically should be provided in the same manner they are maintained, and be crafted to make searching the electronic data as economical and expeditious as possible. The practice tips note that, the arbitrator should ask a number of questions at the pre-hearing conference to understand the type of information maintained, its location, and accessibility.   Moreover, prior to the pre-hearing conference the parties should discuss their Electronically Stored Information (“ESI”) protocol and attempt to come to an agreement.  An arbitrator might even keep a template or sample ESI protocol to share with the parties and provide discretion to deviate from the template based on the size and complexity of the case.

Depositions

As depositions are generally time consuming and costly, their use in arbitration should typically only be used when “clear and compelling grounds are demonstrated that depositions will promote (and not compromise) the speed and efficiency of the arbitration.” The practice tips provided for arbitrators include considering whether imposing a time limit on depositions and limiting the depositions to the primary fact-witnesses each party intends to call. Additionally, an arbitrator may deny the request to depose an expert witness when the expert witness provides a written report in advance of the hearing.

Discovery Disputes

Regarding discovery disputes, in order to avoid unnecessary correspondence, briefing, and time, the Best Practices provides that arbitrators should make clear at the pre-hearing conference that parties are to engage in good-faith discussions to resolve discovery disputes before bringing them to the attention of the arbitrator. In the event that such a dispute does arise, the dispute should be resolved by telephonic conference at or near the time of dispute.  For a practice tip, the best practices note that parties should be aware of “AAA’s Streamlined Panel Option, in which one arbitrator, rather than the full panel, may decide discovery disputes.”

Sanctions

Arbitrators are vested with the authority to order sanctions; however, in doing so, they should order them judiciously and avoid “drastic” sanctions whenever possible. The practice tips indicate that sometimes just “a reminder that the arbitration process envisions sanctions is sometimes all it takes to induce the parties to exercise restraint and responsibility.”

Third-Party Discovery

“Generally, the AAA rules do not contemplate third-party document discovery.” However, as some courts have construed Article 7 of the Federal Arbitration Act to permit an arbitrator to issue a subpoena to a third party to produce documents, the best practices posit that arbitrators “should be aware that this area is constantly evolving” and should ask the party requesting it to provide legal authority to do so.   The practice tips note that the arbitrator should give consideration to the cost and burden on the third-party and that any subpoena should be narrowly tailored.

The Best Practices publication provides a helpful tool for practitioners and arbitrators to ensure that arbitration is more focused and efficient than court proceedings.

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.

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).