The Right to Arbitrate and the Risk of Losing It

Katherine H. Blankenship and J. David Pugh | Buildsmart

The Alabama Supreme Court recently found that a party was in breach of an arbitration agreement for declining to pay the fee schedule set forth by the American Arbitration Association (AAA) and thus lost the right to compel arbitration. This case serves as a reminder to follow the orders of arbitral institutions or risk losing the opportunity to arbitrate your dispute. The Alabama Supreme Court’s decision further enforces the sage advice to draft arbitration agreements carefully and meticulously to protect and ensure your rights and preferences in the adjudication of a dispute.

In Fagan v. Warren Averett Companies, LLC, the parties disputed the applicability of the Employment Arbitration Rules in regards to a dispute arising from a personal service agreement (PSA). Upon review of the plaintiff employee’s arbitration demand, the AAA determined the arbitration would be administered in accordance with the Employment Fee Schedule that required the defendant employer to submit a substantially higher filing fee than the employee.

When the employer declined to pay the AAA filing fee, the AAA closed the case. The employee then filed suit against the employer in state court, and in response, the employer filed a motion to dismiss and compel arbitration. The employer argued that the AAA’s administrative ruling applying the Employment Fee Schedule violated the PSA. The employee responded that the employer was precluded from enforcing the arbitration provision in the PSA because it had declined to participate in the arbitration.

The Alabama Supreme Court agreed with the employee holding that the employer’s refusal to pay the filing fee constituted a default of the arbitration agreement in the PSA and that, based on its breach, the employer had lost the right to compel arbitration.

What can you learn from this decision? First, if you elect arbitration as your means of binding dispute resolution, then the rules, decisions, and procedures of the chosen arbitral institution should be followed or you run the risk of losing the right to arbitrate altogether. That risk is not to be taken lightly. Arbitration is intentionally selected as a means of resolution for any number of reasons, but all of them important to the party so choosing. Arbitration can provide an arbitral tribunal that is expert and well versed in the subject matter and industry providing parties with crucial expertise they may not have access to in state or federal courts. It may also offer a more expedient and efficient means of resolution. But, whatever the motivations for selecting arbitration, the parties most likely want to preserve and protect that right. To preserve the arbitration remedy and all its accompanying benefits, adherence to applicable rules and procedures is important.

The second key takeaway from this case is to carefully and precisely draft your contracts. In this case, if the parties had specified they would split all costs and fees 50/50 in the arbitration agreement, the court may have decided differently. Enlisting legal help for an assiduous contract review may not sound appealing, but it is a task that can save you much heartache and expense down the road. Ensuring that your priorities, intentions, and requirements are codified clearly and unambiguously in a binding document is money well spent.

Lawyer’s Advocacy in Arbitrations: No. 5 of the Top 10 Horrible, Terrible, No Good Mistakes Lawyers Make

David K. Taylor | Buildsmart

This post is a continuation of the Top 10 most horrible, terrible, no good, “bang your head against the door” mistakes that I have seen lawyers make before, during, and after arbitrations in which I served as the arbitrator. As stated in the previous posts, there are pros and cons to binding arbitration versus trial in a court that go beyond a series of blog posts. In many instances, representing a party in an arbitration requires more due diligence and work than a trial. Great “arbitration” lawyering is essential, but many times does not happen.

No. 5: Know When to Fold ‘Em (Bad Claims/Defenses)

As the late Kenny Rogers sang, when playing poker, “you’ve got to know when to hold ‘em, know when to fold ‘em.”  The same analysis equally applies to preparing for an arbitration hearing and determining what claims/defenses will actually be presented at the hearing. Without repeating the title of these series of blogs, one serious mistake I see, while both acting as an arbitrator or counsel, is lawyers (and clients) who feel that they not only need to present every single possible claim/defense to the arbitrator, but refuse to concede positions in the middle of a hearing when it’s clear the facts are not going their way. An arbitration is not a hearing before a jury or a judge who may not know anything about the subject matter of the dispute. Your arbitrator is an industry expert, most of the time an experienced lawyer in the field at issue. She knows what good and bad positions are and when one side is trying to pull the wool over her eyes. Especially in arbitrations where there are multiple claims (such as a construction dispute), a party’s credibility on ALL positions is vital. Presenting four great claims/defenses but also one to two highly questionable ones, or stubbornly sticking to positions that look like losers, is a serious mistake. Your adversary will use anything they can to oppose the four great claims/defenses and use the questionable claims/defenses to cast doubt on the valid claims/defenses. More importantly, the arbitrator will look askance (he may not say so) at those bad claims/defenses and wonder why you are still presenting a position that appears to be a sure loser. Conceding certain claims/defenses during a hearing, no matter how hard fought, can increase your credibility to the arbitrator. Such a narrowing down on positions and in-hearing concessions can also help reduce exposure, especially if there’s a prevailing party attorneys’ fees clause. This may take some persuasion for a client who may be worried about making ANY concessions, especially in a hard fought, emotional arbitration. But part of your job as a counselor is to give the best advice possible and lay out the pros and cons, and the client can then decide if he wants to go “all in” on all stated positions.

Finally, the other great line from this song is “you never count your money when you’re sittin’ at the table.” Knowing what claims and defenses to “hold” and present, and which ones to dump and fold, will give you and your client the best chance of walking away from the arbitration table with money in your client’s pocket (after legal fees are paid, of course…).

Read numbers 123, and 4 on the list.

Including Non-Signatory Subcontractors in Arbitration Clauses in Construction Contracts

Jaime Dewees | Framing Issues

Arbitration is an increasingly popular forum for the resolution of construction disputes.  It often provides a more predictable procedural process specially designed for the industry in light of construction-specific rules and mediation procedures enacted by alternative dispute resolution providers, such as the American Arbitration Association (AAA). Of course, there are pros and cons to private arbitration proceedings administered by AAA and other organizations, including, among other things, those discussed in last week’s post about the increased up-front costs incurred to initiate an arbitration proceeding and paying the fees and expenses associated with a single arbitrator or multiple arbitrator panel. On the other hand, construction arbitrators are generally highly-qualified and experienced construction attorneys and industry professionals capable of resolving complex and highly-technical disputes  Given the complexity of construction disputes this is often advantageous and preferable to a state court judge or jury of laypersons with little or no construction experience.

When planning a construction project, construction professionals should anticipate claims or controversies and make an informed decision up front about the ideal forum for resolving these disputes when they inevitably arise.  Whether arbitration or litigation is preferred depends on a number of time and expense factors, as discussed above.  However, if arbitration is preferred, then “consistency is key” in order to bring all claims and controversies into an arbitration involving many contractors and subcontractors (and their subcontractors and vendors) and to avoid piecemeal dispute resolution outside of arbitration.

The arbitration clause in construction contracts defines the scope of the claims, controversies, and disputes arising from construction projects and directly influences the parties that are bound by an agreement to arbitrate.  The contracting parties should express a clear intent to arbitrate, and must also consider other parties who do not actually sign the construction contract but are nevertheless contemplated by the terms of the operative agreement. In Texas, a non-signatory to an agreement to arbitrate within a construction contract—including a subcontractor, for example—may be compelled to arbitration under legal theories establishing the non-signing subcontractor’s agency with and for another contractor, or as an alter ego of a general contractor that is in essence the same entity as between the general contractor and subcontractor (which is, generally, difficult to prove absent fraud).

At the outset of beginning a construction project, contracting parties can contemplate and capture non-signatories to the main construction contract through incorporating by reference the respective party’s signed subcontract agreements or even reference to the subcontractors themselves. Generally, contracting parties seeking to arbitrate their disputes must establish both a valid agreement to arbitrate and that their claims fall within that agreement’s scope. See Jody James Farms, JV v. Altman Grp., Inc., 547 S.W.3d 624, 629 (Tex. 2018) (citing In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739 (Tex. 2005)). If the goal is to keep construction disputes wholly confined in the arbitration forum, the arbitration clause must be given special focus.  That is, the owner/developer and its general contractor, and all subcontractors and second-tier or below subcontractors, should be expressly contemplated by and accounted for in the arbitration clause.  The parties to the prime construction contract should endeavor to reference all of their respective signed subcontract agreements, to the extent they exist, as well as develop the arbitration clause to capture all disputes arising from the construction project and include joinder or consolidation with the arbitration proceeding of any other person or entity that is necessary to resolve the claim, controversy, or dispute, or that is substantially involved in or affected by the same. In doing so, the contracting parties can better avoid bringing piecemeal, fact-intensive litigation against subcontractors.

It is often penny-wise and pound-foolish not to consult with an experienced attorney when drafting a construction contract on any project of significance.  A well-drafted arbitration provision can later save significant time and expense in an effort to avoid costly multi-party (and potentially multi-forum) litigation.  The KRCL Construction Team has significant experience guiding clients through the contract formation process.  The cost of preparing an enforceable arbitration provision costs pennies on the dollar as compared to potential extensive discovery and prolonged litigation in state or federal court.

Prospective Additional Insureds may be Obligated to Arbitrate Coverage Disputes

Danielle S. Ward | Balestreri Potocki & Holmes

The Court of Appeal closed out 2019 by ruling that an additional insured can be bound to the arbitration clause in a policy when a coverage dispute arises between that additional insured and the carrier. (Philadelphia Indemnity Ins. Co. v. SMG Holdings, Inc. (2019) 44 Cal. App. 5th 834, 837.)

In 2009, Future Farmers of America (“Future Farmers”) entered into a license agreement with SMG Holdings Incorporated (“SMG”) to use the Fresno Convention Center. As part of the agreement, Future Farmers was required to secure comprehensive general liability (“CGL”) coverage and name SMG and the City of Fresno as additional insureds (“AI”) on its policies.

Future Farmers purchased a general liability policy from Plaintiff Philadelphia Indemnity Insurance Company (“Philadelphia”). Neither SMG nor the City of Fresno were added as AIs, but the policy contained a “deluxe endorsement” which extended coverage to lessors of premises for “liability arising out of the ownership, maintenance or use of that part of the premises leased or rented” to the named insured. The policy also contained an endorsement that extended coverage where required by a written contract for liability due to the negligence of the named insured. Philadelphia’s policy also stated that if the insurance company and insured “do not agree whether coverage is provided . . . for a claim made against the insured, then either party may make a written demand for arbitration.”

A patron to Future Farmer’s event at the Fresno Convention Center was seriously injured after he tripped over a pothole in the parking lot and hit his head. He sued both Fresno and SMG. In turn, Fresno and SMG tendered their defense to Philadelphia. Philadelphia denied coverage finding that the incident did not arise out of Future Farmer’s negligence, and that SMG had the sole responsibility for maintaining the parking lot.  Consequently, Philadelphia concluded that neither Fresno nor SMG qualified “as an additional insured under the policy” for the injury in the parking lot.

The coverage dispute continued, and in 2016, Philadelphia issued a demand for arbitration which was rejected by SMG. Philadelphia then petitioned the state court to compel arbitration arguing that SMG could not avoid the burdens of the policy while seeking to obtain policy benefits. SMG used Philadelphia’s conclusion that it did not qualify as an AI under the policy to argue that Philadelphia was “estopped from demanding arbitration”. In other words, SMG argued that it could not be held to the burdens of the policy without being provided with the benefits of the policy.

The trial court sided with SMG finding that there was no arbitration agreement between the parties. The court noted that while third party beneficiaries can be compelled to arbitration there was no evidence that applied here, and Philadelphia could not maintain its inconsistent positions on the policy as its respects SMG.

Disagreeing with the trial court, the Court of Appeal concluded that SMG was a third-party beneficiary of the policy. The AI obligations in the license agreement and the deluxe endorsement in the Philadelphia policy collectively establish an intended beneficiary status. The Court saw SMG’s tender to Philadelphia as an acknowledgement of that status.

Relatedly, the Court found that SMG’s tender to Philadelphia – its demand for policy benefits – equitably estopped them from avoiding the burdens of the policy. The Court stated it defied logic to require a named insured to arbitrate coverage disputes but free an unnamed insured demanding policy coverage from the same requirement.  Conversely, the Court found no inconsistency in Philadelphia’s denial of coverage to SMG and its subsequent demand for arbitration. Philadelphia did not outright reject SMG’s status as a potential insured, but rather concluded that there was no coverage because the injury occurred in the parking lot. In other words, the coverage determination turned on the circumstances of the injury not SMG’s status under the policy.

In short, the Court concluded that the potential insured takes the good with the bad. If one seeks to claim coverage as an additional insured, they can be subject to the restrictions of the policy including arbitration clauses even if they did not purchase the policy.

Securing additional insurance has become increasingly more difficult and limited over the years, and this holding presents yet another hurdle to attaining AI coverage. For those seeking coverage, it is important to note that the Court’s ruling may have turned out differently had the carrier outright denied SMG’s AI status, rather than concluding that the injury was not covered.

Your insurance scenario may vary from the case discussed above. Please contact legal counsel before making any decisions. BPH’s attorneys can be reached via email to answer your questions.

Is Arbitration on the Briefs Right for your Client?

Megan K. George | Forum on Construction Law

As clients increasingly demand options for timely, efficient dispute resolution, attorneys need to stay apprised of all available alternatives. Private arbitration was developed with efficiency in mind and has become wildly popular in the construction industry, providing parties a means to avoid delays caused by backlog in state and federal court dockets as well as evidentiary and procedural formalities. The American Arbitration Association’s Fast Track Procedures within the Construction Rules further trim the usual arbitration procedures, pushing parties through a streamlined pleading and discovery process. However, even the AAA Fast Track Procedures require significant time and resources, primarily those invested in conducting a hearing before an arbitrator.

Submitting a case for decision on briefs alone, without presenting in-person evidence or argument to the adjudicating body, is common in appellate litigation. It is also frequently used in trial court-level litigation, sometimes without the parties’ consent. Parties agreeing to arbitration on briefs alone, however, is exceedingly rare. Yet, when employed in the appropriate situation, agreeing to submit a dispute to an arbitrator on briefs alone can be a useful tool for quick and efficient dispute resolution and a highly satisfied client. On major construction projects, the commitment to arbitrate certain matters is often made before a dispute arises. So, when is arbitration on the briefs the right choice for your client’s project? And, what can you do to ensure a successful resolution? Let’s explore.

Arbitration on the briefs has two primary benefits. First, it can be highly cost-effective. Eliminating the costs associated with witness and hearing preparation and presentation can significantly reduce the overall price tag of arbitration. Second, arbitration on the briefs provides for speedy dispute resolution without sacrificing equity or expertise. Again, jettisoning a hearing can expedite a final resolution on the merits by weeks, if not months; certain disputes may even be submitted for a decision on the briefs without a traditional discovery process, which all practitioners know can be extremely time-consuming. Furthermore, the arbitration agreement allows the parties to dictate the timeline for decision, eliminating uncertainty and facilitating easy mid-project or mid-term dispute resolution.

Foregoing a hearing is not without its downsides. Without a hearing, an arbitrator may miss or misunderstand certain complex factual issues, and the parties have limited opportunity for clarification. Thus, astute construction attorneys will recognize that arbitration on the briefs is not one-size fits all. Predicting the nature of disputes likely to arise on your project and the evidence necessary to resolving those disputes is critical in 1) deciding whether arbitration on the briefs is appropriate for your client’s project and 2) drafting the terms of such an arrangement. When considering an agreement to arbitration on the briefs, keep in mind the following tips for success.

Identifying the Issues Subject to Arbitration. Not all disputes lend themselves to resolution on written arguments alone. For the same reasons decisions without a hearing are regularly issued in an appellate court setting, an arbitrator’s decision on the briefs is most successful when the dispute is straightforward and turns on a few narrow questions if not a single, objective issue. Lay witness and/or subjective evidence-heavy fact patterns and other, more complex disputes may be difficult for an arbitrator to grasp on paper alone and key details may be lost without an opportunity for the arbitrator to ask questions. Conveying witness credibility and evidentiary context may also be difficult. Accordingly, disputes involving competing expert testimony are not well-suited to resolution by this method. By contrast, a foreseeable, single-issue quarrel that requires either interpretation or application of a contract clause to a limited factual scenario is easily decided with limited party input. For example, in an agreement based primarily on unit prices, disputes over adjustments to unit prices may be well-suited to arbitration on the briefs. Adjustments to unit pricing are often necessitated by either 1) market fluctuations or 2) significant changes to the quantity of units subject to the agreement. Hence, few subjective factual issues will compound a dispute over the equity of an adjustment to an agreed unit price. Design ambiguity controversies and cost-only change order disputes may also lend themselves to resolution through arbitration on the briefs, particularly when employed mid-project to mitigate damages resulting from postponing a final resolution.

Careful Clause Drafting. Once you have identified the types of disputes amenable to arbitration on the briefs, your arbitration clause should carefully identify and describe those disputes to be subjected to arbitration. In addition, the language should plainly outline the particularities of the arbitration process itself. Each condition applied to the process should promote swift and cost-effective adjudication. Contemplate the following terms when developing an agreement to arbitrate without a hearing:

Arbitrator Selection. Before agreeing to arbitration on the briefs, consider the qualifications an arbitrator needs to provide a speedy and fair resolution. Ideally, an arbitrator should be able to jump into a dispute with minimal education on the intricacies of the particular dispute. In pricing disputes, an arbitrator with an accounting or financial background might be valuable. Alternatively, in a design ambiguity scenario, an arbitrator with architectural or design expertise will require less explanation to understand the parties’ respective positions and reach an equitable decision. To avoid wasting the expediency provided by arbitration on the briefs, the parties should also delineate explicit terms as to how a candidate pool will be developed and how the arbitrator will be selected in the event the parties cannot agree.

Specific Timeframes. As discussed above, a timely resolution of your dispute is a principal benefit of arbitration on briefs alone. Thus, the parties should settle on hard and fast deadlines for brief submission and the arbitrator’s decision. If needed, a limited timeframe for seeking clarification or enforcement of the arbitrator’s decision should also be employed.

Evidentiary Limitations. Your arbitration agreement should place strict limitations on the type and volume of evidence each party is permitted to submit in conjunction with its brief. Disputes that may be decided on objective, empirical, and/or documented evidence will find the most success in arbitration without a hearing. This is not to say that no fact witness testimony should be admitted; a successful arbitration on the briefs provision will permit submission of an affidavit or similar sworn statement to verify documentary evidence and provide necessary project details to put the dispute in context. Still, the primary source of evidence submitted to the arbitrator should be documentary, not testimonial. Taking it a step further, restricting evidence included in the briefs to evidence exchanged prior to submitting the case to arbitration may facilitate the arbitrator’s decision making process, and may even promote interparty resolution without arbitration. Similarly, you might also consider a page limitation on the briefs; a limited writing will force each party to concisely state its position, and it will assist the arbitrator in identifying the key issues she must consider in making her decision.

Decision Implementation and Cost Allocation. Finally, consider how an arbitrator’s decision should be effectuated. Should the decision or award be applied retroactively? If so, at what point should its application begin? Take our example of a unit price disagreement. Should the arbitrator’s decision apply only to future units? Or, if the pricing decision applies retroactively, should it apply to all units from the time the adjustment was requested forward? Or from the time the dispute was submitted to arbitration? The answers to these questions depend on the projected disputes and your client’s anticipated position. Another important term to consider in an arbitration on the briefs agreement is an attorney fee-shifting provision. In keeping with the cost-efficiency goal of opting for arbitration on the briefs, an agreement that the prevailing party will recover its attorney’s fees will aid in ensuring only truly unresolvable disputes reach the arbitration phase and dis-incentivize over-lawyering.

Arbitration on the briefs is an interesting dispute resolution procedure to consider for your clients’ future projects and disputes. While it may not benefit all clients or all projects, under the right circumstances, proposing this procedure can yield dividends for your client and allow you to appear strategically savvy and cost-minded.