What's Up At Division 1 (No. 10)

Happy Law Day! Did you know that tomorrow, May 1st, is Law Day?  Do you know that Law Day was created by the American Bar Association? Well . . . it was.  Here is a brief history about Law Day:

In 1957, the ABA President envisioned a day to celebrate our legal system.  The next year, President Eisenhower established Law Day as a day of national dedication to the principles of government under law.  In 1961, Congress joined in the recognition of Law Day as May 1st.  The trend has spread throughout many countries since.  So, to my fellow D1 Friends, congratulations on being part of the legal system of the United States. I hope you find something rewarding and fun to do this weekend to celebrate!  

Speaking of fun, we had some fun in Division 1 in April 2021.  

Our toolbox talk series this month was led by Jen Millender and Bill Franczek.  They talked about virtual testimony particularly from the arbitrator's perspective.  Bill expressed that he finds virtual testimony to be productive.  He can see the facial expressions effectively -- sometimes better than if he were in a large conference rooms.  There was a discussion about using the record feature during virtual arbitrations and best practices to work with those and/or have them transcribed.  We discussed the AAA Rules as it relates to virtual testimony and inquired whether a task force about specific rules should be employed.  The 30-minute discussion (and, it was a true discussion amongst many attendees) flew by given our dynamic speakers and members.  Thanks Jen and Bill for putting together a great TTS.  

Earlier this year, in either late January or early February, I spoke with Nicky Steen about Division 1 and some ideas she had about programing.  We discussed a variety of programs, but she said she was particularly interested in doing a Privilege Walk program.  My first impression was that she wanted to do a survey of various evidentiary privileges, attorney-client, work product, common interest, etc., but then she clarified it wasn't that kind of privilege.  She expressed that a Privilege Walk is normally done in person whereby the attendees stand in a line at a common starting point.  Thereafter, the moderator reads a series of statements concerning "privileges" (racial, gender, socio-economic) and asks the attendees to take a step forward or a step backwards.  After the statements are read, the attendees can see where they are in reference to each other in terms of privilege.  Nicky did a virtual privilege walk for her firm earlier this year and suggested D1 would benefit from it.  It seemed like a perfect thing for us to do so we partnered up with the Forum's Diversity + Inclusion Committee, Division 13, and the National Association of Women in Construction (NAWIC) as co-sponsors to conduct the program on April 29th.  Nicky and I were blessed with a fabulous planning team consisting of Jessica Sabbath, Lexie Pereira, MJ Torres-Martin, and Peter Hahn.  Our awesome ABA team members put together an amazing flyer and promoted the event in the Forum's emails and social media accounts.  

Yesterday, we held the privilege walk event.  We had 57+ people attend (with a lot of NAWIC members!).  We went through just under 50 statements and took a poll of where we ended up.  We then engaged in a 25-30 minute breakout-room discussions led by a great team of Forum volunteers.  The event was a true eye-opener for many attendees.  I was moved the experience and, more importantly, the constructive discussion we had afterwards.  Huge thanks to Nicky and our D1 team for putting this together!  I look forward to continuing the discussion in Division 1 and hope to continue our partnership with NAWIC (their members were great!).  

This blog also published two excellent articles on arbitration in April.  One was about international arbitration and the other was about the new AAA guidelines regarding discovery in the arbitration.  If you haven't read them, check them out at http://abaconstructionforumdivision1.blogspot.com/.

Looking forward into May, please consider attending our monthly business meeting on May 10th and our Toolbox Talk Series on May 27th on discovery for delay claims.  If you want the login information for the monthly meeting, contact me or visit our ABA Connect page.  

REGISTER FOR MAY TTS

I hope to see you at one of those meetings.  If you want to learn more about D1 or get involved, contact me and we can schedule a call. 

Tom Dunn, Chair Division 1 (Litigation & Dispute Resolution), rtdunn@PierceAtwood.com

AAA Releases Discovery Best Practices for Construction Arbitration

 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.

Author Patrick McKnight is an associate in the Litigation Department at Klehr Harrison Harvey Branzburg LLP in Philadelphia, Pennsylvania. Patrick also serves on the Klehr Harrison Coronavirus Task Force. He can be reached at pmcknight@klehr.com.

Next Toolbox Talk Series -- April 22nd at Noon -- Virtual Testimony: Lessons Learned from the Arbitrator's Perspective

 REGISTER

Now that we have been living with virtual testimony on a more regular basis for one year, there are truly well-developed lessons learned from all perspectives.  On April 22nd, we will hear what works and what doesn't work for virtual testimony from the arbitrator's perspective.  

We will be led by two fabulous discussion leaders.  Bill Franczek is a Forum leader, advocate, and active AAA arbitrator.  He previously served on Division 1's steering committee and was the first Chair of Division 13 (Government Construction).  

Hon. Gill Freeman (retired) is one of Division 1's newest team members.  She had the opportunity to handle complex commercial and construction cases while on the bench and is now doing the same with JAMS.  Welcome Judge Freeman to the Forum and D1!  We look forward to learning from you.  

If you have a good idea for an upcoming TTS or have other suggestions for Division 1, please reach out to me (Tom Dunn, D1 Chair, rtdunn@PierceAtwood.com).  

Privilege Walk -- April 29 at 3PM ET

Join us on April 29th for the Division 1 Privilege Walk.  We are partnering up on this program with Division 13, the Forum's Diversity + Inclusion Committee and the National Association of Women in Connection.  

REGISTER

 

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

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.

Author Hailey Barnett is a senior associate in the Construction Practice Group at Troutman Pepper in Atlanta. She concentrates her practice in construction transactions and construction related disputes before U.S. courts and arbitral tribunals. She can be reached at Hailey.Barnett@troutman.com.

Author Zach Torres-Fowler is a senior associate in the Construction Practice Group at Troutman Pepper in Philadelphia and New York. He concentrates his practice in construction related disputes and specializes in complex international and domestic arbitration proceedings. He can be reached at Zach.Torres-Fowler@Troutman.com.