The Supreme Court of the United States To Review California’s Contract Severance Rule as Applied to Agreements to Arbitrate.

On its docket this term, the Supreme Court of the United States will consider MHN Government Services, Inc. v. Zaborowski, case no. 14-1458, and whether the Federal Arbitration Act (“FAA”) preempts the application of a California statute.  California's law affords courts discretion when faced with agreements containing unconscionable provisions -- strike entirely or sever and save.  At issue is whether, in practice, the application of this law to arbitration agreements has resulted in more striking than saving.  If history is a guide to the possible outcome, consider that in 2011 in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) , the Court’s 5-4 majority struck down another California rule, concerning class-action prohibitions in arbitration agreements, because it “interfere[d] with fundamental attributes of arbitration” in violation of the tenets of the FAA.

Underlying the Zaborowski dispute are military consultants who were classified as independent contractors rather than employees.  As a result of this classification, the consultants did not receive overtime compensation and asserted various claims against their defendant employer.   In turn, the defendant employer, relying the parties’ services contract, moved to compel mandatory arbitration.  To oppose arbitration, the plaintiff consultants argued that many terms in the arbitration agreement were unconscionable and therefore the whole arbitration agreement was unenforceable.

The district court agreed with the plaintiffs and held, inter alia, that certain terms—including the limitations period of only 6 months, a punitive damages waiver, and an arbitrator-selection procedure that permitted the defendant employer to limit the universe of possible arbitrators to three from which the plaintiffs could select one— were “overly harsh,” “generated one-sided results,” and therefore were unconscionable.  Zaborowski v. MHN Gov't Servs., Inc., 936 F. Supp. 2d 1145, 1153, 1156 (N.D. Cal. 2013).  The district court then went a step further.  It acknowledged that Cal. Civ.Code § 1670.5(a) gives courts the authority either save contracts by striking the unconscionable portions or refuse to enforce contracts altogether.  Here, the district court held that the agreement was both procedurally and substantively unconscionable and was so permeated with these one-sided terms that it declined to save the agreement by severing them.  Id. at 1157.  The court denied the motion to compel arbitration.

As an aside, consider that at issue in this matter was whether there was unconscionability in the arbitration agreement, not whether the plaintiffs were unconscionably induced into making the arbitration agreement.  Where the AAA Rules are incorporated into the agreement, as here in Zaborowski, the arbitrator has specific authority to decide “objections with respect to the existence, scope, or validity of the arbitration agreement.” AAA Commercial Rules at R-7.  Consider whether the district court could have declined to address the plaintiffs’ unconscionability arguments and left them for the arbitrator to decide.  See, e.g., Brennan v. Opus Bank, 796 F.3d 1125, 1127 (9th Cir. 2015) (holding that the determination whether the arbitration clause is substantively or procedurally unconscionable belongs to the arbitrator especially where the AAA Rules are incorporated to the agreement).

The defendant employer appealed to the 9^th Circuit, where the decision was affirmed.  Zaborowski v. MHN Gov't Servs., Inc., 601 F. App'x 461 (9th Cir. 2014).  The appellate court noted that although “Federal Arbitration Act expresses a strong preference for the enforcement of arbitration agreements,” there was no federal preemption concern because the FAA does not “license a party with superior bargaining power to stack the deck.”  Id. at 464.  It therefore concluded that the district court did not err when it applied California law and declined to sever unconscionable provisions.  Id.   There was a dissent that sided with preemption.  The dissenting judge explained that the application of the California law, as here, rejecting arbitration agreements will cause a “disproportionate impact on arbitration agreements” that is in fact preempted by the FAA.  Id. at 465 (citing AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (which held that the Federal Arbitration Act preempts California’s rule regarding the unconscionability of class arbitration waivers in consumer contracts)).

On October 1, 2015, the Supreme Court of the United States agreed to hear this preemption argument on certiorari.   The petitioner employer staged the question before the Court as an unequal application of law.   It recognized that the California law purports to be neutral and applicable to all contracts.  But in practice the law has a “disproportionate impact on arbitration agreements” especially here where the subject arbitration agreement contained its own provision for excising invalid terms, which was not given effect.  The petitioner asserted that the “California courts show a clear preference against enforcing an agreement to arbitrate” and have used this California law as their vehicle for this agenda.  The petitioner then presented a history of the disparate treatment citing various general contract vs. arbitration contract cases.  It observed that the California Supreme Court’s precedent that “multiple unconscionable provisions will render an arbitration agreement’s purpose unlawful” necessarily treats arbitration contracts differently than other contracts under the California law.  Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d 669, 697 (Cal. 2000).  The Petitioner concluded that because the “FAA preempts state-law defenses that single out or otherwise burden arbitration agreements more than any other contract,” this California law must be preempted by the FAA.

For their part, the Respondents focused on the facially neutral language of the California law as applicable to all contracts.  They also observed that the law directed courts, as the district court did here, to exercise discretion whether to sever the terms or reject the contract altogether.   The respondents emphasized the instant arbitration agreement contained five unconscionable provisions, not just one or two, that went to material, as opposed to collateral, issues of arbitration relationship.  They noted also that numerous other courts have refused to enforce this very same agreement.

------------------

The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island.  She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Attend D1's Lunch Program at the Fall Meeting: Technology Is Making Things Better, Right? A Litigator's Guide to Thriving in the Digital Age

To submit questions/topics in advance of the lunch presentation, please contact the Moderator or Panelists at the email addresses listed above.  See you on October 8 at the #ADRSummit.  #ABAConstruct #FCLAustin

Cross-Post From Division 12: Massachusetts Decision Limits Spearin Doctrine in CM-at-Risk Contracts on Public Projects

Below is the link to a post from our colleagues over at Division 12 regarding the September 2, 2015, decision of the Massachusetts Supreme Court in Coghlin Electrical Contractors, Inc. v. Gilbane Building Company, et al., SJC Docket No. SJC-11778.

http://abaconstructionforumdivision12.blogspot.com/2015/09/massachusetts-decision-limits-spearin.html

* * *

 

On September 2, 2015, the Massachusetts Supreme Judicial Court issued a long-awaited opinion in Coghlin Electrical Contractors, Inc. v. Gilbane Building Company et al., SJC Docket No. SJC-11778.  Among other issues decided in the case, the Court held that the scope of a public-awarding authority's implied warranty of adequacy and sufficiency of the plans and specifications is more limited in the context of a construction-management-at-risk contract than a traditional design-bid-build contract.  

 

This case represents the first time that the highest court in Massachusetts has looked at the Spearin Doctrine in the context of the CM-at-Risk delivery method under the state's relatively new CM-at-Risk statute (M.G.L. c. 149A, Sections 1-13).  Under this law, public awarding authorities are permitted to retain construction managers early during the project's design phase in order to involve them in project planning and design development.  

 

In Coughlin, the Court recognized the relationship between the awarding authority and a construction manager at risk is different from the traditional relationship in the design-bid-build context, insomuch as a construction manager may be engaged to participate extensively in the design phase and, therefore, has an opportunity to influence the final plans and specifications. However, despite several noted differences between CM-at-Risk and design-bid-build delivery, the Court was not persuaded that the implied warranty should not apply. In construing the relevant statutory language, the Court determined that "the legislative intent in providing the construction management at risk alternative [to design-bid-build] was to permit the [construction manager at risk] a greater consultative role regarding the project's design, not to eliminate the owner's responsibility for design defects."  The Court concluded that the proper scope of the implied warranty in the CM-at-Risk context should be limited to instances where the construction manager acts in good faith and acts reasonably in light of its design responsibilities.  Therefore, on projects where the construction manager's design responsibilities are greater, the construction manager will have a higher burden to show that its reliance on the defective design was reasonable.

 

Links to more information regarding this case, including the text of the opinion, all appellate and amicus briefs, as well as video of the oral argument, are below.

 

Full Text Opinion

 

Oral Argument Webcast

 

Link to Docket and Appellate Briefs



A Texas Hill Country Barbecue!

Do you like Barbecue?

Have you ever eaten Texas Barbecue?

If you like barbecue and you are coming to the ABA Forum on Construction Law's ADR Summit in Austin, Texas, then you need to come early enough to join Divisions 1 and 13 for some of the best barbecue Texas has to offer -- the world-renowned THE SALT LICK.  Details are below.

This is expected to sell out quickly, so get in touch with Lisa Sumner Heard now to reserve your seat and find out where to send your money.

Appeal of Arbitration -- answers to many "what if" scenarios will be provided

As part of the first day in at the Forum's #ADRSummit in Austin, John Bulman and Ben Wheatley are offering a practical (and hopefully interactive) workshop on the intersection between arbitration and appeals.  Both Ben and John are experienced construction attorneys and American Arbitration Association (AAA) arbitrators.  John was also a Board Member of the AAA for twelve years, is currently a member of the Board of Governors of the American College of Construction Lawyers (ACCL), and a fellow of the College of Commercial Arbitrators (CCA) -- all co-sponsors of the #ADRSummit.

During their hour discussion, Ben and John will consider many of the burning “what if” questions that can arise in the context of appellate arbitration and appealing an arbitrator’s decision to a court.  Some of the highlights include “what if the institutional provider appoints an arbitrator that lacks necessary industry experience in the subject of the claims?” and “what if a court stays your litigation pending arbitration but applies the blue pencil approach to rewrite your arbitration agreement?”  John and Ben also will touch upon the “hidden appeal,” the availability of discovery in a vacatur action, and whether manifest disregard is still viable or past its prime.  

If you haven't registered for the Fall Meeting yet, #FCLAustin, do so before August 31st to take advantage of the early bird pricing. Register here: http://bit.ly/1TodsIK.  

The Construction ADR Summit, Plenary 6: In Defense of Lying

Is it ethical to lie in a mediation?  Or, more to the point, how far should deceit or puffery really go?

Maybe the question should be how much truth must a party tell during a mediation.  In fairness, most attorneys expect gamesmanship when they go to a mediation. 

But, does the mediator have any ethical rules to follow?

Imagine the following scenario: you are a mediator trying to get a case settled. The case involves a lien that was filed in your state. After a brief review of the parties' mediation statements and document submissions, it becomes pretty clear to you that the party filing the lien has a fairly clear defect in its lien filing that makes it invalid.  

When you get to the mediation, the parties make their initial presentations.  You start in caucus with the owner to gauge the owner's interest in putting money on the table despite what seems to be the obviously invalid lien.

To your surprise, however, the project owner and its counsel apparently do not realize the problem with the lien's validity.  In your first caucus session, the owner's representative says to you in confidence, "I think we have some problems here, and we need to settle this today."

As the mediator, do you say anything to the Owner about what appears to be the invalidity of the lien?  Do you have any responsibility to say anything?

Former Division 1 chair Buzz Tarlow of Tarlow & Stonecipher, PLLC, in Bozeman, Montana, and Charles M. Sink of Farella, Braun + Martel LLP in San Francisco, California, will be discussing this issue, among others, in the final session of the Construction ADR Summit in Austin, Texas.  

Buzz was kind enough to take a few minutes to talk to me about this presentation. He pointed out to me that, to date, neither he nor Mr. Sink have found a single reported case anywhere in the United States in which a mediator was found to have committed an ethical violation based on their conduct during the mediation. 

Indeed, is there even a body of law or rules spelling out the ethics a mediator must follow? Do we as lawyers and advocates even want rules for mediators?

These topics -- and a discussion of the theory called consensual deception -- will feature prominently in the final Plenary session in Austin, as will the ability to obtain ethics CLE credit.

Forum ADR Summit, Plenary V: The View from the Tower: New Perspectives on ADR

In my post a few weeks ago, I urged young construction lawyers to attend the upcoming Forum Construction Law ADR Summit on October 8-9, 2015, in Austin, Texas because young lawyers have unique ideas, experiences, and perspectives regarding practicality, reasonableness, and cost-effectiveness that will undoubtedly shape ADR’s future.

Plenary V at the Summit will provide additional insight from the best and brightest in academia.  Tom Stipanowich, Acadamic Director of Pepperdine University School of Law’s Straus Institute for Dispute Resolution, will present compelling new data on ADR trends: What does the industry expect from ADR?  Has ADR delivered on its promise?  How will the recent past shape the future? 

Next, Stan Sklar, Executive Director of DePaul University College of Law’s Center for Dispute Resolution, will discuss the unique nature of arbitration, how lawyers have hijacked the process and eroded its effectiveness, and how to debunk arbitration myths to get it back.

Finally, Dean Thompson will present up-to-date nationwide survey data from arbitrators on their general preferences and the application of the most commonly used arbitration rules.

We look forward to seeing you at the Summit.  To learn more, please click the link for the Forum’s Construction Law ADR Summit Brochure.

Discounted Early Bird Pricing for the Forum's Fall Meeting #ADRSummit (10/8-9) Ends August 31, 2015

Register today: http://bit.ly/1TodsIK

Brochure:http://www.americanbar.org/content/dam/aba/administrative/construction_industry/Fall%202015/cifall-brochure-fall_Online.authcheckdam.pdf

Join the best construction lawyers in the land at the Forum's Fall Meeting for the Construction ADR Summit in Austin, Texas on October 8 - 9, 2015. 

This program will convene renowned practitioners, top service providers, leading academics, and major stakeholders in Construction ADR for an in-depth look at the past, present and future of ADR in the construction industry. 

The program also features: 

• Accommodations at the Hilton Austin in downtown Austin, Texas; 

• Convenient access to Austin's famed Sixth Street music scene, the University of Texas, the LBJ Presidential Library, and other highlights of the capital of Texas; and 

• Opportunity to attend the Austin City Limits Music Festival, one of the largest music festivals in the country, occurring on the weekends before and after the meeting. 

While the program will offer much for the construction advocate, it will also appeal to both transactional lawyers and current or aspiring neutrals. 

This program is co-sponsored by over a dozen ADR industry participants. Stay in touch with announcements and updates with the Forum's application and on social media (@ABAConstruction, #FCLAustin).

The Masked Attorney Unveiled: Full Disclosure Required for Ghostwriting Pleadings in Rhode Island

The Scenario: A sole proprietorship carpenter who has a successful luxury home renovation business calls you and asks for help perfecting a mechanic's lien in her state.  You say absolutely and send off your standard form of engagement letter with a list of documents/information you need to prepare the lien paperwork. 

The carpenter calls back saying that he just needs the lien paperwork filled out and he will handle all the filings including filing the action in Court. 

He says "I don't want you to appear for me, I don't need an attorney to talk for me, I don't need a mask.  I do want the mechanic's lien paperwork done per the statute, which frankly I don't understand." 

Can you do what the client is asking under the applicable civil rules of procedure and rules of professional responsibility? 

The issue of attorney ghostwriting for pro se litigants was recently decided by the Rhode Island Supreme Court in FIA Card Services, N.A. v. Pichette, Nos. 2012-272-Appeal, 2013-156-Appeal, 2013-157-Appeal (R.I. June 8, 2015).  The Court consolidated three cases where three different attorneys had been sanctioned by the trial court for ghostwriting pro se litigants' pleadings.  There were two issues considered by the Supreme Court:

1. "[W]hether an attorney who engages in ghostwriting -- providing drafting assistance to a pro se litigant without disclosing his or her identity to the court either by signing the pleading or entering his or her appearance -- violates Rule 11." FIA Card Services, at *12.
2. "[W]hether 'ghostwriting' is permitted under Article V, Rule 1.2(c) of the Supreme Court Rules of Professional Conduct [which expressly permits limited scope representation]."

Rule 11 Is Not Violated By Ghostwriting

Following a line of federal court cases that condemn ghostwriting as a violation of Rule 11, the Trial Court issued sanctions against two of the attorney appellants because such conduct violated the purpose of the rule.  Construing the language of Rhode Island Superior Court Rule of Procedure, Rule 11 (based off of the 1983 version of Fed. R. Civ. P. R. 11), one of the hearing justices wrote:

While this language might be read to suggest that a non-signing attorney cannot be sanctioned under Rule 11, the [c]ourt finds that this reading runs contrary to the clear intent of Rule 11, which is to enforce an attorney's ethical obligations of candor and honesty in interactions with the tribunal.

FIA Card Services, at *14.  While the Supreme Court agreed with the policy findings of the trial justice, it disagreed with the "expansive interpretation of Rule 11 in the ghostwriting context." FIA Card Services, at *14.  The Court explained:

[T]he linchpin of Rule 11 is its signature requirement. This signature provides the vehicle through which courts may reach attorneys or litigants to impose sanctions, if necessary, for misconduct in the submission of signed papers during the litigation process.

FIA Card Services, at *14.  Thus, because each of the appellant attorneys did not sign the pleadings presented by the pro se litigants, the Supreme Court vacated the Rule 11 sanctions issued against the three attorneys. 

Undisclosed Ghostwriting Is Prohibited In RI (but check your state)

Limited attorney client engagements are permitted in Rhode Island by Rule of Professional Conduct Rule 1.2(c).  Mirrored after the ABA's Model Rules of Professional Conduct, Rule 1.2(c) "allows that '[a] lawyer may limit the scope of the representation if the limitation is reasonable under the circumstances and the client gives informed consent.'" FIA Card Services, at *19. 

The Court engaged in a thoughtful analysis of whether an attorney providing ghostwriting services is dishonest (MRCP R. 8.2) and/or violates the duty of candor to the tribunal/opposing party.  It cited repeatedly the ABA's Formal Opinion 07-446, Undisclosed Legal Assistance to Pro Se Litigants (May 5, 2007), which surveyed different jurisdictions and concluded "that there is no prohibition in the Model Rules of Professional Conduct against undisclosed assistance to pro se litigants, as long as the lawyer does not do so in a manner that violates rules that otherwise would apply to the lawyer's conduct." ABA Formal Opinion 07-446, p. 4.

The Court noted different paths taken by jurisdictions:

• California: Permits complete nondisclosure of attorney assistance. FIA Card Services, at *20, citing Cal. Rules of Court Title 3, chapter 3, Rules 3.35, 3.37.
• Massachusetts, New Hampshire, Connecticut: Requires a written disclosure in a pleading that legal assistance was provided in the preparation of the document, but permits anonymity. FIA Card Services, at *20, citing Mass. Sup. Jud. Ct., Order In Re: Limited Assistance Representation (2009). [Note that these are the bordering states of Rhode Island.]
• Colorado: Requires the attorney's name assisting with the drafting to be disclosed on the document. FIA Card Services, at *20, citing Colo. R. Prof. Cond. 1.2; Colo. R. Civ. P. 11(b).

Recognizing the need for "clear guidelines to assist practitioners navigating these murky waters[,]" the Court "declar[ed] the policy in [Rhode Island] courts to be as follows:

• An attorney may provide legal assistance to litigants appearing pro se before courts, provided the scope of the attorney's representation is reasonable and the litigant gives informed consent. See Rule 1.2(c). 
• Such consent shall be in writing and shall set forth the nature and extent of the attorney-client relationship.
• An attorney, however, shall not assist a pro se litigant with the preparation of pleadings, motions, or other written submissions unless the attorney signs the document and discloses thereon his or her identity and the nature and extent of the assistance that he or she is providing to the tribunal and to all parties to the litigation.
• The attorney shall also indicate on the written document, if applicable, that his or her signature does not constitute an entry of appearance."

FIA Card Services, at *21-23 (bold font and bullet points not in the original).  Departing from its neighboring states, the Rhode Island high court believed "full disclosure of the attorney's involvement, albeit limited, is the better practice" because a drafting attorney ". . . should be held to imparts the same standard of good faith as an attorney of record." FIA Card Services, at *23.

Conclusion

The answer to the initial questions raised in the scenario above, of course, is "it depends."  What if you are in a state that has not decided the issue?  While the Rhode Island Supreme Court heavily cited the ABA Formal Opinion, it chose not to follow it. 

As demand increases to grow for limited-scope or "un-bundled" representation, these issues should become more uniform across state-lines.  Until then, it is particularly important to consult the rules of each state in which you practice before agreeing to be the man or woman behind the mask. 

-----
The author, Tom Dunn, is one of The Dispute Resolver's Co-Editors. Tom practices construction law and complex business litigation in Rhode Island and Massachusetts.  He is a partner at Pierce Atwood, LLP. He also serves on the Steering Committee for Division 1 of the Forum on Construction Law, the Associate Editor of Under Construction, the Forum on Construction Law's newsletter, and is involved in the Forum's Publications and Membership Committees.   Tom can be contacted at 401-490-3418 or rtdunn@PierceAtwood.com.

YOUNG CONSTRUCTION LAWYERS: THE FORUM’S CONSTRUCTION LAW ADR SUMMIT NEEDS YOUR IDEAS AND PARTICIPATION

We have all seen the recent articles and the blogs reflecting that clients are yearning for more planned, thoughtful, holistic approaches to dispute resolution. As construction litigators, I like to think we are a bit ahead of the curve because we have always attempted to resolve disputes in the same planned and thoughtful ways our clients approach their projects - particularly, with the key objective to collaborate with our clients, opposing parties, and opposing counsel to resolve construction disputes in the most beneficial, efficient, and cost-effective manner. ADR offers several opportunities and tools toward that goal. The Forum’s Construction Law ADR Summit on October 7-9, 2015, in Austin, Texas, offers a unique opportunity for like-minded professionals from multiple disciplines to discuss their viewpoints and appreciate the viewpoints of others to advance the ball together to define and sculpt how ADR will serve construction attorneys and their various clients.

We often fail to recognize that, even before receiving mentoring from seasoned construction lawyers, “younger” construction attorneys and professionals (e.g., “millennials”) share our collective goal of efficient and reasonable dispute resolution, so we should encourage them to transfer their insights across the generational gaps that sometimes hinder collaborative progress.  On Wednesday, October 7, from 2 p.m. to 5 p.m., the Summit will include a Young Lawyers Construction Practicum regarding advocacy in mediation. If you work with young lawyers, please encourage them to attend. And if you are a young lawyer, we encourage you to attend not only the Practicum, but the entire Summit, to sharpen your own skills to better serve your clients but also to provide your unique ideas, experiences, and perspectives to help develop and identify the practical, reasonable, and cost-effective tools and ideas that will shape ADR in the future.

For more information about the Young Lawyers Construction Practicum and the program generally, here is the link to the Forum’s Construction Law ADR Summit Brochure.

Please Take This Survey About Email -- Results Presented During D1 Lunch in Austin, TX

http://svy.mk/1MFUpWk

Division 1's Lunch Program at the Fall Meeting in Austin, Texas (10/8/2015) will focus on technology and the practice of construction law.
One aspect of the program will be about law practice management -- specifically email. 

How do Division 1 members manage/process/preserve their emails? Do we have it under control?  Or, are we overwhelmed by email?  

From avoiding losses in productivity to preservation/safely securing client communications, we will have an open dialogue regarding strategies that that we will be able to employ when we get back home from the meeting to reduce the stress involved with email. 

Please take this 10-question survey - http://svy.mk/1MFUpWk.   

If I receive sufficient number of responses, we will share the results at our lunch meeting in Austin. 

Thanks for your assistance and looking forward to seeing everyone in Austin!

Tom Dunn
Division 1 Steering Committee Member

CLE Tip: The ABA's Free CLE Series

Why be a member of the ABA?  What value comes from it?  

Not all members of the Forum on Construction Law or Division 1 are able to be active members.  For these members, the above questions may arise from time to time, why be a member of the ABA? Sometimes these questions may be asked by your law firm management. 

One answer is the Free CLE series provided by ABA.  

I (Tom Dunn) regularly attend these free CLEs.  While they are often on topics outside of my litigation / construction law practice, I find them well done and I ultimately come away with some good information.  I tend to sign-up for them upon receipt of the announcement email.  If I can participate, great!  If not, there is no loss.  

One of these free CLEs is scheduled for this afternoon at 1PM.  It is on Driverless Cars in the Fast Lane: Legality, Safety, and Liability on the Road Ahead.  At the very least, I am sure I will come away from this webinar with some interesting networking talking points.  

Next month's Free CLE is Representing Clients in Mediation: A Master Class in Mediation Advocacy.  This topic fits squarely within Division 1's focus on advocacy.  

So . . . the next time you (or your firm) think you are not getting enough out of the ABA, consider attending these Free CLEs which could get you up to 18 CLE credits each year! 

ADR Tip: Voiding "Sham" Arbitration Agreements

ADR Tip -- If a client presents you with an arbitration clause that identifies rules or an administrator that are unknown or unfamiliar, the arbitration agreement could be void. 

Check out the article written by P. Jean Baker, Young Lawyers: Recognizing "Sham" Agreements to Arbitrate, for the ABA Section of Litigation's Alternative Dispute Resolution's E-Newsletter.  

Ms. Baker describes two cases that refused to enforce arbitration agreements contained within high interest loan transactions which specified that disputes "shall be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules." Inetianbor v. CashCall, Inc., 768 F.3d 1346 (11th Cir. 2014), cert. denied (S. Ct. Apr. 6, 2015); Jackson v. Payday Financial, LLC, 764 F.3d 765 (7th Cir. 2014). 

The arbitration agreements were not enforced because there were lack of arbitration rules and procedures in place to conduct a fair arbitration process.  

The link to the Article is http://apps.americanbar.org/litigation/committees/adr/articles/spring2015-0515-young-lawyers-recognizing-sham-agreements.html.

Under Construction Newsletter -- Call for Construction Law Articles

Last month, I was asked to serve as the Associate Editor of the Forum on Construction Law's newsletter, Under Construction.  I had the confidence to apply for the position because of the work I have done on The Dispute Resolver in collaboration with our co-editors.  I am excited to introduce some of the experiments of The Dispute Resolver to Under Construction.  I want feedback from Division 1 members and Forum members on what you all would like to see in Under Construction and how The Dispute Resolver (and other division publications) could collaborate with Under Construction.  

As always, fabulous and interesting content is essential to any publication.  I sent out the email below to a number of my friends from the Forum and construction law colleagues soliciting input and articles.  

If you want to be published or know an attorney (or summer associate) in your office that is interested in a publication opportunity, please share this invitation.  

Thanks for getting involved and contributing to Division 1 and the Forum on Construction Law!

Tom Dunn, rtdunn@PierceAtwood.com

Friends and Colleagues:

With my recent post as Associate Editor of Under Construction (ABA Forum on Construction Law’s newsletter), one of my jobs is to seek out interesting construction law articles along with Under Construction’s Editor, Jayne Czik. 

Consider submitting an article for consideration.  The cool thing is that Under Construction is going back to paper (while also keeping an online component) so it is a great opportunity to be published and speak directly to the Forum’s 6,000+ members.  We are also increasing our use of the Forum’s social media accounts (LinkedIn, Facebook, Twitter) to further distribute #ABAUnderConstruction articles.  The more Forum members engage in the Forum’s social media pages, the more we will be able to send out the Forum’s message so make sure to join the Forum’s LinkedIn groups, like the Forum’s page on Facebook, and follow the Forum on Twitter.

If you are interested in submitting an article or have an article ready to submit, please email Jayne and myself.  We are looking for articles around 1500 words (although we have not yet finalized the paper design) that provide a practical approach/guidance to issues impacting the practice of construction law.  Click here for the rules and procedures for submissions.

If you are not familiar with the newsletter, look at the most recent online edition: http://www.americanbar.org/publications/under_construction/2015/july2015.html. 

In addition to articles, we are looking for innovative / creative ideas that feature the best attributes of the Forum’s membership such as member features / construction project features / case recaps (war story case studies, lessons learned).  Something with interesting graphics or photos.  Let us know if you have any ideas for this type of submission.   

Please spread the word that Under Construction is accepting articles to your Divisions, Forum friends, and construction colleagues. 

Even if we are not able to use your submission for Under Construction, we will likely find a home for your article/topic with other Forum publications such as The Construction Lawyer, The Dispute Resolver (Division 1’s Blog), The Owner’s Authority (Division 12’s Blog), The Division 4 Triclinium, Division 7’s newsletter, Division 10’s newsletter, Forum’s social media pages, concepts book, etc. 

Thank you and we look forward to reading/editing/publishing your articles!

Tom Dunn

Associate Editor, Under Construction

How New AAA Construction Arbitration Rules and Mediation Procedures Are Enacted

As you may have heard, on July 1, 2015, the American Arbitration Association announced the release of updated Construction Arbitration Rules.  Briefly, those changes include:

•  an automatic referral to mediation for all cases with claims exceeding $100,000 (though each party has the ability to opt out of this process);
• time limits and additional filing requirements for consolidation and joinder to limit the use of these time-consuming processes to delay proceedings;
• increased arbitrator control over the exchange of information, particularly electronic documents;
• new preliminary hearing rules providing detailed guidance to all involved parties and arbitrators as to what issues should be considered at the preliminary hearing;
•  emergency relief rules for contracts entered on or after July 1, 2015, to appoint an emergency arbitrator within one day of filing the demand for emergency relief; and,
•  additional authority for arbitrators to respond to parties refusing to comply with the Rules and/or the arbitrator’s orders.

To read more about these rule changes, go to the Construction Industry Arbitration Rules and Mediation Procedures page on the AAA's website.

I had the opportunity to speak with John Bulman of Pierce Atwood LLP about these rule changes. John has been a construction lawyer for over twenty-five years and, in that time, has served frequently as a mediator and arbitrator through the AAA.  He is a past member of the AAA Board and has been involved in the AAA rulemaking process for over a decade.

For this most recent revision of the rules, John served as the American College of Construction Lawyers liaison to the National Construction Dispute Resolution Committee (NCDRC), an organization founded in 1966 by the AAA and other industry and trade organizations.  Currently, thirty different industry organizations including the Forum are represented in the NCDRC.  It is tasked with analyzing proposed rule changes to the AAA Construction Arbitration Rules in addition to creating and providing input on program content and faculty for proposed neutral training and in recruiting qualified neutrals.

The way that rules are changed involves a multi-year process.  The AAA is always gathering comments, feedback, objections, and insight about the rules.  On a periodic basis, the AAA will consider whether to revise its commercial arbitration rules or one of the industry specific rule sets. In addition, the NCDRC intermittently provides its own comments or proposals for possible rule changes.

With respect to this particular set of changes, the rule changes were adopted previously by the AAA for the Commercial Arbitration Rules.  From there, the NCDRC was tasked with determining whether to adopt  similar rules for the Construction Industry. In making this determination, the AAA Vice Presidents held eighteen different focus groups across the country to discuss the rule changes and seek input.  

After receiving input from these focus groups and incorporating comments accordingly, the NCDRC developed and vetted the rules in December of 2014.  From there, the Chair of the AAA’s Practice Committee reviewed and approved the changes. Once that approval was received, the AAA’s senior counsel and staff review the rules to ensure that they are acceptable and consistent with AAA policies and procedures.  After that, the rules were released to the public.

With regard to the current changes, John believes that the checklist for preliminary hearings set forth in Preliminary Hearing Procedures Rule P-2 are extremely important in keeping a particular arbitration proceeding on schedule. Reviewing this checklist, one can see what John means – the checklist is attempting to bring the parties to as early an agreement as possible regarding the key procedural issues in the case. 

It combines the most important parts of an early conference of counsel in federal court – such as dealing with ESI at the beginning of the case – and of a pretrial conference – discussing witnesses, exhibits, the forms of testimony to be provided, and the form of the award.  As John stated to me, failing to address these issues at the beginning of the case only leads to problems and delays down the road.

John also highlighted how important the consolidation provisions are. Too often, he has seen parties wait until late in the proceedings to try to join new parties to an arbitration or to consolidate one arbitration with another. That procedural decision causes a separate arbitrator to be appointed to determine whether consolidation is appropriate – a “Rule 7 arbitrator” – and waiting until late in the process to seek consolidation only serves to delay proceedings.  To address this issue, the Rules have been revised to provide a cutoff date by which the parties must seek consolidation and still get the benefit of having a Rule 7 arbitrator appointed to determine if consolidation is appropriate. Otherwise, if the request comes later in the process, the arbitrators called the “Merits Arbitrators” – the panel appointed to decide the case – will make the determination on consolidation. 

As John noted, the AAA continues to seek feedback regarding its rules and any improvements that you might have.  To that end, Michael A. Marra, who is a Vice President with AAA in Philadelphia, welcomes your telephone calls to discuss any rules issue you might have.  He can be reached at (215) 731-6136.

Supreme Court of Pennsylvania Holds Contractor and Subcontractor Payment Act Inapplicable to Public Works Projects

Thomas J. Madigan, Partner, Pepper Hamilton LLP
Kristopher Berr, Associate, Pepper Hamilton LLP

Clipper Pipe & Service, Inc. v. The Ohio Cas. Ins. Co., 2015 Pa. LEXIS 1275 (PA  June 15, 2015)

The Supreme Court of Pennsylvania held that the Contractor and Subcontractor Payment Act (“CASPA”), 73 P.S. §§501-516, “does not apply to a construction project where the owner is a governmental entity.”  This decision once and for all resolved the issue of whether CASPA applies to payment disputes between prime contractors and subcontractors on public works projects, either instead of or in addition to the prompt payment provisions of the Commonwealth Procurement Code, 62 Pa.C.S. §§ 3931-3939 (commonly referred to as “the Prompt Payment Act”).

The decision is in line with what most practitioners already understood: that the Pennsylvania General Assembly intended to establish two separate statutory payment schemes governing public and private projects, respectively.  As argued by the appellants in Clipper, it would seem untenable that both CASPA and the Prompt Payment Act would apply to payment disputes on public construction projects, given that there are substantial differences in the required notice, the rate of interest on delayed payments and the burden of proof associated with penalty and attorneys’ fee awards under those statutes.  Despite this seeming incongruence, subcontractors on public projects who hoped to access the more advantageous provisions of CASPA have, to this point, seized on its somewhat imprecise definition of “owner” to argue that CASPA could be read to apply to payment disputes between prime and subcontractors on public projects.  After Clipper, there is no longer any question that CASPA does not apply to such disputes, which are governed exclusively by the Prompt Payment Act.

The case arose from a project for certain improvements to the Navy/Marine Corps Reserve Training Center in Pennsylvania’s Lehigh Valley.  In furtherance of the project, the United States Department of the Navy contracted with Contracting Systems, Inc. (“CSI”) as general contractor.  In turn, CSI subcontracted with Clipper Pipe & Service, Inc. (“Clipper”) to perform certain heating, ventilation and air conditioning work .  Eventually, Clipper filed suit against CSI and its surety in the United States District Court for the Eastern District of Pennsylvania, alleging that CSI had failed to pay Clipper sums that were due under the parties’ subcontract.  Clipper further asserted a claim against CSI under CASPA.

CSI moved for summary judgment on Clipper’s CASPA claim, arguing that CASPA did not apply in the context of a public works project.  The District Court denied the motion and, ultimately, Clipper prevailed on its CASPA claim after the subsequent jury trial.  CSI then appealed to the Court of Appeals for the Third Circuit.  The Third Circuit applied to the Supreme Court of Pennsylvania for certification of a question of law: “does [CASPA] apply to a project where the owner is a governmental entity, such as the federal government in this case?”  The Supreme Court granted certification.

At the outset of its analysis, the Supreme Court noted that CASPA establishes rights and duties among “owners”, “contractors”, and “subcontractors” as it relates to “construction contracts.”  To the Court, the definition of “owner” is crucial to determining CASPA’s scope because the term “owner” is used throughout the statute.  For example, as the Court pointed out, CASPA defines “contractor” as a “person authorized or engaged by an owner” to make certain improvements to property. 73 P.S. § 502.  Thus, unless there is an “owner” within the meaning of CASPA, there can be no “contractor.”

Accordingly, as it relates to a public works project, the central question was whether or not the government could be deemed an “owner.”  The Supreme Court held that it could not.

CASPA defines “owner” to mean a “person who has an interest in the real property that is improved and who ordered the improvement to be made.”  73 P.S. § 502.  In turn, “person” refers to a “corporation, partnership, business trust, other association, estate, trust foundation or a natural individual.”  Id.  The Court determined, under the doctrine of ejusdem generis,  the government could not possibly be an “other association” within the meaning of CASPA because the term “other association” must take its meaning from the terms that precede it.  In this case, “other association”  could not be read to encompass the government because the government is “dissimilar to a ‘corporation,’ ‘partnership,’ ‘business trust,’ ‘estate,’ ‘trust foundation,’ and ‘natural individual,’ among which the term ‘association’ appears.”

The Court further observed that “statutes in derogation of sovereignty should be construed strictly in favor of the sovereign.”  This approach is derived from the common law principle of sovereign immunity and is further “grounded on the assumption that non-specific statutes are most often directed to the affairs of the citizenry.”  Consequently, in the absence of express textual authority, the Court declined to construe “association” or “owner” to refer to the government ..

After concluding that the government is not an “owner” as that term is used in CASPA, the Supreme Court turned to the question of whether CASPA would nonetheless apply to a dispute between a contractor and subcontractor on a public project if the dispute did not directly involve the government.  Holding in the negative, the Court recognized the existence of the dual statutory schemes established by CASPA and the Prompt Payment Act, and noted that the timing and penalty provisions for late payment under the Prompt Payment Act differed from those under CASPA.   The Court concluded that “the Legislature simply did not design CASPA to apply independently to subcontracts in scenarios in which the foundational contract resides outside its boundaries” (i.e., where the contract between the owner and general contractor was governed by the Prompt Payment Act).  Thus, the Court held that, even though CASPA’s policy of protecting contractors and subcontractors would be promoted if it were applied to the case before it, “such application is too disharmonious with the statutory mechanics to support the extension.”

 

Article originally posted June 25, 2015 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

What Useful Construction Litigation Data Are We Missing?

Frank Sommers’ wrote a thought-provoking article for the recent June 2015 issue of Litigation News in which he explored the data that civil litigants might attempt to access to prove their case, including GPS data, Event Data Recorder (“EDR”) data, and cell tower “ping” data. At the end of the article, he identifies now-popular home sensor technology as a possible location of evidentiary data.

While not the primary focus of Mr. Sommers’ article, he makes an excellent recommendation for construction lawyers. With the proliferation of “smart” commercial building design and technology aimed at greener and more convenient construction, maintenance, and use, what useful data do our buildings hold for use in construction disputes? Could a Nest or similar thermostat provide data that consultants can use to identify the cause of moisture intrusion and mold in buildings? Do smartphones or devices that might be installed during construction store data that can be accessed to identify the number of workers present in a project area to track and/or defend delay and productivity claims? By way of example, linked here is Nest’s Privacy Statement for Nest Products and Services, which identifies some of the data that its products collect.

We do not yet know the answers to the questions above, but we should be asking those and similar questions to our clients and witnesses, and perhaps even to opposing parties in formal discovery. In fact, arguments could be made that we are obligated to inquire about, instruct our clients to preserve, and produce such devices and their stored data in litigation. But regardless of whether the inquiries are formal or informal, we will not know what data is available until we know what devices are installed that might hold that data.

Discovery Denied in ICC Arbitration over Panama Canal

As many people are aware, the Panama Canal expansion is one of the largest "megaprojects" going on in the world today. In January of 2014, the joint-venture contractor called GUPC (which stands for Grupo Unidos Por El Canal, S.A.) announced that cost overruns required $1.6 billion in additional money to be paid to it by the Panamanian government.  Then, in December of 2014, the GUPC consortium stated that it had additional claims totaling $737 million.

Of course, in the world of the international construction lawyer, this means arbitration.  GUPC filed its arbitration in December of 2013 under the International Chamber of Commerce ("ICC") rules in Miami, Florida, in accordance with the contractual dispute resolution clause. Discovery in the case is being conducted under the International Bar Association Rules on the Taking of Evidence in International Commercial Arbitration -- the IBA Rules.

In that arbitration, GUPC seeks compensation for its cost overruns and other damages from Autoridad del Canal de Panama -- the Panama Canal Authority, or ACP.  ACP contracted with CH2M Hill Panama, S. de R.L., for CH2M Hill-Panama to serve as ACP's program manager for the Canal expansion.

GUPC believed that CH2M Hill-Panama would have documents necessary for its arbitration with GUPC and served a request for production of documents under 28 U.S.C. § 1782 on CH2M Hill-USA in Colorado as a result.  CH2M Hill-USA refused to provide the documents.

The result of that subpoena ended up in a battle in the United States District Court for the District of Colorado.  In re Application of Grupo Unidos Por El Canal, S.A., Civil Action No. 14-mc-00226-MSK-KMT (D. Colo. April 17, 2015).  Bear in mind that this opinion is a magistrate's recommendation to the District Court, so this is by no means a final decision.

CH2M Hill-USA made five major arguments.  First, CH2M Hill-USA argued that the ICC arbitration was not a tribunal as that term is defined under §1782.  Second, CH2M Hill-USA claimed that the ICC arbitration is not a "foreign or international tribunal" as is required by § 1782.  Third, CH2M Hill-USA stated that they do not have possession or control of the documents -- CH2M Hill-Panama does -- and, further, that the documents are located outside the United States. Fourth, CH2M Hill-USA argued that the subpoena was unduly burdensome and intrusive. Finally, CH2M Hill argued that the subpoena in federal court was an attempt to circumvent discovery limitations imposed in the ICC arbitration.

In the end, the magistrate agreed with CH2M Hill-USA on all of its arguments.  First, the ICC arbitration was not a "tribunal" because it arose out of a private agreement to decide claims using certain rules. Even though those rules may lend the appearance of being a quasi-judicial proceeding, the court was not persuaded that voluntarily agreeing to those rules created a "tribunal" for purposes of §1782.

Second, the court held that private arbitration does not fall under the meaning of "foreign or international tribunal" under §1782.  The distinction drawn is that arbitral proceedings that are the product of contractual agreements differ from state-sponsored proceedings in foreign courts. The magistrate was persuaded that enforcing the subpoena "would defeat the timeliness and cost-effectiveness of arbitration, and would place a heavy burden on the federal courts to determine discovery requests." Slip Op. at 16.  Further, the magistrate was not persuaded that this was an international arbitration because it was being held in the United States, but she did not rule on the issue because it was not necessary to do so.

Third, as to the location of the documents, the magistrate cited to the fact that Congress likely meant for the reach of §1782 to apply only to evidence located inside the United States. After all, it would be outside the Court's jurisdictional reach to compel CH2M Hill-USA to produce documents physically located in Panama.

Fourth, in analyzing the burden issue on CH2M Hill-USA, the magistrate considered the factors set forth in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004).  Even though the magistrate was not required to reach these factors, the court noted that if the statutory requirements under §1782 had been met, she still would have denied production. Under Intel, certain discretionary factors such as burden come into play. Here, production would have required CH2M-Panama to produce 89 boxes of paper and 1.6575 terabytes of information -- which works out to approximately 80,000 boxes of documents. Thus, the magistrate held that on that fact alone, it is likely that the requests were too broad.

Finally, the magistrate agreed that the subpoena was an effort to circumvent the ICC panel's authority related to discovery.  GUPC neither sought nor received approval from the arbitration panel to obtain the information requested.  This fact led the magistrate to believe that the delay associated with such a "grandiose document production" would not be well received by the Panel.  As such, for every reason possible -- both statutory and those within the court's discretion -- the request for the subpoena to be enforced was denied.