The Best of 2014 from Under Construction

It's coming close to the end of the year. Many websites and news outlets use the end of the year to highlight those news stories and headlines that made people talk or, alternatively, that people may have missed along the way.

That second issue is what this blog post is about. I am taking the opportunity today to highlight several articles from the Forum's e-newsletter Under Construction that fall under the rubric of dispute resolution, litigation, and advocacy -- in other words, those articles that members of Division 1 should read.

March 2014 Edition

The March 2014 Edition of Under Construction featured an article that arose out of a blogpost here at the Dispute Resolver. The two Anthonys on our blog panel -- Anthony Osborn and Anthony Lehman -- collaborated to give tips on drafting lawsuits to trigger insurance coverage. While not meaning to blow our own horns too much, this article provides some useful information to the lawyer trying to find some money to cover a construction defect for an owner or to invoke contribution from subcontractors for a contractor client.

A second article of note from March 2014 came from Division 1 member Jason W. Hill of Shutts & Bowen LLP in Orlando. Entitled, "Stays Pending Arbitration of Claims Made Either By or Against Non-Parties to Arbitration Agreement," Jason's article covers a situation which arises frequently: when a party to a contract with an arbitration clause attempts to avoid arbitration either by suing in the name of a non-signatory to the agreement or by suing non-signatories to the agreement. Jason's well-written article covers mandatory stays, discretionary stays, and whether parties can appeal the court's decision on such a motion.

The final article I want to highlight is not strictly related to litigation/ADR, but it does relate to an issue that all of us deal with regularly: New client and new case intake. Peter C. Halls of Faegre Baker Daniels LLP in Minneapolis and Erik P. Raines of Hill Ward Henderson in Tampa provided their checklist of issues to note when reviewing how to process and pursue potential claims on behalf of a client. The checklist includes noting dispute resolution procedures, whether mediation is required or should be used, what notice might be required, whether arbitration is involved, whether any statutory requirements need to be satisfied prior to filing suit, whether all parties are involved in the case, and making sure that client concerns and expectations are addressed. It's a fascinating look at how Peter and Erik deal with these issues.

September 2014 Edition

In the September edition, yet another Under Construction article that started as a Dispute Resolver blogpost was featured in discussing the AAA's Supplementary Rules for Fixed Time and Cost Construction Arbitration. Now I'm bragging, because I was the one who wrote this article, but I have had other people tell me it is a good article. 

An article featuring an interview with the Honorable Nancy Holtz, Division 1 member and frequent blog contributor, also appeared in September. Judge Holtz discussed the "Judge's Toolbox" for dealing with construction cases in court. In that interview with Under Construction editor Jayne Czik, Judge Holtz provided important advice as to how we, as litigators, are viewed by the judges presiding over the cases we are trying. If you have not read this interview, do it now.

September featured two more articles that touched on issues of ADR/litigation about which we as advocates should be aware. First, Suzanne McSorley of Stevens & Lee in Princeton, New Jersey, wrote about the importance of coming to mediations prepared. As she pointed out from her perspective of nearly twenty years serving as a mediator, the point of the mediation is to come to negotiate and not to convince a mediator that your client is "right."

Finally, Sanjay Kurian of Becker & Poliakoff in Fort Myers/Naples, Florida, wrote an intriguing article discussing electronically stored information. Yes, everyone in litigation has ESI fatigue and has had it for at least the last decade, but Sanjay's article looks at how contract clauses can be fashioned up front in the construction process to determine what ESI will be retained and considered as part of the project documents, which custodians will be considered as key personnel, what search terms would be used for searching through electronic information, and who will bear the costs for searching/storing information. From my perspective, these types of agreements make a lot of sense and require some finesse in how they are drafted; it would be a good idea for the transactional lawyers to work with their litigation colleagues to make sure what is drafted makes sense in a litigation context.

Happy Holidays!

As the chair for the Division 1 publications subcommittee and on behalf of everyone on the Division 1 Steering Committee, I hope that everyone has a safe and happy holiday season. Thank you for reading the blog this year.

Is the Med-Arb Format Right For You?

By Nicholas P. Brown, Pierce Atwood, LLP

As the cost of litigation has grown and the appetite for its attendant risks declined, owners and contractors have increasingly relied upon mediation and binding arbitration to resolve disputes. One particularly unique dispute resolution format is the combination mediation/arbitration (or “med-arb”) where the same neutral serves as both mediator and, if needed, arbitrator. In the med-arb format, mediation and arbitration are scheduled concurrently so that the threat of arbitration, and its binding result, hangs over the mediation like the proverbial Sword of Damocles. The parties know that if mediation fails, arbitration immediately follows without delay.

 

The significant wrinkle in the med-arb approach is that the neutral mediator also serves as fact-finder and decision-maker in the event of arbitration. This is not the case in the traditional mediation/arbitration scenario where the mediator has no role in the arbitration and decision-making process. Thus, the parties know that their discussions with the mediator are confidential and will not have any influence on the arbitrator’s decision. This traditional separation between mediation and arbitration enables the mediator to encourage a level of candor from the parties that may be difficult to achieve in the med-arb format.

 

With the med-arb format, the parties must recognize that the mediator may learn facts about the dispute or the parties that might otherwise be inadmissible in arbitration. The mediator is expected to disregard such information in the event he or she subsequently sits as arbitrator. But human nature can make it difficult if not impossible for the mediator to erect the appropriate mental barriers and “forget” what he or she has heard. As such, parties to the mediation may withhold information harmful to their case that they might normally share with a traditional neutral mediator. Where the parties exercise such caution, the likelihood of a mediated settlement may decline.

By the same token, parties may disclose to the mediator wholly irrelevant yet harmful information about the other party in an effort sway the soon-to-be-arbitrator’s impressions of the case. In this way, the mediation may be used as a means of presenting evidence that might never have been heard.

Given this dynamic, you may be wondering about the benefits of the med-arb approach. First and foremost, is the opportunity for a quick and relatively inexpensive resolution. A recent dispute I worked on took less than nine months to fully resolve from the moment the case came through the door. Once the parties agreed to the med-arb format, it took just four months for the arbitrator to issue her decision and award. Considering the significant number of issues presented by the parties, litigation likely would have dragged on for two or more years and likely would have entailed extensive discovery. Under the circumstances, med-arb offered a tremendous opportunity to save the time, expense, and aggravation of a prolonged litigation schedule. 

Second, the threat of immediate arbitration may provide the necessary incentive for the parties to approve a mediated settlement. With traditional mediation and arbitration, the arbitration hearings are often not even scheduled at the time of mediation. Thus, arbitration may seem more theoretical than real to your clients whose rights and interests will be ultimately be decided should mediation fail. Without the imminent possibility of loss at arbitration, settlement may remain out-of-reach until just prior to arbitration.

 

Ultimately, these benefits must be weighed against the risk of having the same person serve as mediator and arbitrator. Attorneys are well advised to consider the relative strength of their case taking into consideration all facts and circumstances that might be shared with the mediator by the opposing party. Thus, if you are concerned that your client may be cast in an unflattering light by the disclosure of otherwise inadmissible evidence during mediation, the med-arb format may not provide a benefit to your client. In contrast, if your client has a strong case and you believe there is little risk that the mediator will be swayed by irrelevant information, med-arb may offer a cost-effective alternative to litigation. Regardless, attorneys should assess the strength of their case using a holistic approach that might not normally be needed.

 

For further information and an interesting discussion of the merits and pitfalls of the med-arb format, the following articles are recommended. See Martin C. Weisman, Med-Arb: The Best ofBoth Worlds, Dispute ResolutionMagazine, Spring 2013, at 40; Brian A. Pappas, Med-Arb: The Best of Both Worlds May Be Too Good to Be True, Dispute Resolution Magazine, Spring 2013, at 42. Both articles and others are available at http://guides.library.harvard.edu/content.php?pid=442479&sid=4396465

Texas Supreme Court Adopts Restyled Evidence Rules

The Texas Supreme Court recently announced that it has adopted revisions to the Texas Rules of Evidence. The revisions are intended to mirror the recent style revisions to the Federal Rules of Evidence. As with the Federal Rules, the revisions to the Texas Rules are intended to make them easier to read and understand.

According to the Court, only two substantive changes have been made:

• Amendments to Tex. R. Evid. 511 align Texas law with Fed. R. Evid. 502 on waiving privilege by voluntary disclosure.
• Amendments to Tex. R. Evid. 613 retain the requirement that a witness be given an opportunity to explain or deny (a) a prior inconsistent statement or (b) circumstances or a statement showing bias or interest, but the requirement is no longer part of the foundation that an examining attorney must lay before introducing extrinsic evidence of the statement or its circumstances.

The revisions are subject to a comment period that will end on February 28, 2015. Final approval of the revisions will be effective April 1, 2015.

For the full announcement, click here.

JAMS Global Construction Solutions Fall 2014 Newsletter Explores Crucial Elements to Successful Mediation

The success of a mediation depends on several factors, including timing, preparation, and settlement confirmation, as recently discussed in the Fall 2014 newsletter of the JAMS Global Engineering and Construction Group, linked here.

In Sealing the Deal: Critical Issues in the Preparation of Mediated Settlement Agreements, (JAMS Global Construction Solutions), Fall 2014 at 1; 5, Patrick J. O’Connor, Jr. underscores the importance of confirming a settlement agreement at mediation with a signed writing with key terms. 

In Mediation Decision-Makers Need “Decision Quality Information”, (JAMS Global Construction Solutions), Fall 2014 at 2, Hon. Carol Park-Conroy explores when a dispute is ready for mediation, particularly when the people with settlement authority have the factual and legal information they need to make informed settlement decisions at mediation.

Both articles remind us that timing, preparation, and confirmation are crucial to a successful mediation regardless of how sharp our negotiation skills might be.

The Owner's Authority: Illinois Public-Construction Bonds Are “Deemed” to Include Both a Performance and Payment Guarantee

On The Owner's Authority, Daniel Dorfman recently posted an interesting article on a recent Illinois case concerning performance and payment bonds:

Last month, in Lake County Grading Company, LLC v. Village of Antioch, the Illinois Supreme Court handed down a ruling concerning bonds procured under the Illinois Public Construction Bond Act. The Court held that performance bonds procured under the Act are deemed to include payment obligations, regardless of whether the bonds expressly include payment guarantees.

[Read more]

JAMS Construction Arbitration Rules -- Revised 11/15/2014

Effective November 15, 2014, JAMS issued an update to its Engineering and Construction Arbitration Rules & Procedures.


Click HERE for a summary of the revisions.  For the most part, the rules appear to clarify existing practice.  We highlight a few revisions below:

• Rule 7. Number and Neutrality of Arbitrators, Appointment and Authority of Chairperson.  Creates defaults for sole arbitrator vs. tripartite panel.  A sole arbitrator will be appointed if the total amount in dispute in the aggregate is less than $2 million or involves residential construction.  All other disputes will have a tripartite panel. 

• Rule 9. Notice of Claims. Failure to raise jurisdictional or arbitrability challenges in response to a demand or counterclaim (or as soon as circumstances first suggest), will result in waiver of the objection. 

• Rule 15. Arbitrator Selection, Disclosure and Replacement.  Failure to follow the instructions regarding selection of arbitrators (e.g. striking out all candidates), will be regarded as an acceptance of all proposed arbitrators.  Subparagraph (h) also requires Parties and their representatives "to disclose to JAMS any circumstance likely to give rise to justifiable doubt as to the Arbitrator's impartiality or independence, including any bias or any financial or personal interest in the results of the Arbitration or any past or present relationship with the Parties or their representatives." 

• Rule 22. The Arbitration Hearing. Subparagraph (g) permits hearings to be conducted videographically and telephonically. 

• Rule 24. Awards. Permits the entry of an interim award or a partial final award if interim relief is issued.  The time to request a correction runs from the entry of the partial final or final award (not interim award). 

• Rule 28. Settlement and Consent Award.  This was modified to permit the arbitrator to assist with closing out a settlement confirmed in writing.  To obtain such assistance, the parties must agree that the process will not result in the disqualification of the arbitrator or later motion to vacate/modify any Award.

• Rule 29. Sanctions. An Arbitrator may order appropriate sanctions for failure to comply with the rules and/or order of the Arbitrator. 

• Rule 34. Optional Arbitration Appeal Procedure. The parties may agree to use the JAMS Optional Arbitration Appeal Procedure at any time -- even after an Award becomes final.

Download the Forum on Construction Law's App

At the Fall Meeting in Chicago, the Forum on Construction Law released its new application.  At the meeting, the application had all speaker and event information a couple of clicks away.  It is amazing that over the past 5 or so years, the Forum has moved from large books filled with the resource material, to CDs (which required you to bring your laptop), to applications and thumb-drives that you can place in your wallet. Impressive stuff.


If you have not downloaded the Forum's application, Division 1 encourages you to do so.   Information is below:

Apple Store Users can download the App from: https://appsto.re/us/UOUl3.i

Android Users the App can also be downloaded from: https://play.google.com/store/apps/details?id=net.manageapps.app_69899

There is a ton of information on the Forum's App, including links to:

• Membership Directory (lists sorted alphabetically, by region, and by division)
• Searchable Knowledgebase
• Division information
• Midwinter Brochures
• Forum publications

The format of the App will revert back to a "meeting app" for the mid-winter meeting so now is a great time to download the App and become familiar with it. 

Mediation Privilege Bars Reopening Previously Settled Suit in Bankruptcy

The United States Court of Appeals for the Seventh Circuit recently affirmed a decision of the Bankruptcy Court for the Eastern District of Wisconsin relating to the breadth of the mediation privilege under Wisconsin law in John Doe v. Archdiocese of Milwaukee (Case No. 13-3783, decided November 5, 2014). 

While this is not a construction case, it is an informative case in terms of how far the mediation privilege can extend to protect statements in a mediation which, on their surface, might be seen as fraudulent and flat-out lies.

The 2007 Mediation

In Doe, the claimant was sexually abused by Father Lawrence Murphy while the child was attending the St. John's School for the Deaf in 1974 when he was 17 years old. In 2007, Doe participated in the Archdiocese's voluntary mediation program for victims of sexual abuse. As a result of the mediation, he was paid $80,000 in return for settling his claims of fraud, negligence, and sexual battery. To formalize the settlement, both Doe and the Archdiocese signed a settlement agreement containing a confidentiality clause and a second clause precluding the parties from introducing any statements made at the mediation into evidence in any later proceeding. The Settlement Agreement also purported to settle "all claims of any nature" between the parties "arising from any sexual abuse of [Doe] by Murphy . . . ."

The Archdiocese Files Bankruptcy

Unfortunately, Doe was not the only person who was sexually abused by priests who were being supervised by the Archdiocese of Milwaukee. So many claims arose that the Archdiocese filed a petition for reorganization under Chapter 11 of the Bankruptcy Code in 2011. Doe filed a proof of claim against the Archdiocese as part of the bankruptcy for the sexual abuse he suffered in 1974.

Summary Judgment Granted After Reconsideration by the Bankruptcy Court

In response, the Archdiocese moved for summary judgment on Doe's claim, citing to the 2007 settlement agreement. On its face, this was a straight-forward motion.

In response to the motion, however, Doe claimed that he had been fraudulently misled during the mediation to believe that the $80,000 he received was the maximum amount of money that the Archdiocese could pay to him. Doe further alleged that the Archdiocese told him during the mediation that other similarly situated victims were also being paid $80,000 and so, out of fairness, the Archdiocese could not pay him more than the others.

Doe stated in his appellate brief that he learned later that other survivors of the sexual abuse received amounts from $100,000 to $200,000. Additionally, Doe argued that the Archdiocese had failed to inform him that priests were being paid between $10,000 and $20,000 to leave the church.  Doe finally argued that the Archdiocese withheld the extent of its knowledge regarding Father Murphy's past history of abusing children.

Initially, the Bankruptcy Court held in Doe's favor, finding that the two claims -- one from 2007, the other in 2011 -- were distinct claims and disputes and that breaking the mediation privilege to avoid "manifest injustice" was necessary. In response, the Archdiocese subpoenaed the mediator, and the mediator moved to quash the subpoena. As a result of the hearing on the motion to quash, the bankruptcy court reconsidered its prior ruling and held that the communications in mediation were inadmissible and granted summary judgment to the Archdiocese.

Seventh Circuit Affirms
The problem that Doe ran into in fighting the previous settlement is a Wisconsin Statute codifying the mediation privilege, Wis. Stat. §904.085. That statute makes inadmissible any "oral or written communication relating to a dispute in mediation made or presented in mediation by the mediator or a party . . . ." The statute includes exceptions, however, such as whether, "in an action or proceeding distinct from the dispute whose settlement is attempted through mediation . . . admission is necessary to prevent a manifest injustice of sufficient magnitude to outweigh the importance of protecting the principle of confidentiality in mediation proceedings generally." Wis. Stat. §904.085(4)(e) (emphasis added).

In affirming the Bankruptcy Court's decision, the Seventh Circuit agreed with the lower court that the allegations and claims that were resolved as part of the mediation were the same claim and action. Doe argued that a fraudulent inducement claim was "distinct" from the underlying sexual abuse claims; the Seventh Circuit was not convinced.

Policy Considerations
The question raised to me is whether the mediation privilege should have precluded Doe from being able to raise a fraudulent inducement claim in the Archdiocese's bankruptcy. The question left unanswered by the Court based on the breadth and language of the state statute was whether the Archdiocese had any duty of candor to Doe in the mediation in which neither party was represented by an attorney (not to mention that Doe was and is deaf).  If lawyers are not involved in a negotiated settlement, is there any duty of candor?

Further, should the mediation privilege be so broadly construed if it means that parties can be less than truthful to one another? Especially in a mass-claim context -- where the claims cannot be aggregated as a class action due to the individual factual scenarios and injuries involved -- should the Archdiocese be able to represent -- apparently falsely -- that "everyone was getting $80,000" and that it would be unfair to others for Doe to get more?

What are your thoughts on this?

6th Circuit: Manufactured Homes are not "Consumer Products" under Magnuson-Moss Warranty Act

In Bennett v. CMH Homes, the plaintiffs' purchased a 2,180 square foot manufactured home from CMH Homes after their prior residence was destroyed by fire. As part of the agreement, CMH was required to deliver and install the home. In addition, CMH warranted the home would be installed "in accordance with applicable governmental requirements."

Shortly after they moved into the manufactured home, the plaintiffs began noticing defects which led them to believe the home was not level. CMH assured the plaintiffs it would repair and level the home, but CMH's repair efforts were unsuccessful. As a result, the plaintiffs filed suit in Tennessee federal court, asserting various claims which included a breach of warranty claim under the Magnuson-Moss Warranty Act ("WMWA"), a federal statute regulating the sale of consumer products which applies to warranties for "tangible personal property."

After a bench trial, the District Court found CMH had breached the contract and its warranties by failing to properly install and level the residence. On appeal, however, the Sixth Circuit held that a manufactured home is not a "consumer product" and was, therefore, not intended to be regulated by the Magnuson-Moss Warranty Act. As the Sixth Circuit reasoned, a manufactured home is not designed to be moved once constructed and placed on land, and is not an expendable product or an item which is meant to be replaced periodically. Thus, the Court of Appeals found it more akin to a house than "tangible personal property" which might otherwise qualify as a "consumer product" subject to protection under the Magnuson-Moss Warranty Act.

One of the Circuit's Judges delivered a dissenting opinion. Do you agree with the majority or dissent? A copy of the decision can be found at http://www.ca6.uscourts.gov/opinions.pdf/14a0272p-06.pdf.

A Contractual-Liability Exclusion to Insurance Coverage Might Not Apply to Defective-Work Claims Against a Contractor.

The U.S. Court of Appeals for the Fifth Circuit recently held that, under Texas law, an insurer could not exclude coverage for property damage claims against a general contractor that were based on violations of express warranties of good workmanship and repair. Such claims did not fall within the typical contractual-liability exclusion used in the general contractor’s commercial general liability policy (“CGL policy”). The Fifth Circuit reversed the district court and rendered summary judgment in favor of the homeowners asserting the insured’s rights, remanding for a determination of attorneys’ fees.

Crownover v. Mid-Continent Cas. Co., --- F. 3d ----, No. 11-10166, 2014 U.S. App. LEXIS 20737 (5th Cir. Oct. 29, 2014), on reh’g from 757 F. 3d 200 (5th Cir. 2014).

U.S. Supreme Court Declines to Review Ninth Circuit’s Assumption of Role As Additional Daubert Gatekeeper

On October 6, 2014, the United States Supreme Court denied a writ of certiorari regarding the Ninth Circuit’s January 15, 2014, decision in Estate of Henry Barabin v. AstenJohnson, Inc., 740 F.3d 457 (9th Cir. 2014).  See Estate of Henry Barabin v. AstenJohnson, Inc., 2014 WL 1496421 (2014).  The Ninth Circuit’s January 15, 2014, decision had reversed the district court’s admission of expert testimony presented by the plaintiffs at trial, then remanded for a new trial.  The court held that the district court had abused its discretion by admitting the expert testimony without first finding it relevant and reliable under Rule 702 of the Federal Rules of Evidence and Daubert.

But the Ninth Circuit did not stop with a reversal and remand.  Before remanding, the Ninth Circuit opined that an appellate reviewing court should have the authority to make Daubert findings regarding relevance and reliability, as well as reverse a judgment based on those findings, relying on the district court record:

If the reviewing court decides the record is sufficient to determine whether expert testimony is relevant and reliable, it may make such findings.  If it “determines that evidence [would be inadmissible] at the trial and that the remaining, properly admitted evidence is insufficient to constitute a submissible case[,]” the reviewing court may direct entry of judgment as a nature of law.

Barabin, 740 F.3d at 467 (quoting Weisgram v. Marley Co.,, 528 U.S. 440, 446-47 (2000)).

The court ultimately declined the appellants’ request that the court enter judgment in their favor because the court found the record before it to be too sparse to determine if the excluded expert testimony was relevant and reliable.  But one can expect that the Ninth Circuit’s ruling and the Supreme Court’s writ refusal might be argued as support for an appellate court’s ability to now provide direct relief and avoid the time and expense of a new trial on remand when the appellate court finds that the district court erroneously admitted expert testimony.  If followed by other circuits, the Ninth Circuit and Barabin might one day be cited for the start of a new era in admission of expert testimony with appellate courts serving a role as an additional – or at least a backup – Daubert gatekeeper.

The Ninth Circuit’s decision is linked here, and information regarding the Supreme Court’s writ denial and the parties’ briefs to the Supreme Court can be found here.

California General Contractors May Prospectively Waive Lien Claims

Christopher Ng recently posted an interesting article concerning the waiver of a general contractor's priority for its mechanic's lien rights through a subordination agreement with the project lender under California law.

California General Contractors May Prospectively Waive Lien Claims

General contractors are often asked (or required) to subordinate their lien claims by owners and lenders before commencing work on a construction project. It may not come as a surprise to these contractors that such a subordination agreement may be enforceable in most states. In California, however, where the mechanics lien is a constitutional right under the California Constitution, the question of enforceability of such a subordination agreement against a general contractor was not as certain.

In Moorefield Construction, Inc. v. Intervest-Mortgage Investment Company (September 30, 2014), the California Court of Appeals held that, despite the constitutional protection and priority rights accorded to mechanics liens, a general contractor could waive its mechanics lien rights through a subordination agreement with a construction lender.

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New York Commercial Division Enacts New Rule to Promote More Efficient Privilege Logging

In document-intensive construction cases, a complete privilege log with enough information to allow the opposition to determine whether to challenge the assertion of the particular privilege is time-consuming and burdensome. This post, written by Joseph Imperiale and Kristopher Berr of Pepper Hamilton LLP summarizes a new rule in New York that attempts to rationalize the process of putting together a privilege log:

When responding to document requests or a subpoena duces tecum, litigants in New York traditionally have been faced with the onerous privilege log requirements set forth in Section 3122 of the New York Civil Practice Law and Rules.  Section 3122 requires a litigant who withholds any responsive documents to provide to the requesting party a privilege log containing a separate entry for each withheld document.  Each entry must disclose the legal grounds on which the document is withheld, in addition to certain identifying information including the type of document, the general subject matter of the document, and the date of the document.  N.Y. CPLR § 3122(b).  In complex construction disputes, there is often a large volume of privileged documents, and thus preparing a privilege log that meets the requirements of Section 3122 can be time consuming and expensive.

The “New York State Chief Judge’s Task Force on Commercial Litigation in the 21^st Century” recognized that the privilege log procedure of Section 3122 “has become a substantial expense in complex commercial litigation” with a “demonstrable need” for reform and issued a report in June 2012 recommending that the practice be reexamined.  In response, the Commercial Division Advisory Council drafted Commercial Division Rule 11-b, which represents a significant departure from the requirements of Rule 3122.  Rule 11-b requires that litigants work together to effectuate a newly expressed “preference in the Commercial Division…for the parties to use categorical designations” rather than line-by-line privilege logs.  22 N.Y.C.R.R. §202.70(g), Rule 11-b(b)(1).  Ultimately, Rule 11-b became effective on September 2, 2014.

The new rule requires the parties to “meet and confer at the outset of the case” to discuss the scope of the privilege review, the amount of information required to be set forth in the privilege log, the use of categories in the privilege log, including whether or not certain categories can be excluded from logging altogether, as well as any other pertinent issues.  22 N.Y.C.R.R. §202.70(g), Rule 11-b(a).  The stated goal of Rule 11-b is “to reduce the time and costs associated with preparing privilege logs”, and accordingly, “the parties are expected” under the rule to employ a categorical approach, rather than line-by-line logging.  22 N.Y.C.R.R. §202.70(g), Rule 11-b(b)(1).  Under this rule, the parties may use “any reasoned method of organizing the documents” into categories, which are to be provided to the requesting party in lieu of a document-by-document log.  22 N.Y.C.R.R. §202.70(g), Rule 11-b(b)(1). 

The rule recognizes that the categorical approach to privilege logging may not be appropriate or desirable in all cases and thus provides that the approach should be utilized only “where appropriate” and “where possible[.]”  22 N.Y.C.R.R. §202.70(g), Rule 11-b(b)(1).  But, where a party refuses to allow the categorical approach, the other party may seek an order shifting its costs, including attorney’s fees, to the party rejecting the categorical approach.  22 N.Y.C.R.R. §202.70(g), Rule 11-b(b)(2).  The courts are authorized to shift such costs “upon good cause shown.”  22 N.Y.C.R.R. §202.70(g), Rule 11-b(b)(2).

The parameters of “good cause” are not defined with any particularity in the text of Rule 11-b, and it is therefore unclear under what circumstances the rule’s cost-shifting provision takes effect.  For example, the rule does not indicate whether “good cause” to shift fees and costs is established merely where the court agrees that the categorical approach was preferable, if a showing of bad faith is necessary, or if “good cause” falls somewhere else along this spectrum.  The answer to this question will be borne out by the courts’ application of the new rule. 

No-Damages-For-Delay Provision Does Not Shield Owner from Liability for Deliberate Interference With a Contractor’s Work.

In a much-anticipated decision, the Texas Supreme Court has ruled in favor of a general contractor seeking to recover funds withheld by an owner for delays that the jury found were caused by the owner’s deliberate and wrongful interference. The Court addressed the effect of a no-damages-for-delay provision in the construction contract, as well as whether language in the waivers the contractor submitted for progress payments also waived the contractor’s claims for delay damages. Finally, the Court analyzed at length whether the applicable statutes waived the governmental immunity of the owner, a local port authority.

Background

Zachry Construction Corporation agreed to construct a wharf for the Port of Houston Authority for over $62 million. The construction contract gave Zachry control over the means and methods of the work. It also stated that Zachry could not recover any damages from delays in the work, even if the delays resulted from “the negligence, breach of contract or other fault of the Port Authority.” The parties agreed to a provision that permitted the Port to recover its attorneys’ fees from Zachry if Zachry brought an unsuccessful claim under the contract.

As part of the construction of the wharf, Zachry planned to utilize an innovative technique that involved creating a long U-shaped berm made of frozen earth that would extend into the water to surround the worksite. Water would then be removed from the worksite, allowing Zachry to work “in the dry” for much of the construction work. Zachry believed that this technique would make the work less expensive, complete it more quickly, and provide environmental benefits to the Port.

Nine months into the project, the Port asked Zachry to add another section to the wharf, expanding the scope of the project by almost $13 million. To continue to meet the time deadlines in the project, Zachry proposed building a cutoff wall through the middle of the worksite, splitting the work area into two parts. Though the Port had reservations about this plan, it did not raise its concern before the parties executed the change order.

Two weeks later, the Port ordered Zachry to revise its plans to remove the cutoff wall. This forced Zachry to finish only a portion of the wharf “in the dry,” and then to remove the wall. The remainder of the project had to be finished “in the wet,” resulting in a delay of about two and a half years.

Zachry sued the Port several weeks after its refusal to allow construction of the cutoff wall. Zachry claimed about $30 million in delay damages. The Port argued that the contract precluded delay damages. The trial court disagreed, finding that the provision unenforceable if Zachry showed that the Port’s intentional misconduct caused the delay.

Zachry also sought to recover about $2.36 million in contract funds withheld by the Port as liquidated damages for delays. In response, the Port argued that Zachry had waived its claims by submitting applications for progress payments that included releases of certain claims. The trial court found the waiver language ambiguous and submitted the issue of its meaning to the jury.

In its defense, the Port contended that governmental immunity precluded Zachry’s claims. The Port also counterclaimed for close to $1 million in repair costs to remedy defective wharf fenders installed at the project, and for all of its attorneys’ fees under a contract provision that permitted the Port to recover all attorneys’ fees for any of Zachry’s claims that were not successful.

After a trial, a jury found that the Port breached the contract by rejecting the cutoff wall design, causing about $18.6 million in delay damages. According to the jury, the delay resulted from the Port’s “arbitrary and capricious conduct, active interference, bad faith and/or fraud.” The jury found that Zachry had not released its claim to the withheld funds, but also found in favor of the Port on the counterclaims for defective work.

On appeal, the court of appeals reversed the judgment in favor of Zachry. It found that the no-damages-for-delay provision barred any recovery of delay damages, regardless of whether the Port had intentionally or arbitrarily caused the delays. The court also held that the progress-payment releases were unambiguous and precluded any claims for the withheld funds. Finally, the court of appeals rendered judgment in favor of the Port on its claim for attorneys’ fees, awarding the Port almost $10.7 million.

Summary of the Texas Supreme Court’s holdings

The Texas Supreme Court reversed the court of appeals, holding that:

1. The no-damage-for-delays language did not apply, as a matter of public policy, to claims for delays caused by the owner’s intentional or arbitrary interference;
2. The actual waiver that the contractor signed for the progress payments was not ambiguous, and it did not waive the claims for the withheld claims;
3. Governmental immunity did not bar the contractor’s delay claims;
4. The Port was entitled to recover on its defective-work claims; and
5. The Port was not entitled to the award of attorneys’ fees.

Though the decision was 5-4, the dissent agreed with the majority on points 2 and 4, above. The dissent primarily concerned the governmental immunity issue (point 3), and thus did not reach the public-policy issue (point 1).

A contractor cannot waive claims for delays caused by the owner’s intentional or arbitrary interference

The Court found the no-damages-for-delay provision unenforceable against delay claims based on the owner’s intentional or reckless misconduct. While a contractor generally may agree to assume the risk of construction delays, exceptions to their enforcement apply where the delay resulted from the owner’s fraud, misrepresentation, or bad faith, or where the delay resulted from the owner’s active interference or other wrongful conduct, which includes arbitrary acts, willful misconduct, acting without due consideration, and acting in disregard of other parties’ rights. As the jury found that the Port caused the delays through “arbitrary and capricious conduct, active interference, bad faith and/or fraud,” the Court found that the Port could not enforce the provision against Zachry.

The Court noted that it was “doubtful” that the waiver of delay damages due to the Port’s “negligence, breach of contract or other fault” would even apply to deliberate, wrongful misconduct. It cited an amicus brief from the Associated General Contractors of Texas, which pointed out that contractors can (and often do) include in their estimates potential delaying events such as quality and completeness of plans and specifications, material shortages, weather issues, and soil conditions. These foreseeable issues can be taken into account using the contractors’ years of experience, education, and training. But no contractor can accurately assess potential delays “that may arise due to an owner’s direct interference, willful acts, negligence, bad faith fraudulent acts, and/or omissions.”

Under Texas law, contractual provisions seeking to exempt a party from tort liability for its own future intentional or reckless misconduct are void as against public policy. The Court applied the same rule to contract liability, to avoid “incentiviz[ing] wrongful conduct and damag[ing] contractual relations.” Even though Texas, unlike many other states, does not impose a duty of good faith and fair dealing in the performance of all contracts, the Court found such a duty unnecessary to prohibit provisions allowing a contracting party to evade liability for deliberate misconduct in the future.

A contractual requirement for the contractor to waive claims does not prevail over the actual language of the waivers signed

Next, the Court reversed the court of appeals’ ruling that Zachry had waived its claims for the $2.36 million that the Port withheld as liquidated damages. The Court disagreed with the trial court’s finding that the waiver language was ambiguous, instead holding that language unambiguously did not include Zachry’s claims. In particular, the progress-payment application released claims on “the portion of the Work completed and listed on” the invoice. The liquidated damages withheld by the Port, in contrast, were for delayed work that had not been completed, rather than work already finished.

Interestingly, the Court admitted that Zachry’s underlying construction contract could be read to require Zachry to waive such claims when it applied for progress payments. However, the language in the waiver Zachry actually submitted (whether it complied with the contract or not) did not encompass the claims for the withheld funds.

The Texas Supreme Court narrowly held that there was no governmental immunity for the contractor’s delay claims under these circumstances

Finally, a large portion of the majority, and the entire dissent, focused on whether the Texas legislature had waived the Port’s governmental immunity for Zachry’s delay claims. A more detailed examination of this issue is beyond the scope of this post, but the dispute concerned a statute waiving the governmental immunity of a local governmental entity for a contractor’s claims for its “balance due and owed . . . under the contract.” The majority and the dissent agreed that this issue was jurisdictional, but disagreed on whether delay damages were “owed under the contract” where, as here, the contract expressly prohibited delay damages. The majority found that such damages fell within the scope of the waiver.

Parties to construction contracts could use the public-policy exception to avoid damage waivers

This decision could significantly narrow the enforcement of contract provisions limiting recovery of damages in Texas. With some exceptions, Texas has prohibited contractual provisions that require a contractor to indemnify another person for property damage resulting in whole or in part from the fault of the other person, its agent, or its employee. Tex. Ins. Code § 151.102. The Zachry decision adds a public-policy exception invalidating waivers of damages caused by intentional or reckless misconduct. Contractors could argue that this exception applies to more than delay claims. For example, a waiver of consequential damages could be invalidated if a general contractor showed that the owner’s intentional or reckless misconduct caused the damages. Moreover, the Court’s reasoning might apply to conduct that is less culpable than recklessness, such as acting “without due consideration,” arbitrarily, or “in disregard of other parties’ rights.”

Zachry Constr. Corp. v. Port of Houston Auth., ---S.W. 3d ----, No. 12-0772 (Tex. Aug. 29, 2014) (Hecht, C.J.), (Boyd,J., dissenting).

The Fall Meeting in Chicago

Thank you to everyone who attended the Fall Meeting in Chicago last week. We on the steering committee are very excited about the annual planning session that we held on the Wednesday afternoon before the seminars began. Many potential initiatives were discussed, and all of them will need involvement, support, and participation from our Division 1 membership. 

As is the case with nearly all of our national meetings, Division 1 held a lunch meeting. During the Chicago Meeting, Division 1 teamed up with Division 6 for lunch and learning about Guided Choice Dispute Resolution. National expert Paul M. Lurie of Schiff Hardin, LLP in Chicago joined Tony Lehman of DLA Piper to discuss what Guided Choice is, why it matters, and how construction practitioners can use its principles both to resolve cases promptly and, potentially, to gain new clients.

Here's a photo from that presentation (apologies for the blurriness).

If you were unable to attend or if you did attend and want more information regarding Guided Choice, Mr. Lurie graciously put together a PowerPoint presentation that you can view simply by clicking on this link.

After the first day's seminars wrapped up, Division 1 got together in the laid back atmosphere at Bar Louie for a casual dinner. Thankfully, those of us who were at Bar Louie had the decency not to take the "your mouth is full at dinner" photos!  

From Bar Louie, most of the group headed over to Buddy Guy's Legends to see blues singer Nellie "Tiger" Travis in action. Buddy Guy's is surprisingly well-lit for being a blues club, so our photos of "Tiger" turned out reasonably well.

 

Once there, Division 1 was joined by a number of other folks from other divisions who realized the errors of their ways in not having as much of a fun itinerary as we did. Here are Division 1's Rob Ruesch and former Young Lawyers Division Chair Angela Stephens, who put the rest of us to shame by dancing their way through the show!

Division 1 Chair Nick Holmes was entranced by Tiger's show -- so much so that he bought the CD:

And yes, it's autographed!

A great time was had by all who attended. 

So, don't get left out of the fun! Be sure to attend either the Midwinter Meeting in Scottsdale, Arizona, the Annual Meeting in Boca Raton, Florida, or both. 

New Name, New Logo . . . Same Great Forum. The Forum on Construction Law. Building The Best Construction Lawyers

Plan ahead for the Forum's 2015 Midwinter Meeting on January 29-30, 2015 in Scottsdale, Arizona. 

This Week: Forum's Fall Meeting in Chicago

If you are attending the Fall Meeting in Chicago, you should have received an email last week with a link to the written materials. If you missed it, click here http://shop.americanbar.org/ebus/ABAEventsCalendar/EventDetails.aspx?productId=130853994

The Construction Law Practicum for New Construction Lawyers is occuring tomorrow at 3:30PM, October 14, 2014, at ABA headquarters.

For information on events while you are in Chicago, visit:

http://www.timeout.com/chicago/things-to-do

http://www.events12.com/chicago/october/

http://www.choosechicago.com/articles/view/CHICAGO-EVENTS-FESTIVALS-2014-CALENDAR-HIGHLIGHTS/1243/

United States Supreme Court To Review Two Qui Tam Issues: Application of “First-to-File” Under the Federal False Claims Act and Tolling Provisions of the Wartime Suspension of Limitations Act

The United States Supreme Court granted certiorari on July 1, 2014 to review the United States Fourth Circuit’s March 18, 2013, decision that reversed the district court’s dismissal of a qui tam petitioner’s False Claims Act (“FCA”) complaint, with prejudice. See United States v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013).

In his complaint, the petitioner alleged that Halliburton Company, KBR, Inc., Kellogg Brown & Root Services, Inc. and Service Employees International (collectively “KBR”) fraudulently billed the United States for services provided to the military forces serving in Iraq. The district court dismissed the petitioner’s complaint on two bases: (1) because the district court lacked subject matter jurisdiction over the petitioner’s claims under the “first-to-file” bar of the False Claims Act, 31 U.S.C. § 3730(b)(5) and (2) because the petitioner’s complaint was filed beyond the six-year statute of limitations and had not been tolled by the Wartime Suspension of Limitations Act (“WSLA”), 18 U.S.C. § 3287. The district court ruled that the WSLA did not apply to non-intervened qui tam cases. The Fourth Circuit, however, reversed and held that the district court did have jurisdiction and that the WSLA did apply to the qui tam action.

While there were previously filed qui tam actions against KBR urging false billing practices, the petitioner urged that those cases did not bar his qui tam action because they alleged false billing practices in different work scopes and by different employees in different company divisions than those alleged in his complaint. The Fourth Circuit, however, applied the “material elements test” that had been adopted by the Third, Fifth, Sixth, Ninth, Tenth, and D.C. Circuits, instead of a test requiring “identical” actions, and held that all of the actions essentially involved submission of false time sheets in order to falsely claim payment.

The petitioner further argued that, although the other cases were active when his case was filed, they had since been dismissed, so they were no longer a “pending” case giving rise to the “first-to-file” bar of the statute. On this point, the Fourth Circuit agreed and held that the district court’s dismissal with prejudice was incorrect.

Regarding application of the WSLA to toll the six-year statute of limitations for an action under the FCA, the statute originally tolled the statute of limitations regarding offenses involving defrauding or attempting to defraud the United States that were “indictable under any existing statutes,” but that requirement was deleted from the statute in 1944. KBR argued that the use of the term “offense” in the statute maintained the statute’s original intent to toll only criminal actions; therefore, the petitioner’s civil qui tam action was barred by the statute of limitations, which had not been tolled due to the Iraq conflict. The Fourth Circuit, though, held that, if Congress had intended that result, it could have done so by not deleting the “indictable” requirement in 1944, so the statute of limitations on the petitioner’s action had been tolled by the WSLA.

On July 1, 2014, the U.S. Supreme Court granted certiorari to decide:

1. Whether the Wartime Suspension of Limitations Act--a criminal code provision that tolls the statute of limitations for "any offense" involving fraud against the government "[w] hen the United States is at war," 18 U.S.C. § 3287, and which this Court has instructed must be "narrowly construed" in favor of repose--applies to claims of civil fraud brought by private relators, and is triggered without a formal declaration of war, in a manner that leads to indefinite tolling.

2. Whether, contrary to the conclusion of numerous courts, the False Claims Act's so called "first-to-file" bar, 31 U.S.C. § 3730(b)(5)--which creates a race to the courthouse to reward relators who promptly disclose fraud against the government, while prohibiting repetitive, parasitic claims--functions as a "one-case-at-a-time" rule allowing an infinite series of duplicative claims so long as no prior claim is pending at the time of filing.

We will keep an eye out for a decision, but in the meantime, for your reference, the U.S. Supreme Court docket information is linked here, and the Fourth Circuit’s March 18, 2013, decision is linked here.

Sixth Circuit Allows Lawsuit Against Indirect Parties Following Consolidated Arbitration

Jones Day recently posted an interesting article about a case allowing a subcontractor to proceed with a lawsuit against design professionals, even though the subcontractor, the design professionals, and others had previously participated in a consolidated arbitration.

Arbitration for One is Not Arbitration for All: Sixth Circuit Allows Lawsuit Against Indirect Parties Following Consolidated Arbitration

Recently, the U.S. Court of Appeals for the Sixth Circuit allowed a subcontractor's lawsuit against design professionals to proceed even though all parties had previously participated in a consolidated arbitration proceeding over the same issues. W.J. O'Neil Co. v. Shepley, Bulfinch, Richardson & Abbott, Inc., No. 12-2320, 2014 U.S. App. LEXIS 16607 (6thCir. Aug. 28, 2014). The design professionals were brought into the arbitration via indemnification claims by the owner, and there was no arbitration agreement between the subcontractor and the design professionals. Given this, the court found that the subcontractor's claims against the designers were not a part of the arbitration and not barred byres judicata. The court applied a technical approach to res judicata based on the principle that a party cannot be forced to arbitrate a claim against another party with whom it has not agreed to arbitrate.

The O'Neil decision is potentially significant for any consolidated construction arbitrations involving additional parties added through indemnification claims. Whether a contractor, project manager, or design professional, O'Neil holds that arbitration is binding and final only as to the parties who agreed to arbitrate the claims that are subject to arbitration. The result highlights the fact that the same claims may have to be relitigated in their entirety in a second proceeding—depriving everyone of a sense of finality. The risk of multiple proceedings and increased costs should be considered in determining how to proceed in a consolidated arbitration proceeding and how to draft arbitration clauses to minimize the risk of repeatedly litigating the same claims.

[...]

Here are links to the article's authors:

Scott W. Cowan

Kent W. Lindsay

Andrew D. Ness

Stephen V. O'Neal

E-Discovery Is Complicated, But It Is Still Discovery.

Reasonable cooperation between opposing counsel during discovery can save clients significant costs and delays in litigation. The current proposed changes to the Federal Rules of Civil Procedure to require more efficiency and proportionality in e-discovery certainly support those efforts. But some would argue that many discovery disputes could be avoided - even in the complicated world of e-discovery - if attorneys adhere to their fundamental obligations in discovery After all, e-discovery is still discovery, as we were reminded in Branhaven, LLC v. Beeftek, Inc., 288 F.R.D. 386 (D. Md. 2013).

In Branhaven, the defendant served discovery requests on the plaintiff on January 31, 2012. On March 21, 2012, the plaintiff’s counsel signed written discovery responses indicating that responsive documents would be available for inspection and copying at a mutually convenient time. The court noted, however, that counsel had done little, or nothing, in terms of a reasonable inquiry and had no knowledge of the number and identity of responsive documents when the written responses were provided. In fact, the record reflected that the plaintiff’s counsel had not taken any action until the middle of June when the plaintiff’s counsel finally produced some documents that were in counsel’s possession. Then, only a few business days before depositions were to start, the plaintiff produced 112,106 pages, apparently from certain e-mail servers and laptops that had been previously overlooked. In response to the defendant’s motion for exclusion and sanctions, the plaintiff argued that the production was mostly delayed because the plaintiff lacked access to passwords for the servers, which were purchased as part of an asset sale of another entity in 2011.

The court was not convinced. Instead, the court stated that, while a one-month delay before seeking vendor or IT assistance might be reasonable, a five-month delay was not.  Coupling that with the fact that plaintiff’s counsel’s signed responses had been made prior to any investigation by counsel, the court found the plaintiff’s actions punishable through the award of attorneys’ fees to the defendant for both the time spent drafting and prosecuting the motion for sanctions, and for the time spent converting the plaintiffs’ produced documents to a reviewable format (which was a separate complaint by the defendant). The court did not, however, exclude the documents.

E-discovery is time consuming, complicated, and costly, but as Branhaven reminds us, it is still discovery. Attorneys should not use meaningless and arguably misleading written responses to buy time and technically comply with Federal Rule 34. Accordingly, attorneys and their clients should be prepared to make a meaningful production before providing written responses that promise production at a mutually agreeable time and place.

For your reference, a copy of the Branhaven decision is linked here: http://www.mdd.uscourts.gov/Opinions/Opinions/branhaven1302013.pdf.