Unbalanced Arbitration Clauses: Are They Enforceable?

A Tenth Circuit case from earlier this year in a non-construction context raises an important question in every context in which arbitration clauses are used.  Generally, construction arbitration agreements are structured in a way which allows either party to the relationship to compel arbitration.  Similarly, most construction arbitration agreements do not limit the types of actions which can be pursued in an arbitration.  In THI of New Mexico at Hobbs Center, LLC, v. Patton, 741 F.3d 1162 (10th Cir. 2014), however, the Tenth Circuit considered the enforceability of an arbitration clause requiring a nursing home patient to arbitrate all of her claims but allowing the nursing home to file suit on certain limited claims -- here, small claims under $2,500, or claims related to guardianship, collections, or evictions.

The arbitration clause in question was upheld initially by the U.S. District Court.  Then, the New Mexico Court of Appeals held an identical arbitration agreement to be unconscionable under New Mexico law.  See Figueroa v. THI of N.M. at Casa Arena Blanca, LLC, 306 P.3d 480 (N.M. Ct. App. 2012).  The question before the Tenth Circuit then became whether an arbitration provision which was unenforceable under state law could nonetheless be enforced under the Federal Arbitration Act.  741 F.3d at 1165.  The Tenth Circuit determined that the decision of the New Mexico Court of Appeals was based on the notion that arbitration as a dispute-resolution process was inferior to litigation.  As a result, the Tenth Circuit held that the FAA would enforce the arbitration provision and, further, would preempt the state court decision on the issue.

How does this relate to construction?  In many large-project contracts and especially for international projects, arbitration clauses allowing one party the right to choose whether it pursues its claims in arbitration or litigation are becoming more common.  Based on case law as it appears currently, it is likely that the United States would enforce such provisions.

A recent article by Alexandra Douglas published by CPR raised the issue as to whether a rule of law similar to would be followed in other countries.  As with many issues in the law, the answer is, "it depends."  In cases from both Russia and France, unilateral arbitration clauses which allow only one party to the agreement to choose litigation or arbitration are unenforceable.  On the other hand, it appears that Spanish courts would be more likely to enforce such unilateral clauses.

As a lawyer, if you are involved with international arbitration and, in particular, with drafting arbitration provisions in international construction contracts, it is important to keep these decisions in mind when advising your clients.

8th Circuit: Arbitrator Decides Whether Non-Signatory to Contract can Compel Arbitration if Contract incorporates AAA Arbitration Rules

In a recent decision, Eckert/Wordell Architects, Inc v. FJM Properties of Willmar, LLC, the 8th Circuit reviewed a Minnesota federal court's order compelling the parties to submit - to an arbitrator - the question of whether a non-signatory party to the contract (FJM Properties) could compel arbitration. The parties' contract incorporated the AAA Rules requiring arbitration. As such, the 8th Ciruit found that the contract provided a "clear and unmistakable indication" that the parties intended for the arbitrator to decide the threshold question of arbitrability; therefore, the 8th Circuit affirmed the Minnesota district court's decision that the issue was to be resolved by the arbitrator, not by a court.

This case is in line with the U.S. Supreme Court decision in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), in which the Supreme Court found that a contract incorporating the NASD (National Association of Security Dealers) arbitration rules was a "clear and unmistakable indication" the parties intended for the arbitrator to decide threshold questions of arbitrability.

Partial Disclosure of a Source of Potential Bias Justifies Vacating an Arbitration Award in Texas

When compared with traditional litigation judgments, it is much harder to vacate arbitration awards after they are issued. The Texas Supreme Court recently addressed the standard by which an award can be vacated due to inadequate disclosures by the arbitrator.  In particular, the Court had to evaluate whether an award should be vacated due to an arbitrator’s partial disclosure of a source of potential bias or conflict. Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC, 57 Tex. Sup. J. 617 (Tex. 2014).

The AAA Commercial Arbitration Rules require that “any person appointed or to be appointed as an arbitrator shall disclose…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 result of the arbitration or any past or present relationship with the parties or their representatives.” 

The underlying arbitration proceedings were based on a contract dispute between Tenaska and Ponderosa.  The parties’ arbitration agreement provided for a panel of several arbitrators. Lawyers from Nixon Peabody represented Ponderosa and selected Samuel Stern as their arbitrator.  After his selection Stern disclosed the following information to the parties regarding his relationship with Ponderosa and Nixon Peabody: (1) Nixon Peabody had designated him as an arbitrator in three other proceedings, (2) Stern, on behalf of a company named LexSite, had discussions with Nixon Peabody about outsourcing litigation discovery tasks to LexSite, and (3) “Nixon Peabody and LexSite have done no business, and it is not clear that Nixon Peabody would ever have any business to give LexSite.”  Stern, as part of a divided panel, eventually awarded $125 million to Ponderosa.

Tenaska moved to vacate the award in state court, arguing Stern was neither impartial nor free from bias.  The parties conducted extensive discovery on the issue prior to the hearings on the opposing motions. Ultimately, the trial court vacated the arbitration award based on Stern’s failure to disclose that his only contacts at Nixon Peabody were the two lawyers representing Ponderosa, he owned stock in the litigation services company that was pursuing business from Nixon Peabody, he served as president of the company’s U.S. subsidiary, he conducted significant marketing for the company, he had additional meetings and contact with the Nixon Peabody lawyers to solicit business from the firm, and he allowed one of the Nixon Peabody lawyers to edit his disclosures to downplay the relationship with the firm. The court of appeals reversed, holding that Stern’s disclosures were sufficient to put Tenaska on notice of a potential conflict. 

The Texas Supreme Court ultimately upheld the trial court’s vacation of the arbitration award, reasoning that Stern’s failure to disclose the extent of his relationship with LexSite and his attempts to solicit business from Nixon Peabody demonstrated evident partiality and supported vacating the award.  The Federal Arbitration Act allows a court to set aside an arbitration award “where there was evident partiality.” 9 U.S.C. § 10(a)(2).  The U.S. Supreme Court has interpreted the statute to impose a requirement on arbitrators to “disclose to the parties any dealings that might create an impression of possible bias.”  Commonwealth Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145, 147 (1968). Moreover, the Texas Supreme Court had previously held that “if the arbitrator does not disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality,” then the arbitrator exhibits evident partiality. 

Based upon these cases, the Texas Supreme Court held an arbitration award can be vacated if an arbitrator fails to disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality. However, information that is trivial will not rise to this level and need not be disclosed.  Looking at the facts regarding Stern’s business relationship, his potential financial gain from procuring Nixon Peabody’s business, and his decision to allow Ponderosa’s attorneys to downplay their relationship, the Court held that the information was not trivial and might have conveyed an impression of partiality toward Nixon Peabody’s client to a reasonable person. Accordingly, the failure to disclose the information demonstrated evident partiality, and the trial court properly vacated the award. 

While this case was decided under Texas law, the Texas Supreme Court’s interpretation of the Federal Arbitration Act suggests that its reasoning could be applied more broadly to cases across the country. In particular, the Court’s decision to evaluate the extent to which a partial disclosure could be misleading could give rise to more challenges to arbitration awards based on disclosure issues.

Thanks to J.P. Neyland at Griffith Davison & Shurtleff, P.C. for assistance with preparing this post.

Standards of Proof for Quantum Meruit Actions: Process Engineers & Constructors, Inc. v. DiGregorio, Inc., (R.I., July 1, 2014)

In Process Engineers & Constructors, Inc. v. DiGregorio, Inc., No. 2013-87 (July 1, 2014), the Rhode Island Supreme Court affirmed a judgment awarded to a sub-subcontractor following a bench trial. 

The case is helpful because it provides standards of proof under Rhode Island law for quantum meruit claims often brought in construction disputes.  The two points are:

1. A plaintiff need only prove it was not at fault for the changed condition (not need to prove cause).
2. No expert testimony is required to prove the costs incurred were "fair and reasonable."  Proof of the value of the services is sufficient.

At trial, the sub-subcontractor plaintiff sought to recover against the party with whom it contracted (the subcontractor) $316,000 based upon extra work performed.  Plaintiff brought breach of contract and quantum meruit causes of action.  The trial justice found that the plaintiff did not satisfy its burden of proof on the breach of contract claims for failure to follow the change order requirements of the contract. 

On its quantum meruit recovery, plaintiff sought to recover for three categories: (1) change order work, (2) increased bond premium charged due to increased contract amount, and (3) additional costs due to replacing a pipe caused by wet insulation. 

As to the first item (unallocated change order work), the trial justice held that the plaintiff failed to meet its burden of showing that a benefit was conferred on defendant and that the defendant accepted the benefit.

The trial justice found in the plaintiff's favor as to the increased bond premium and wet insulation extra work item.  Specifically regarding the wet insulation item, the trial court found that the loss was not due to the sub-subcontractor's action because it was not responsible to dewater the trenches that became wet. 

In its appeal, defendant contended  the evidence presented by the plaintiff was insufficient because the plaintiff did not prove defendant was responsible for the wet insulation.  The Supreme Court framed the issue and its holding as follows:

Whether [plaintiff] only had to prove that it was not responsible for the loss or whether [plaintiff] also had to prove what caused the loss. We hold that [plaintiff] was required to prove only that it was not at fault for the loss; it did not need to prove who was at fault." Emphasis added.

The second issue on appeal concerned the requisite proof that services rendered were "fair and reasonable" for quantum meruit recovery.  Here, the Court shifted the burden on the defendant to establish the claimed charges and costs were unreasonable.  Citing Bruner & O'Connor, the Supreme Court stated:

For purposes of the prima facie case, a plaintiff need only submit evidence of the value of the services; the factfinder is permitted to infer that the charges are fair and reasonable. A plaintiff is not required to put forth expert testimony on the reasonableness of the value of the services during his or her prima facie case. If a defendant wishes to contest the fairness or reasonableness of the value asserted by a plaintiff, the burden shifts to the defendant to prove that the charges were unreasonable. Emphasis added.

The Supreme Court did not explain what level of proof is required for a defendant to establish charges were not "fair and reasonable" or whether expert testimony would be required.  On the specific facts of the case, the Court found that the defendant simply failed to challenge the reasonableness of the costs .  It stated, "[defendant] did not challenge the hourly rates, the number of hours worked, the costs of materials, or the charges for equipment." 

Sign On the Dotted Line! by Hon. Nancy Holtz (Ret.)

“One of the main purposes of mediation is the expeditious resolution of disputes. Mediation will not always be successful, but it should not spawn more litigation . . . .”

So said the New Jersey Supreme Court in the case of WillingboroMall LTD v. 240/242 Franklin Avenue, LLC, 71 A.3d 888 (2013), as it considered a mediation which itself became the controversy. Five depositions, a four-day evidentiary hearing, and two appeals later, the high court set forth a new rule in New Jersey requiring that, to be enforceable, an agreement reached at mediation must be in writing.

The controversy began when a commercial case, arising out of the sale of a mall, was sent to mediation by the trial court. At mediation, the parties reached an agreement. The mediator reviewed the terms of the settlement with the parties, but the settlement terms were not put in writing at the conclusion of the mediation.

Several weeks later, in what may have simply been a bout of buyer’s remorse, Willingboro’s manager balked at the settlement. He complained that his attorney and the mediator had unduly pressured him to settle. In his words, he would have confessed to the Lindbergh kidnapping and the Kennedy assassination if it meant he could have extricated himself from an “incredible uncomfortable, high pressure situation.”

With Willingboro refusing to honor the deal struck at mediation, Franklin brought a motion to enforce the terms of the settlement that included certifications from its own attorney and the mediator disclosing communications made during the mediation. Rather than oppose the motion invoking the mediation communication privilege, Willingboro opposed the motion with its own disclosures of confidential communications.

During the evidentiary hearing conducted by the trial court, Willingboro changed course and moved to strike the confidential communications already disclosed. But the trial court found that Willingboro had waived the privilege and that a binding agreement had been reached between the parties. On appeal, the appellate division affirmed.

Willingboro next appealed to the New Jersey Supreme Court and two issues were certified: (1) whether New Jersey law required that a settlement agreement reached at mediation be reduced to writing at the time of the mediation to be enforceable, and (2) whether Willingboro had waived the privilege that protects communications made during mediation from disclosure.

The New Jersey Supreme Court noted that there is a mediation communication privilege with only two exceptions: (1) the signed writing exception, which allows a written settlement agreement to be admitted into evidence to prove a settlement; and (2) when there is a waiver of the privilege.

The court stated that “[i]n the absence of a signed settlement agreement or waiver, it is difficult to imagine any scenario in which a party would be able to prove a settlement was reached during the mediation without running afoul of the mediation-communication privilege.” The court upheld the ruling that Willingboro had waived the privilege and that the settlement was binding.

Recognizing that the court system favors the settlement of disputes by mediation, the court observed that the success of mediation depends on confidentiality. To protect this confidentiality while encouraging the use of mediation to reach binding settlement agreements, the court announced a new rule: “[G]oing forward, a settlement that is reached at mediation but not reduced to a signed written agreement will not be enforced.”

As the courts continue to encourage mediation as a more economical and expeditious means to resolve cases, this new rule in New Jersey will no doubt be adopted in other jurisdictions that have yet to address the issue. A signed writing (or video or audio recording, which the high court suggested as an alternative) may ensure the enforceability of settlements reached at mediations.

A Mediator’s Takeaway

Mediators may wish to provide a standard form that attorneys can utilize to memorialize the key terms of a settlement. In the event the parties are not able to complete a memorandum of understanding before the close of the mediation proceedings, the mediator may want to suggest that the mediation remain open until the settlement is reduced to writing.

Parties choose mediation for expedience and economy. Willingboro should serve as a cautionary tale to mediators: Parties are entitled to rely on the guarantee of confidentiality at mediations. If a dispute arises, a mediator may not divulge privileged communications in order to assist a party in enforcing a settlement reached during mediation. The result in Willingboro speaks volumes about the consequences of disclosing confidential communications.

Hon. Nancy Holtz is a mediator and arbitrator based in Boston, Massachusetts providing neutral services nationwide.

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© 2014 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Effective Risk Management Planning - Step 2 - Quality Over Quantity

Division 1 is pleased to provide Andrew Englehart's, principal at Construction Process Solutions, Ltd., second installment of his series on Effective Risk Management Planning.  To review Step 1 - Identify Your Team - click here.

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How Should We Go About Documenting Our Project?

A Pound of Bologna or that 4 Oz. Fillet??

 

How many times have you heard, “We didn’t document that project well enough?” Such regrets are typically aimed at the lack of stacks of documentation. However, quantity does not equate to quality, and often times, in the interest of a perceived desire for pushing as many e-mails through the pipe, the project team loses sight that the quality of the documentation is more important.

What is meant by referring to “quality?” There are 4 primary characteristics that a project player should consider when considering a project’s plan for documentation, as well as when considering what, when, to whom, how, and in what “form” a particular piece of documentation should go out:

·         The substantive nature of the documentation.

·         The documentation’s conformance with the contract requirements.

·         The documentation’s conformance with the “big picture” risk profile.

·         The documentation’s form and how effective it can be used in a forensic setting.

The content of the documentation should be factually accurate, sufficiently comprehensive, but the aim should be for brevity.  Avoid positions in documentation. There are certainly times when positional communiqué need to occur, but such communiqué themselves should rely upon quality documentation. As a particular practical tip, a common oversight in the preparation of documentation is to focus on what is occurring, as contrasted to, or perhaps complimented by, registering what should have been occurring, but couldn’t and why.

The documentation must strive to conform to the contract requirements. It is particularly galling to incur the emotional and real cost of producing documentation, only to see the effectiveness significantly undermined because of a failure to conform to the contract. In order to do so, the first step is to read the contract. Not surprisingly, most project level players fail to review and gain an understanding of what the particular project’s documentation requirements may be. Upper level project management (particularly those charged with P/L and risk management) should provide an abstract of the contract’s requirements and ensure that the organization’s processes and protocols can be molded to fit those requirements, and that those documenting the project understand what those requirements are. Don’t fall into the “This is the way we have always done it” trap.

Before drafting that e-mail (and certainly before hitting the “send” button), or before filling out that daily log, documenters should take a breath a read what they are proposing to write and think how it will read a year later. Superintendent and foremen daily logs are often rife with complaints about their own company. Needless to say . . . those come back to haunt them.

Finally, if the documentation is so cumbersome and expensive to retrieve and use, then all the time and effort in preparing it is wasted. As part of an organization’s risk management plan, the use (and power) of technology should be considered. Handwritten daily logs, while perhaps tradition, and clearly served a purpose 30 years ago, are often illegible, incomplete, incoherent, and require a monumental amount of time and resources to be useful in a forensic setting. Innovative (and intelligent and appropriate) uses of ubiquitous programs such as Excel should be considered. (Note: Excel is essentially a data base compilation application. However, to utilize its robustness, the user must recognize the importance and power of entering individual types of data into individual cells, and doing so in a consistent fashion. In other words, it should not be used as word processor.)

Documentation is a key part of any risk management program. However, the difference between an effective risk management program and one that fails is the quality of that documentation and not the quantity produced.

“It is quality rather than quantity that matters.”

Lucius Annaeus Seneca

 

Andrew T. Englehart

Principal
Director of Dispute Resolution Support Services
Construction Process Solutions, Ltd.
www.cpsconsult.com

ARCADIS Global Construction Disputes Report for 2014

If you are active in the Forum at all, you are probably aware that ARCADIS is one of the Forum's most active sponsors.  Indeed, both in Dana Point in 2013 and in Las Vegas in 2012, ARCADIS sponsored the Service Project with the Young Lawyers Section.  

ARCADIS is also a globally recognized construction management and claims assistance firm. In those capacities and for the past four years, ARCADIS has published its Global Construction Disputes report.  Its most recent iteration summarizing the 2013 year in construction disputes is available at this link.

In the report, some intriguing information is provided.  First, Mike Allen, who compiled the report and is the Global Head of Contract Solutions for ARCADIS, noted that he believes that there has been an increase in the number of "Mega Disputes" in which the disputed sums are in excess of $1 billion in American dollars.  These mega-disputes, of course, arise out of mega-projects -- after all, for a claim of $1 billion to exist, the project had better be at least that large itself.  Overall, the average dispute rose by approximately $400,000 over 2012.

A second interesting point can be seen in the causes for disputes.  The most common reason for a dispute arising was identified as being a "failure to properly administer the contract." That replaced "poorly drafted or incomplete and unsubstantiated claims" at the top of the chart, and it underlines an issue that all of us can take to our clients: dispute avoidance starts at the beginning of the contracting process with a full understanding of what requirements for contract administration exist in the contract and how the contract identifies how administration should be undertaken.

The final takeaway from this report in many respects is that performing work in joint ventures is more frequently leading to disputes.  Fully 1 of every 3 disputes that ARCADIS encountered in 2013 involved differences between joint venture parties.  In some areas of the world, that number was even higher -- in the Middle East, 46% of joint ventures ended up in a dispute. As projects get larger, fewer companies can take on the risk of contracting to provide all of the services required to build a project. As a result, more joint ventures are formed.  If these numbers hold true going forward, more disputes may result. 

American Arbitration Association Announces New Supplementary Rules for Construction Cases

On June 15, the American Arbitration Association rolled out a new set of supplementary rules aimed at addressing complaints about the increasing costs and durations involved in construction arbitration for those claims that total less than $5 million.  Called The Supplementary Rules for Fixed Time and Cost Construction Arbitration, these supplementary rules are intended to allow the parties to calculate maximum fees for the arbitrator and for the AAA's administration fees at the beginning of their arbitration. 

A copy of the rules is located at this link (note: this link leads to a PDF of the rules).  

What is not new in these rules?  First, the Supplementary Rules do not change how arbitrations involving claims of less than $75,000 are handled.  Those smaller claims have been -- and will remain -- decided by the submission of documents to a single arbitrator.  Second, the Supplementary Rules do not affect large claims of over $5 million.  

What is new?  The Supplemental Rules include several schedules setting forth the fees to be charged based on the size of the largest monetary claim in the case.  For example, using the largest group of claims -- above $1 million to a maximum of $5 million -- AAA Administration Fees will be capped at $10,000.  The maximum days from the claim being filed to the award is 360.  The maximum number of hearing days is limited to ten, and arbitrators are limited to a maximum of 40 study hours compensated at a maximum rate of $350 per study hour.  

Further, the maximum total arbitrator fees are capped at $52,000, not including travel-related expenses and costs incurred based on the remaining fee schedules.  The additional fee schedules include costs for administrative conference calls, site visits, and reviewing post-hearing briefs.  For claims of over $1 million to a maximum of $5 million, administrative conference call arbitrator fees and post-hearing review of briefs are each capped at $1,400 at $350 per hour over a maximum of four hours respectively.  For site visits, a maximum of 8 hours at $350 per hour is allowed for a total fee to the arbitrator of $2,800.

To invoke the procedures under these Supplementary Rules, parties may include provisions within their contracts to provide for this relative cost certainty.  Alternatively, the parties to an existing arbitration may choose to apply the Supplementary Rules to a dispute through a joint submission to the AAA that the parties wish to proceed under the Supplementary Rules.

Another new wrinkle in the Supplementary Rules relates to the notices provided by AAA related to arbitration-related communications.  The AAA requires parties under Supplemental Rule SR-2 to identify a representative other than their attorney -- for example, a company executive or in-house counsel -- identified as the "designated employee" to be included on all communications via e-mail. In the Corporate Counsel article regarding the new rules, AAA construction division vice president Rodney Toben stated his belief that this designated person will "be able to track the case, because they are going to be receiving those communications throughout the life of the case." Toben stated further that the AAA believes that it is "very important" that in-house counsel is kept in the loop on the arbitration process.

In an effort to streamline the procedures, several other Supplemental Rules are worth noting. Under Rules SR-5 and SR-6, the statement of claim and any counterclaims are limited to no more than five pages.  Further, SR-6 limits amendments to either the claim or counterclaim to the time period of thirty days following the filing of the counterclaim, though this time may be extended or changed only by the arbitrator in his or her determination.  

Under SR-9, the parties and the AAA will hold an administrative conference within three days of the filing of the Arbitration Demand (or as soon thereafter as is practicable).  The rule states that this administrative conference is meant to allow the AAA and the parties to explore administrative details and, most importantly, to establish an efficient means to selecting the single arbitrator by ascertaining the parties' preferred arbitrator qualifications.  Within two days of the administrative conference, the AAA will provide a list of at least 10 prospective arbitrators to the parties.  

To select the arbitrator -- and to agree on such issues as the time, date, and place of hearing, the number of days for the arbitration and the allocation of those days between the parties, the time period for and limitations on discovery, and the date by which discovery disputes must be submitted to the arbitrator or be waived -- the parties are required to engage in a Meet and Confer Conference under Rule SR-11.  Rather than relying on the parties to cross out those names that are not acceptable without any discussions with the other party, the Meet and Confer Conference requires the parties to agree on three potential arbitrators ranked in order of preference.  After that, the AAA contacts the prospective arbitrators in order to serve.  If none of the three arbitrators on the list are willing to serve, then the AAA appoints an arbitrator itself.

If the parties fail to reach agreement on any or all of the items set forth in Rule SR-11 at the Meet and Confer Conference, then Rule SR-12 provides that the AAA will appoint an arbitrator off its National Roster of Construction Neutrals.  Within seven days thereafter, the parties may request an administrative call with the arbitrator to resolve any other open issues from the Meet and Confer Conference.

Finally, another interesting twist in the Supplemental Rules is the procedure when a party fails or refuses to pay its share of the arbitration fees.  Under the current Construction Industry Rules, rule R-56 provides that parties cannot be precluded from pursuing their claims even though they have refused or have failed to pay the arbitrator compensation or AAA administrative charges in full.  To make sure that the arbitration goes forward, the AAA generally asks the other party to the arbitration to pay the fees that the first party has not paid.  In many situations, this is an untenable position for a party to be put in -- paying up front for the other party's right to assert a counterclaim against them generally is not something most business people wish to do.  Under the Supplemental Rules, however, Rule SR-22 states that, "[f]ailure of a party to pay requested fees or deposits without good cause shown shall result in a default award. . . . The party seeking a default award must prove its damages to the arbitrator at a scheduled hearing."  

There are a number of other procedures which are vital to the arbitration process which are altered under these Supplemental Rules.  Before using these rules, the parties and their counsel need to review the processes closely to make an informed determination that following these faster-track rules is in the best interest of the parties in resolving their dispute.

Recent Amendments to the Federal Rules of Evidence Alter Hearsay Rules

On April 25, 2014, the Supreme Court approved four amendments to the Federal Rules of Evidence that will take effect on December 1, 2014, unless Congress takes another action prior to that time.  These amendments affect Rules 801(d)(1)(B) and 803(6), (7), and (8) of the Federal Rules of Evidence. 

Regarding Federal Rule of Evidence 801(d)(1)(B), the current Rule provides that a statement is not hearsay if it “is consistent with the declarant’s testimony and is offered to rebut an express or implied charge that the declarant recently fabricated it or acted from a recent improper influence or motive in so testifying.”  Amended Federal Rule of Evidence 801(d)(1)(B) will now provide that a statement is not hearsay under the following circumstances:

(B) is consistent with the declarant’s testimony and is offered: 

(i) to rebut an express or implied charge that the declarant recently fabricated it or acted from a recent improper influence or motive in so testifying; or 

(ii) to rehabilitate the declarant’s credibility as a witness when attacked on another ground; …

Therefore, while current Rule 801(d)(1)(B) provides that a prior consistent statement can only be introduced as non-hearsay if the opposing party claims that a witness’s trial testimony is a recent fabrication based upon a recent improper influence of motive, amended Rule 801(d)(1)(B) now allows for the admission of witness’s prior consistent statement for any impeachment purposes.

The amendments to Federal Rules of Evidence 803(6)–Records of a Regularly Conducted Activity), 803(7)–Absence of a Record of a Regularly Conducted Activity, and 803(8)–Public Records, resolve an issue in the case law concerning which party bears the burden to establish the untrustworthiness of business or public records.  Amended Rule 803 clarifies that this burden is held by the opponent to the evidence.  Under the amendments, a business or public record is admissible (assuming all other requirements of the Rule have been met) if “the opponent does not show that the source of information nor or the method or circumstances of preparation indicate a lack of trustworthiness.”

The Supreme Court’s amendments to Rules 801 and 803 are available at:

http://www.supremecourt.gov/orders/courtorders/frev14_3318.pdf

Superseding the Implied Warranty of Good and Workmanlike Repair in Texas

In a case involving foundation repairs to a residence, the Texas Supreme Court addressed the question of whether the implied warranty for good and workmanlike repair of tangible goods or property can be disclaimed or superseded.  The Court held that the implied warranty cannot be disclaimed, but it can be superseded by the parties. Gonzalez v. Southwest Olshan Foundation Repair Company, LLC, 400 S.W. 3d 52 (Tex. 2013).

In Gonzalez, a homeowner (“Gonzalez”) hired Olshan Foundation Repair Co., LLC (“Olshan”) to repair the foundation of their home.  The repair contract (the “Contract”) included two warranty provisions.  First, the Contract stated Olshan would use the Cable Lock system of foundation repair and would adjust the foundation for the life of the home.  Second, it required Olshan to perform all of the necessary work in a good and workmanlike manner.  Olshan repaired the foundation, but Gonzalez continued to experience foundation problems. 

Gonzalez ultimately sued Olshan for, among other things, breach of express warranty, breach of the common law warranty of good and workmanlike repair, and DTPA violations.  The jury found that Olshan did breach the implied warranty of good and workmanlike repair and committed DTPA violations, but did not breach any express warranty.  The Court of Appeals reversed this holding on the grounds that the implied-warranty and DTPA claims were barred by the two-year statute of limitations.  The case then proceeded to the Texas Supreme Court. 

Olshan argued that its express warranty superseded any implied warranty of good and workmanlike repair.  Therefore, because the jury held Olshan did not breach any express warranty, liability was precluded on Gonzalez’s implied-warranty claims. The Texas Supreme Court agreed.  The Court stated that Texas law recognizes an implied warranty to repair or modify existing tangible goods or property in a good and workmanlike manner, and that such implied warranty cannot be disclaimed or waived.  The Court then analogized this implied warranty with the implied warranty of good workmanship related to new home construction. See Melody Home Manufacturing Co. v. Barnes, 741 S.W.2d 349, 354 (Tex. 1984).  The Court held that the implied warranty of good and workmanlike repair may be superseded if the parties’ agreement sufficiently describes the manner, performance or quality of the services to be provided. 

In the case at bar, the Court found the Contract sufficient to supersede the implied warranty.  The Contract specified the manner, performance or quality of the services by stating that Olshan would perform the work in a good and workmanlike manner and would use the Cable Lock foundation repair system and would adjust the foundation for the life of the home.  Accordingly, because the implied warranty was superseded, the jury’s finding that there was no breach of an express warranty was conclusive on Gonzalez’s claims.  

New ConsensusDocs Contract Between CM and Owner Supposed to Help Avoid Disputes

ConsensusDocs has published a new Construction Management Agency standard agreement, the 831 "Agreement Between Owner and Construction Manager (CM Does Not Provide General Conditions)." The agreement provides an alternative to the ConsensusDocs 830 Agreement, in which the CM provides General Conditions. According to ConsensusDocs, the 831 Agreement provides greater clarity in defining costs, fees and profit to avoid potential claims and disputes. For those of you who have used the new 831 Agreement (I have not yet), please let us know your thoughts.

The Standard of Care in a Design Build World, by Robert C. McCue, PE and E. Mitchell Swann, PE

Is a design-build contractor entitled to 'reasonably rely upon' the materials prepared by its designer...even if the designer works for the design-build contractor?

The article below, The Standard of Care in a Design Build World, from Robert C. McCue, PE and E. Mitchell Swann, PE of MDCSystems® helps frame and provides context for this question.

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The Standard of Care in a Design Build World

Design-Build Delivery can create new responsibilities for designers where they would not exist in traditional Design-Bid-Build delivery situations and require new awareness on the part of contractors to the iterative and uncertain world of conceptual design. These new responsibilities require a paradigm shift for both Designers and Contractors as the realities of working together challenge the leadership of the organizations.

For designers the change requires them to abandon their traditionally "client only" focused advice and consent role and adopt a new paradigm of working for, or with, the contractor to deliver an acceptable and profitable product. For the contractor working with and supporting the designer changes the very nature of their previous working relationship. The contractor is now working with and for the people they are all too often at odds with concerning project delivery.

The following situation is illustrative of the evolving nature of construction in the Design Build world.

MDC's client was a building contractor who wanted to bid on a public project being offered as a Design-Build (DB) opportunity. In order to prepare a bid the contractor had to team with a designer and develop the bid from what were advertised as 30% complete preliminary design documents – bridging documents or a "two step" design-build process. In our example the contractor retained a design firm as a sub-contractor. In selecting his design partner, the contractor looked for a firm with significant experience in the region and with the agency soliciting the work. A number of similar DB ventures formed and provided competing bids for the work. The agency soliciting the work provided a bid preparation design fee reimbursement in recognition of the design effort required of the DB teams to prepare the bids. On award the designer was retained to prepare the construction documents as part of the team.

As the contractor/designer team prepared their bid, the contractor looked to his designer to provide technical guidance on interpreting the 30% bid documents and conceptualizing and quantifying bid quantities which formed the basis of the contractor developed unit prices and overall estimate. As the project entered the construction phase, it became evident that there were major features of the project that had not been fully developed in the agency-issued bid documents; but those documents were not defined as being a "100% complete" document set. The requirements and constraints for and on the project were described, if not detailed. To be fair, there were potential risk items identified by the designer in preparing the bid documents and quantities. But the contractor did ask for guidance from his design sub-consultant on these issues and there was an extension of the bid submission deadline which would have ostensibly created an opportunity to make some adjustments.

The wrinkle in this DB instance is that normally if the bid documents showed a scope -- say, 100 linear feet and the final work actually required 150 linear feet then he could make an argument to be paid for the difference. He, the contractor, expects to "reasonably rely upon" the bid documents. It is a risk inherent in the owner declaring that the "instruments of service" are reasonable and complete. The designer however often sees such differences between "as shown" and "as built" as a part of the contractor's risk. A requirement of the installation that is "reasonably inferred from the documents" and part of his obligation to provide a "complete and working system." However in this case the design is contracted (in part) to the contractor via the DB team and the designer is contracted to construct (in part) via the DB team. Who is responsible for making sure the instruments are suitable for the service intended and who is responsible for making sure that reasonable inferences are made and included in the bid?

This scenario raises a number of challenges to the traditional application of Standard of Care. In this situation the designer has the normal Standard of Care responsibilities and also the additional requirements imposed through its contract with its design-build partner, the contractor. A number of unique situations contributed to the challenges posed by the agency receiving the work. The agency was accustomed to letting Design-Bid-Build work. All of its procedures, specifications and approvals were applied to the project compounding any scope challenges. The designer had worked directly for the agency historically and was hesitant to challenge or resist agency requests or preferences. The pacing of the discovery of "challenges," constraints and restrictions in the contractor's originally intended solutions along with the staggered issuing of "revised" drawings during construction prevented the IFC construction documents prevented the contractor from addressing the cost implications at the start of the project and thus reduce or mitigate some of the overruns that occurred.

All parties to the work had plausible denial of responsibility for the cost issues.

• The agency said, "It is a Design-Build contract and we are not accepting change orders."

• The designer said, "The changes are minor in nature and within the Standard of Care for any project and we warned of risks."

• The contractor said, "These cost overruns accumulated and not until the end of the drawing issues did we see the problem and determine the final installed quantities and related costs."

In this instance MDC® had to first determine the applicable Standard of Care in the design effort. Because, hundreds of construction items are aggregated to make a bid pricing submission, relatively minor changes in quantity (considered as acceptable in the normal application of design Standard of Care for DBB) become significant to the final installed contractor cost. Is the contractor entitled to 'reasonably rely upon' the materials prepared by the designer...even if the designer works for him? In this particular case, it was significant that the designer was compensated for its pre-bidwork (along with any work performed after award), nor was there any type of profit/loss sharing agreement as part of the subcontract between designer and contractor.  They received fees for service. 

What became key along with contracted agreement was the trail of correspondence during the bid development period; when the contractor was putting his numbers together in part based on input from the design team. There are some interesting points of view that rattle around like loose pebbles in a hubcap. The designer in this case had worked for the owner on several occasions before but in traditional Design-Bid-Build arrangements. It was the presumed advantage of that prior experience that prompted the contractor to select them. But is it possible that the designer wasn't really enthused about the prospects of Design Build arrangements where there was now an intermediary – the contractor – between him and his traditional client?

The designer certainly wouldn't want the owner to be unsatisfied with the finished project, but would he be really concerned about the financial position of the contractor? MDC® suggests that a brave new world exists to be developed and there are some points worth pondering before your next Design-Build team formation and undertaking.

How precise should you make your bridging documents? Is it possible that you could unwittingly create an 'impossibility' defense if you ask for ...the impossible? Is it possible that you could leave a major gap undefined in what is expected to address it?

If a designer is asked to address issues like quantities and installation sequencing, is that a drift into the traditionally forbidden territory of "means and methods?" What about if the designer is a subconsultant to the contractor?

If a bid package leaves elements open to interpretation, does the contractor have a role (and responsibility) to play in arriving at solutions? If the contractor is the lead of the team, can he truly defer to a sub-consultant if things go awry? (Is it similar to the "linkage" that binds an architect to his or her engineering subconsultant.)

If you go into a "project specific" design-build should you be setting up appropriate incentives (and penalties?) to properly align the team members' interests?

Should DB teams develop specialized language to address the overlaps or bridge between design and construction to avoid stepping on toes or dropping fly balls?

A Blueprint for a Successful Construction Mediation, by Judge Nancy Holtz (Ret.)

Division 1 Member, Nancy Holtz, shares with The Dispute Resolver her insight on a blueprint for a successful construction mediation. 

Project: Settlement. Construction mediation is no different than any other type of mediation. However, it can present additional challenges since there are frequently a multitude of parties, as well as numerous collateral issues which can impede settlement. Let’s take a look at the critical path to getting the case settled.

The Program. For almost every construction case, the best pathway out of the dispute is through settlement rather than through adjudication by judge, jury or arbitrator. Point out to your client that in choosing mediation over litigation, your client is retaking control of his business – and life. Because as litigation unfolds, your client will quickly and unhappily experience a complete lack of control over what happens. But with mediation, your client will have control over the timing, process and outcome of the dispute. Your client’s business will have no interruption occasioned by assisting in discovery, attending depositions, and, worst of all, attending and testifying at trial. There will be no bad blood between business entities with whom your client wishes to continue to work. Bear in mind, people in the construction industry are used to having a fair amount of control over their part of a construction project. So, the idea of regaining control of their fate regarding the legal dispute is very appealing.

Design-Build. The beauty of mediation is that the parties can create whatever dispute resolution process they feel will be most effective. Formats to consider include mediation, mediation-arbitration, or arbitration-mediation.

Seek Bids for the Job - The Mediator. A construction mediator should possess the characteristics of any good mediator: skill, fairness, and common sense. But, because of the challenges of construction mediation, more is needed. No one wants a mediator who thinks The Eichleay Formula is a Robert Ludlum book; but, to resolve a tough construction dispute, you will want a mediator who has certain traits beyond some level of fluency in construction law. An effective construction mediator must have highly developed interpersonal skills, tenacity, and boundless energy for the marathon sessions which can occur.

A mediator should be flexible and be able to move between approaches – facilitative and evaluative – depending on the circumstances of the mediation and needs of the parties. Specifically, you will want a mediator who can speak to questions of evidence and other legal issues which may arise if the case goes to trial.

Erect the Scaffolding. A candid pre-mediation telephone conversation is crucial to the success of the mediation. Although dubbed a “pre” mediation call, it is in fact the beginning of the mediation because you will begin to describe the case from your perspective during this conversation. This is also the time where you should talk about the trial date, what settlement discussions have already occurred, and any particular challenges you anticipate. For example, are there issues regarding insurance coverage; in multi-defendant cases, is there a question of apportionment among the defendants; what to do about a non-participating defendant; and, whether a defense-only mediation session might be helpful. There may also be personality issues to address. Finally, you should discuss opening statements which, on occasion, can be unduly lengthy, provocative and even counterproductive.

The Project Documents. A good mediation summary should distill the significant information into a format which is persuasive and manageable. An unfiltered data dump of plans, photos, and technical information does not provide the mediator with the most effective tools to question and challenge the other side’s position.

Assembling the Team. The oft cited advice of bringing the people with authority to settle is a good starting point. Beyond that, consider bringing people who are knowledgeable on anticipated areas of controversy. You may want to bring someone at a senior management level who is above the fray of having worked on the project himself. Such a person can bring great knowledge without the protective feelings of ownership regarding the project. You, as advocate, need to move beyond the role of warrior and become a diplomat. As the attorney at a mediation, you should be part of the solution-not part of the problem.

No Hard Positions on Hard Hats. The construction industry is populated by people who take great pride in their work. So, if your opening statement includes claims which might be taken as insulting, such as shoddy workmanship, try to soften your words a bit. A successful mediation needs buy in from all participants. Harsh statements attacking the integrity or competence of a party are sure ways to harden positions.

Loss of Productivity. Be careful if you choose to bring an expert. An expert should attend a mediation to help educate and elucidate - not carry the day for your side. The goal of mediation is to move the parties beyond their positions and focus on their interests. So, do not waste valuable time having the expert expound on why your client’s position is 100% unassailable.

Also, sometimes even powerful evidence presented at mediation can be a waste of time. Such evidence is not particularly valuable if it is so technical that it will never be understood by a fact finder or, worse still, will never pass evidentiary muster. Never forget that this is a legal dispute headed for court if it cannot be resolved. To make the session productive, focus on those items which will be admissible and persuasive to the ultimate fact finder. That is what will elicit movement on the other side.

Delay Damages (Don’t). Do not spend the whole session trying to jam a week’s worth of evidence into a single day in order to prove the liability part of your case. Regardless of the strength of your case, your interest now is to get it settled. So, like it or not, you simply must move to the numbers and - working with the mediator - find the number that everyone can live with.

Be Ready for Change Orders. Come to the mediation with a settlement range in mind, but, be prepared to be flexible. Those last moves beyond your hoped for end point may be tough but will be worth it when the case settles.

Terminations for Convenience. It can be tempting to take the easy route and walk out on a mediation when it is not going well. But remember, rarely is your client better served by a trial. The brief moment of righteousness upon walking out will soon be eclipsed by the specter of a lengthy expensive trial looming in your client’s future.

Concurrent Delays. As the parties near resolution, there are some obstacles which tend to crop up all at once. You may have some terms which you consider minor but which the other side might balk at. Do not wait until the very end of negotiations to raise these terms. When you present additional terms after the other side thinks they have struck a deal, it can derail the process. In fact, you may be providing the other side with new leverage. So, raise these issues earlier rather than later in the negotiations.

Another cause for delay at the end is the task of reducing the settlement to writing. Even when everyone is exhausted and content with a handshake, do not leave until the basic terms of the settlement are memorialized in a binding agreement. Your mediator should provide the parties with a Memorandum of Understanding to use once a settlement is reached. But, you should come to the mediation with any particular language which you want to be included in the Memorandum of Understanding already prepared. You will want to address any liens and logistics of releases of those liens. Consider the collateral effect of this settlement. Do you want language relating to any warranties or on any ongoing insurance litigation. These are all items which can be anticipated and you should have language ready to include in the Memorandum of Understanding if at all possible. It is much wiser to have an enforceable Memorandum of Understanding when the mediation breaks than hope the necessary terms will all be included in a later drafted settlement agreement and release.

Punch List. If the case does not settle at mediation, the project is still not over. Construction mediations can take more than one session – in person or by phone. Keep working with your mediator. With the right plan you can complete Project: Settlement within an acceptable budget and your client will thank you for it.

Latest Wave Of The Litigation World -- Technology Assisted Review (TAR), by Jared R. Lake, RCSP, BDO Consulting

Year over year, the main line of legal press generates a fair amount of "noise" with articles in their periodicals, publications, journals, and blogs about the rising expense and burden surrounding the litigation world- as it does with the rapidly changing world of litigation technology. The use of technology has become common place in litigation.  Yet, even as technology related law experiences gains in both admissibility, as well as understanding, parties are under more scrutiny with respect to tolls they have utilized to identify, preserve, and collect electronically store information (ESI).

Enter the latest technology wave to crash into the litigation world- Technology Assisted Review (TAR).  The Blair Maron study empirically established beyond a statistical doubt that humans are not nearly as accurate than they self-reported being when working amidst a heterogeneous data set of documents that have a variety of different data types and formats...or using ad hoc, keyword as the lone approach to identifying relevant ESI, for that matter. This, then, is a very important factor that should be at the root of and interwoven into the foundation of evaluating the effectiveness of automated search technology and accompanying tools with respect to their positive impact on litigation practices.

The 2012 judicial opinion approving the use of said TAR will only expedite its acceptance and utilization of this methodology.  At its core, TAR is a process for ranking or coding a collected corpus of ESI by using a computerized system that harnesses a the knowledge base of a multitude of subject matter experts on a smaller set of documents- and then takes license and liberty when applying them to the remaining documents in the corpus of the collection.

How does this happen?  It could be through a few different methods:

1.      algorithms can be to either show how similar- or dissimilar- the remaining documents are to what has already been coded as "relevant"  to a litigation matter by subject matter experts'

2.      Or by implementing methodologies that develop a set of stringent, systematic rules that essentially emulate the patterns of the expert decision makers processes.

3.      Generally, TAR systems incorporate the use of statistical and/or sampling techniques that serve as a road map of sorts to guide and measure the overall process.

There is, importantly, often an accepted trade-off for the practitioner between precision and volume.  The system to “retrieve more documents” comes with an expense- figuratively and literally- of decreasing accuracy/precision, resulting in the presence of more irrelevant documents.  For this reason, logically, practitioners and litigating parties would be best served to evaluate the use of TAR methods and techniques in a wide range of cases- but particularly in large and complex litigation matters.  For additional background and a glossary of terms, see Maura R. Grossman and Gordon V. Cormack, The Grossman-Cormack Glossary of Technology-Assisted Review, with Foreword by John M. Facciola, U.S. Magistrate Judge, 2013 Fed. Cts. L. Rev. 7 (January 2013).

A publication from The Sedona Conference, The Sedona Conference, Navigating The Vendor Proposal Process (2007 ed.), p. 29, summarizes this best:

Technology is developing that will allow for electronic relevancy assessments and subject matter, or issue coding. These technologies have the potential to dramatically change the way electronic discovery is handled in litigation, and could save litigants millions of dollars in document review costs. Hand-in-hand with electronic relevancy assessment and issue coding, it is anticipated that advanced searching and retrieval technologies may allow for targeted collections and productions, thus reducing the volume of information involved in the discovery process.

The trajectory and enormity of growing data warehouses- in concert with human language fluidity/interchangeability, and individual differences- in concert with cost factors- should make this a required approach to litigation going forward.