constructionattorneyblog

Cannot record Lis Pendens for arbitration case if no litigation has commenced

A California case, Manhattan Loft v. Mercury Liquor, 2009 WL 1219732 (May 6, 2009), has ruled that a lis pendens notice cannot be recorded unless an underlying court case has been filed. In this case, two arbitration proceedings were commenced and lis pendens notices were recorded.  Both arbitrations resulted in awards in favor of the respondent who had recorded the lis pendens. Thereafter, a slander of title action was filed against respondents alleging that the lis pendens had caused substantial damage. Respondent filed a motion to dismiss per California's anti-SLAPP statute. The trial court granted the motion and the appellate court reversed.

Non-signatories bound by arbitration agreement in wrongful death case

The Fifth Circuit Court of Appeals, in Graves v. BP America Inc., No. 8-40575 (May 6, 2009), has held that the surviving spouse and children of a worker killed in an accident were bound by the decedent's employment agreement that contained an arbitration provision. The plaintiffs claimed that their wrongful death action was not subject to arbitration. The appellate court found that a wrongful death action is derivative of a decedent's rights. Therefore, this action was also premised on the employment agreement and was subject to arbitration.

Appeal from order denying stay of arbitration is immediately appealable under FAA

The Supreme Court in Arthur Andersen v. Carlisle, No. 08-146 (May 4, 2009) held that a party in federal court can take an immediate appeal under section 3 of the Federal Arbitration Act from an order refusing a stay of arbitration. There will be jurisdiction in the appellate court regardless of the merits of the actual action. The only requirement for such jurisdiction is the denial of a stay.

The court also held that a litigant who is not a party to the arbitration agreement may invoke section 3 if the relevant state contract law allows him to enforce the agreement. Thus, non-signatories to the arbitration agreement such as third party beneficiaries and others entitled to enforce contracts under state law can request and obtain a stay under section 3, if permitted by applicable state law.

Trial court has jurisdiction to determine whether statute of limitations bars arbitration

In Day Masonry v. Independent School Dist. 347, 2009 WL 1182053 (Minn.App., May 5, 2009), the appellate court held that a trial court can stay arbitration if the movant can demonstrate that the applicable statute of limitations has expired. The court rejected the argument that only the arbitrator can decide such matters. A trial court may resolve factual issues that are necessary to determine if the demand for arbitration was timely.

Summary Judgment in Arbitration Upheld

The court in Campbell v. American Family Life Assurance Company of Columbus, Inc., 2009 WL 995577 (D.Minn., april 14, 2009), denied a motion to vacate an arbitration award. The plaintiffs had brought an arbitration against an insurance company for which they worked as state sales coordinators. The insurance company terminated their employment and the plaintiffs claimed that this violated an unwritten "two-year rule" under which such an employee could not be terminated unless he had failed to meet a sales target for two years. The panel of arbitrators granted summary judgment for the insurance company, finding that the claim had no merit.

The plaintiffs argued that Section 10 of the Federal Arbitration Act prohibits motions for summary judgment except in limited cases. The also argued that the award should be vacated because the arbitrators failed to hear material evidence by deciding the case on summary judgment. These arguments were rejected.

Arbitrators award attorneys fees, contract notwithstanding

On April 9, 2009, the Second Circuit Court of Appeals in ReliaStar Life Insurance v. EMC National Life, affirmed an award by a panel of arbitrators that imposed a sanction of attorneys fees and costs on the losing party for failing to arbitrate in good faith. The arbitration agreement stated that each party would bear the expenses of its own arbitrator and its own attorneys. The arbitrators, after the hearings that awarded ReliaStar some $21 million, found that the conduct of National was "lacking good faith."  National moved to vacate that part of the order awarding more than $3 million in attorney and arbitrator fees as well as almost $700,000 in costs. The trial court agreed that the arbitrators exceeded their powers, but the appellate court reversed and reinstated the award.

The court took the position that a broad arbitration clause confers inherent authority on arbitrators to sanction a party that participates in the arbitration in bad faith and that such a sanction may include an award of attorney's or arbitrator's fees. Further, the award was compensatory and not punitive, so it did not violate a policy against punitive arbitration awards.

Non-signatory bound by agreement to arbitrate

In a recent federal case, Southern Illinois Beverage Inc. v. Hansen Beverage Co., 2007 WL 3046273 (S.D. Ill., Oct. 15, 2007), the court held that a non-signatory to a contract that contained an agreement to arbitrate could be bound by the arbitration requirement. Normally, only a party to an agreement to arbitrate is bound by the arbitration provision. However, there are several exceptions to this rule: (1) assumption; (2) agency; (3) estoppel; (4) veil piercing; and (5) incorporation by reference.

In this case, SIB claimed benefits under a contract between Hansen and a third party. That contract contained a broad form arbitration provision. This third party granted SIB the right to distribute a beverage in a six-county area. When Hansen terminated the subcontract, the distribution right was affected and SIB sued Hansen. Hansen demanded arbitration, but SIB argued that it was not bound by the arbitration clause. The court disagreed. A party cannot rely on the contract when it works to its advantage, and repudiate it when it works to its disadvantage.

Finality in the Initial Decision under the 2007 A201

One of the new provisions of the 2007 AIA Documents is the establishment of an Initial Decision Maker. See Section 15.2 of AIA Document A201. In the past, this role was fulfilled by the architect, but there were often problems with this setup. Many contractors, justifiably or not, believed this to be a conflict of interest for the architect. This new provision, if implemented by the parties (the owner and contractor), calls for a third-party neutral to be named in advance and to make preliminary decisions concerning disputes between the owner and contractor. If no one is named, then the architect undertakes this role by default.

Buried within the various paragraphs that discuss how this will work, is an opportunity for owners to limit future litigation if done properly. Here is the relevant paragraph:

§ 15.2.6.1 Either party may, within 30 days from the date of an initial decision, demand in writing that the other party file for mediation within 60 days of the initial decision. If such a demand is made and the party receiving the demand fails to file for mediation within the time required, then both parties waive their rights to mediate or pursue binding dispute resolution proceedings with respect to the initial decision.

What this contemplates is that an initial decision will be made by the Initial Decision Maker (either the architect or a third party) concerning a dispute between the owner and contractor. Most of these disputes will likely revolve around changes or extras to the contract. Often, the contractor will make a claim for additional money that will be the subject of such an initial decision. Once that initial decision is made, under most circumstances, nothing else will happen until the conclusion of the project, when the unhappy party (most likely the contractor) will aggregate all of these decisions and begin the final claims process consisting of mediation first, followed by either arbitration, if selected, or litigation (the default). The more of these unsuccessful claims there are, the more likely it is that the contractor will pursue litigation to obtain relief after the conclusion of the project.

However, if the owner is aware of Section 15.2.6.1, he can, effectively, cut off such future litigation by making a 30 day demand. Under this procedure, within 30 days of the date of an initial decision, the party in whose favor the decision is made can file a written demand with the other party to commence mediation within 60 days after the date of the initial decision. The failure to commence mediation (this would be done by filing a written demand for mediation with the American Arbitration Association) within this time period cuts off that particular claim and waives it for all future purposes.

Of course, this theoretically works the other way, with a decision in favor of the contractor by the Initial Decision Maker, followed by a 30 day written demand by the contractor served on the owner to commence mediation. If the owner fails to commence mediation within 60 days, the initial decision is final and, presumably, a change order to reflect that would be processed by the architect. In most cases, it can be assumed, this will not work in favor of the contractor, since most claims are by the contractor against the owner, not the other way around.

The parties, and their attorneys, should be aware of this powerful tool. While this is similar to Section 4.4.6 of the 1997 version of A201, this does not require any special language in the initial decision itself. The burden is on the parties to invoke this for their own benefit.

The new AIA Documents and Arbitration - What Rules Apply?

One subtle change in the new 2007 AIA documents involves the incorporation of the Rules of the American Arbitration Association into the agreement, assuming that arbitration is selected as the dispute resolution method. For example, AIA Document B101, Owner-Architect Agreement, states:

§ 8.3.1 If the parties have selected arbitration as the method for binding dispute resolution in this Agreement, any claim, dispute or other matter in question arising out of or related to this Agreement subject to, but not resolved by, mediation shall be subject to arbitration which, unless the parties mutually agree otherwise, shall be administered by the American Arbitration Association in accordance with its Construction Industry Arbitration Rules in effect on the date of this Agreement.

The end of this sentence sets the applicable rules as those "in effect on the date of this Agreement," at least according to the AIA, and this does appear to be what this says. However, if one reads the AAA rules, the very first rule of the AAA reads as follows:

R-1. Agreement of Parties

(a) The parties shall be deemed to have made these rules a part of their arbitration agreement whenever they have provided for arbitration by the American Arbitration Association (hereinafter AAA) under its Construction Industry Arbitration Rules. These rules and any amendment of them shall apply in the form in effect at the time the administrative requirements are met for a demand for arbitration or submission agreement received by the AAA. . . .

Thus, the AIA agreement incorporates this, and other, rules into the agreement. Note that Rule 1 states that the rules that apply are the ones "in effect at the time the administrative requirements are met for a demand for arbitration..." Thus, the rules that will govern the arbitration are not necessarily the ones in effect on the date of the Agreement, but the ones in effect at the time the arbitration is filed with AAA.

One might argue that the AIA agreement trumps Rule 1, but the reverse is true. The AIA document incorporates the AAA Rules, which specify which actual rules will apply. The AIA document does not change that, although a more careful drafting of the above-quoted language could have done so.

So what, you might ask. Do the Rules ever change? Absolutely! Several years ago, the AAA instituted "consumer-friendly" rules. These were intended to apply to situations involving consumers and shifted most of the costs to the business. For instance, if a small architect or contractor were doing work for Michael Jordan (this is an example only, because he is very wealthy. I am not picking on him) on his multi-million dollar residence. Suppose that a dispute developed and a massive arbitration ensued. Under those rules (since changed, because of the ensuing uproar), the owner’s share of the fees was capped at less than $500, while the contractor or architect might have paid tens of thousands of dollars! Because of the ensuing outrage over this, the rules were again revised, but there is no telling when the rules may again be amended to the detriment of architects or contractors.

If the parties truly want the rules that are in effect as of the date of the agreement to be applicable, the standard AIA language needs to be tweaked. Since we are not giving legal advice, we will not make a suggestion, but any competent construction attorney should be able to structure something that will work.

New AIA documents and Arbitration

Much is being written about the 2007 AIA Documents, which were released in early November. One of the much-discussed differences in these documents is the fact that arbitration is no longer the default dispute resolution mechanism, being replaced by a "check-box" system whereby three options are provided: arbitration, litigation and "other." If none of the boxes is checked, then litigation is the default mechanism, following mandatory mediation.

It was with great interest that I opened the new documents using the AIA's Electronic Documents software system. I immediately printed out several of the new documents, including various owner-architect agreements and an owner-contractor agreement. At this point, I had not filled in anything. I was, therefore, astonished to find that the "arbitration" box had been checked on all of the documents where that option appeared. Thinking that I had made some type of mistake, I again started a brand new document and made sure not to check anything.  Once again, the arbitration choice was checked.

I mentioned this to several other people, one of whom apparently has a friend that worked on the electronic version of the documents, and I was informed (this was third or fourth-hand) that the reason this had occurred was that one of the boxes had to be initially checked in order to make the program work, and that the AIA did not favor arbitration. (note that I did not actually speak to this person directly, so I can't vouch for what was actually said). After thinking about this for about half a second, I realized that they could just as easily have selected the "litigation" check box as the one that was initially selected by the software, particularly as that choice is supposed to be the default.

The reason I bring this up is not to blame the AIA for anything. After all, arbitration was the preferred method in the AIA documents for decades. And, the paper documents do not have anything pre-checked. However, most users today are using the electronic documents and may not be aware that they actually need to check the litigation box if that is what they intend. If they just read the articles that claim that litigation is the automatic "default," they may not even look at this provision when drafting the documents if they actually want to have litigation as the real default. They may be surprised years later to receive a demand for arbitration. If they are attorneys, they may be open to a claim for legal malpractice if their client insisted on not using arbitration and they relied on the "default" litigation story.

Perhaps the real lesson is to always read every word of every contract.