Best Practices Construction Law : Construction Lawyer & Attorney : Matthew DeVries : Stites & Harbison Law Firm : Green Building & LEED Litigation

Thanks for all inquiries and well wishes for our family.  Yesterday, my wife was released from the hospital after a prolonged two-week stay.  She has been ordered on bed rest for the near future, but we are on the road to recovery. 

All the emails and phone calls from my friends and colleagues ("Matt, what's going on?"  "Yo! Why have you not responded?"  "I hope your family is okay.")  illustrate a good lesson for construction projects:

Facts are important.

More appropriately, facts are really important!  I have found that a construction dispute with good facts and bad law can, nonetheless, result in a good outcome. Rarely, however, do you find that bad facts and good law will result in a good outcome. 

Since facts are so important, what can you do to develop and preserve the facts necessary to help you win your case?  Here are some tips:

1. Keep written records.  Although conditions in the field may constantly change, make sure you have a process in place to reduce to writing all pertinent facts that affect construction.  This may be a changed condition, interference by another party, unusually severe weather conditions, a change in material price, etc.  If you have a pertinent conversation by phone or in person, make sure you follow-up the conversation in writing.  I cannot tell you how many times I have heard, "Well, they agreed to the change order on the phone."
2. Record just the facts.  If you take the time to record the facts in writing, make sure you leave out all the informal language and other information that will make a good exhibit in litigation.  There is no need to tell the owner's representative that he is an idiot (...even if he is...) in a request for information.  There is no need to tell the contractor's project manager that he is incompetent (...even if he is...) in an email responding to the RFI.  Stick to the facts.
3. Organize your information.  Whether you keep hard-copy documents or you have incorporated the paperless project, make sure you take the time to use a folder structure system that organizes the information in a chronological manner.  This will help you (and your attorney) in the event a dispute arises.

Although this is my own personal opinion, remember that 90% of disputes are fact-driven ... which means that you need to get the facts right, reduce them to writing, and keep them organized.

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As a construction lawyer involved in complex litigation, I am often asked to prepare a "litigation and discovery budget" for a client.  As a construction client, your stomach may turn when you receive one of these budgets from your lawyer.  Is there a way to control the costs of discovery in construction litigation? 

According to the International Institute for Conflict Prevention and Resolution (the Center), the answer can be found in what is known as an economical litigation agreement.  According to the FAQ published by the Center [pdf], the Agreement is like a "litigation prenup" that is intended to reduce the costs and delay of discovery according to the size of the matter.  The procedures can be incorporated into a construction contract as follows: 

Economical Litigation Agreement: Any Dispute arising out of or relating to this contract, including the breach, termination or validity thereof, whether based on action in contract or tort, shall be finally resolved by civil litigation in accordance with the International Institute for Conflict Prevention & Resolution Economical Litigation Agreement (2010 edition), by a judge sitting without a jury. In jurisdictions where advance waiver of jury is prohibited as a matter of law, or where all parties to this agreement subsequently agree in writing, such Dispute shall be decided by a jury.

If litigation ensues, the parties are bound by the procedures in the Economical Litigation Agreement, including a limited scope discovery procedure in lieu of conventional discovery.  Discovery requests are limited and sized proportionally to the amount in dispute. For example, for disputes up to $10.0M, 15 interrogatories and six four-hour depositions are permitted. Discovery disputes are to be resolved by a specially trained arbitrator via telephone conference and with limited briefing.  Other areas addressed by the Agreement include: 

1. Waiver of jury trial
2. Escalating negotiations and mandatory mediation
3. Waiver of service of process
4. Responsive pleadings by letter or email
5. Page limit on motions (3 pages)
6. Executive summaries provided with each affidavit submitted
7. Waiver of oral argument on most motions
8. Mandatory discovery with non-electronic discovery limits
9. Limits on number of interrogatories, document requests and requests for admissions
10. Use of informal witness interviews

As with all other things in the construction world ... it looks good on paper.  But I am interested in hearing any feedback from those who have used the Center's alternative to traditional arbitration and litigation.  Anyone?

Image: chbrenchley

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I recently read a BNA article on commercial arbitration entitled Achieving the Perceived Cost Savings and Expedience of Commercial Arbitration (pdf).  In the article, Chicago attorney William O'Neil identifies six essential terms you should include in your arbitration clauses.

While I agree with most of the essential terms, the recommendations really depend on the type and size of the dispute.  Here are O'Neil's recommendations to include in your arbitration provision, along with some of my thoughts for construction disputes in particular:

1. Insist on a Single Arbitrator.  Three member panels are, indeed, expensive.  While the average case cannot support the arbitration fees for a full arbitration panel, some construction disputes are of such a magnitude that a panel is necessary.  In other words, do you want one arbitrator deciding your $10 million claim?  There are ways to structure your dispute provision to have a single arbitrator for claims under $1 million and a three-member panel for claims over $1 million.
2. Limit the Time to the Hearing, the Length of the Hearing, and Time to Decision.   I wholeheartedly agree with this recommendation, as arbitration should achieve two of its primary intended purposes ... cheaper and quicker.  The problem is that parties rarely (if ever) spell out these deadlines in the contract and wait until the dispute arises to then argue about the time and length issues.
3. Adopt a Notice Pleading Standard for the Notice of Arbitration.  Most arbitration disputes begin with a Demand for Arbitration, which is usually no more than a one-page form that provides the name of the parties, the nature of the dispute and the amount in controversy.  As a construction attorney, I generally will include a multi-page complaint attached to the demand for arbitration. (Side bar: I include a similar complaint with contractor claims against the State of Tennessee even though the initial form does not require it.)  By requiring a "notice pleading" standard in your dispute provision, you are required to describe the basis of your claims or you have more information to review the claim, depending on whether you are the party seeking or defending arbitration.
4. Limit Discovery.  Again, depending on the nature and size of dispute, you may want full discovery just as you would have in the litigation process.  The point here is to decide the extent of discovery the parties want at the "contracting stage" as opposed to waiting for the dispute to arise and then be subject to either an arbitration rule of AAA or JAMS or no rule at all.
5. Authorize Arbitral Sanctions.  I agree that the decision-maker should have authority to resolve preliminary disputes, grant interim relief, and award sanctions.  Again, the key is to include this power in the dispute resolution provisions.
6. Ease the Confirmation Process.  Since arbitration is a creature of contract, the parties can contractually agree on its binding nature.  As O'Neil points out, arbitration is "wasted if there is a delay in confirming and enforcing a favorable judgment."  The problem is remedied by simply including a clause in your arbitration provision that vests jurisdiction in every district court in the United States to confirm and enforce the award.

Again, O'Neil makes some great points ... but some of these may require tweeking depending on the nature and extent of the dispute.  Make sure you check out the Model Arbitration Clause in the article for some sample language.

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Who knew that dispute resolution was a lot like ordering from a menu?  Would you like one arbitrator or a panel of three arbitrators?  Would you like your jurisdictional questions to be determined by the court or the arbitrator?  Which arbitration rules do you want to apply?  So many choices . . .

Recently, the American Arbitration Association revised and amended its set of Construction Industry Arbitration Rules and Mediation Procedures, effective October 1, 2009, which addresses some of these menu options.  A summary of the most significant changes is available through AAA's website.

One change that caught my attention involves L-6 Form of Award, which now reads: "In addition to the award requirements set forth in R-44 (a) and (b) unless the parties agree otherwise, the arbitrator shall issue a reasoned award."  A reasoned award?  What is that?  Why should you care?

Arbitration versus Litigation

First, let's go back to the basics.  If you find yourself in court on a construction dispute, the winner at the end of trial is usually granted a judgment.  That judgment can be in the form of an award of money ... a declaration of some finding (such as coverage under an insurance policy) ... an injunction prohibiting or requiring some act ... or any number of other remedies within the court's power.  The court may or may not issue a written opinion explaining the rationale for its decision.

On the other hand, an arbitration proceeding generally results in an "award," which is the determination on the merits by the arbitrator or panel of arbitrators.  Depending on the parties' contract or the applicable arbitration rules, the arbitrator can award the same or similar relief to that of a court.  Charles Resnick, former general counsel for Raytheon Company, has written a good article on whether to arbitrate or not to arbitrate.

Reasoned Award

While the law generally requires an arbitration award to be in writing, there is no consensus on what must be included in that award.  In fact, the traditional "default rule" has been that an arbitration award does not need to contain the reasons for the decision.  Thus, unless expressly required to do so by the parties' contract or applicable rules, the arbitrator could issue a summary award with a simple finding in favor of one of the parties for a specific award of money—no further explanation was required.  For complex construction cases under the AAA Rules, the "default rule" now requires the reasoned award.

A "reasoned award" requires that the arbitrator explain the reasons for the final decision. The reasoned award answers the question of "why" and should give you the "because" factors.  It can be a summary decision or a more detailed decision that contains Findings of Fact and Conclusions of Law. So, would you like "reason" with your arbitration award?  Here are some considerations:

• Since the reasoned award must be written by the arbitrator, it may take longer for the final decision to be issued. 
• For this same reason, a reasoned award may also require additional arbitrator fees.
• On one hand, the reasoned award may provide a solid basis for the award to stand on appeal in a confirmation hearing.
• On the other hand, the reasoned award may provide fruitful ammunition for vacating the award.
• Parties are more likely to accept the result if there is a reasoned award, which may lead to settlement even after the award is rendered. 

Overall, since the reasoned award will be written, it is likely that the arbitrator will more carefully review the facts and law, as opposed to simply finding a quick and equitable resolution (described by some as "splitting the baby" in arbitration).  

Requesting a "reasoned award" is only one of the many options on the arbitration menu.  It is important to know prior to the dispute arising what rules may apply and whether your contract changes any of the default procedures and processes.

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