Construction Arbitration Is Too Lengthy & Costly. The AAA Hopes to Fix That.

As I noted last November, there’s a growing concern among construction industry stakeholders and others that arbitration too often fails to serve its intended purpose as a speedy, less costly and more streamlined alternative to civil litigation.  This rising chorus has complained that pre-hearing discovery is too extensive and drawn out, the hearings themselves take too long, and at the end of the day, no meaningful cost savings are actually achieved.

The American Arbitration Association (“AAA”) is taking those concerns seriously.  Last June, it rolled out its shiny new Supplementary Rules for Fixed Time and Cost Construction Arbitration, intended “to provide an arbitration process that will be predictable in terms of total time and cost,” particularly for cases “with discrete issues that would benefit from limited document exchange and discovery.”

Here are five key features of the new rules:

1.  They only apply to two-party disputes, although this limitation does not extend to a surety represented by the same counsel as its principal and which is not asserting any independent claims against the principal in the arbitration.

Wednesday Wisdom2.  Demands for arbitration are limited to five (5) pages.  So, too, are answers to such demands — even if the answer contains a counterclaim.

3.  The AAA must schedule an administrative conference to discuss arbitrator selection and explore expediting the proceeding within three (3) days of the arbitration demand.  Fourteen (14) days later, the parties must meet and confer to finalize arbitrator selection, schedule the hearings, identify the total number of hearing days and agree upon the scope of pre-hearing discovery activities.  Should the parties fail to identify three (3) mutually agreeable arbitrator candidates, the AAA will appoint one within five (5) days of the “meet and confer” conference.  If the parties can’t agree on the logistics of the proceeding, the arbitrator will hold an administrative call to resolve the issues within seven (7) days of his/her appointment.

4.  The filing fees, duration of the proceeding, number of hearing days and rate of arbitrator compensation are all spelled out — and, more importantly, capped — in “Schedule 1″ of the Supplementary Rules, which I have reproduced for educational purposes below (click the image to see a larger version):

AAA Supplementary Rules5.  The arbitration award must be made within twenty (20) days from the close of the hearings.

Construction industry stakeholders can incorporate the new rules into their existing contract ADR provisions, but that’s not the sole method for utilizing them.  Even after a dispute arises, parties can submit their claims and defenses to the AAA for administration under the Supplementary Rules.  It’s an option I’ll be thinking about and exploring with my clients whenever limited-issue, two-party disputes come knocking on my door.

A tip of the cap to old friend and Boston construction attorney Chuck Cobb, whose recent tweet on the new rules provided the inspiration for this post:

Thanks, Chuck.  Good luck shoveling.

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Everything’s Bigger in Texas, Including the Construction Litigation (Part 2 of 3)

This is the second of a three-part series exploring the Texas Supreme Court’s decision in Zachry Construction Corp. v. Port of Houston Authority of Harris County.  A summary of the case can be found at Part 1 of the series.  Part 3 will address the lien waiver issues raised by the decision.  This post considers the “no-damages-for-delay” aspects of the case, specifically exceptions to enforcement of such contract clauses.

What Zachry Says About No-Damages-for-Delay Clauses

The Texas Supreme Court began its analysis by noting that as a general rule, a contractor can assume the risk of, and not seek damages for, construction delays by agreeing to a no-damages-for-delay clause (“NDFD clause”) in a construction contract.  The court, however, then went on to note five “generally recognized exceptions” to the enforcement of such clauses:

  1. When the delay is not intended or contemplated by the parties to be within the purview of the NDFD clause;
  2. When the delay results from fraud, misrepresentation, or other bad faith on the party seeking the benefit of the NDFD clause;
  3. When the delay has extended for such an unreasonable length of time that the party delayed would have been justified in abandoning the contract;
  4. When the delay is not within the specifically enumerated delays to which the clause applies; and
  5. When the delay is based upon the active interference or other wrongful conduct of the party seeking the benefit of the NDFD clause, including arbitrary and capricious acts in willful disregard of the rights of other parties.

Monday MemoThe jury in Zachry had found that the “bad faith” and “active interference” exceptions (i.e., the Port Authority’s interference with Zachry’s means and methods for performing changed work after initially accepting Zachry’s proposal and work plan) applied and awarded Zachry delay damages, despite the NDFD clause in its contract with the Port Authority.  The Texas Court of Appeals reversed, “[a]s harsh as this result seems,” because it believed the parties intended to include the kind of misconduct found by the jury within the ambit of the NDFD clause.

By reversing the Court of Appeals and reinstating the jury’s verdict in favor of Zachry, the Texas Supreme Court adopted the rule that pre-breach waivers of future liability for intentionally damaging the other contracting party violate both the law and principles of public policy.  As a result, the Court refused to enforce the NDFD clause.

The State of “No-Damages-for-Delay” in North Carolina

The Texas Supreme Court noted that at least 28 other American jurisdictions have determined that NDFD clauses cannot shield one party from deliberately and wrongfully interfering with another party’s work.  Unfortunately, North Carolina is not among those 28 jurisdictions.  Indeed, a review of the case law reveals that North Carolina appellate courts have yet to consider the “bad faith” and “active interference” exceptions to NDFD clause enforcement at all.  Here’s what we do know about the state of NDFD clause enforcement in North Carolina:

  • In APAC-Carolina, Inc. v. Greensboro-Highpoint Airport Authority, 110 N.C. App. 664, 431 S.E.2d 508 (1993), the North Carolina Court of Appeals (“COA”) considered the “not within the contemplation of the parties” exception to NDFD clause enforcement, holding that because the prime contract called for unclassified excavation and since wet weather was predictable, the undercut and erosion control work performed by the contractor was within the contemplation of the parties.  The COA therefore rejected the exception and enforced the NDFD clause.  The North Carolina General Assembly, however, responded to the decision by enacting N.C. Gen. Stat. § 143-134.3, which bars enforcement of NDFD clauses in contracts between public owners and prime contractors.  Note, however, that the statute’s protection extends neither to prime contracts for private projects nor to subcontracts for private or public projects.
  • In Watson Electrical Construction Co. v. City of Winston Salem, 109 N.C. App. 194, 426 S.E.2d 420 (1993), the COA avoided consideration of either the “not within the contemplation of the parties” or the “active interference” exceptions to NDFD clause enforcement by finding that the contractor was not seeking to apply an exception, but rather pursuing damages for the owner’s failure to approve a time extension required by the contract.  The COA concluded the contract was ambiguous as to what damages the contractor could recover as a result of the owner’s failure to approve the time extension, and remanded the case to the trial level for findings of fact on the issue.
  • In Southern Seeding Service, Inc. v. W.C. English, Inc., 217 N.C. App. 300, 719 S.E.2d 211 (2011), the COA held that an equitable adjustment clause “trumped” the subcontract’s NDFD clause, so that the subcontractor in question could recover its increased material and labor costs arising from unforeseen circumstances.  I blogged about the Southern Seeding decision when it was issued, and you can find my analysis here.

It could be argued that both the Watson and Southern Seeding cases stand for the proposition that the North Carolina appellate courts do not favor NDFD clauses and might be open to applying all of the five “generally recognized exceptions” to NDFD clause enforcement, including the “bad faith” and “active interference” exceptions.  The absence of much case law authority on the subject, however, makes it difficult to predict how the COA might handle Zachry-type issues.

The Upshot for Contractors Building in the Tarheel State

So where does that leave construction contractors and subcontractors (and the lawyers who represent them)?  In a state of limbo, that’s where.  Until our appellate courts wrestle with the same issues the Texas courts addressed in Zachry, it’s not possible to predict with much accuracy the extent to which they might apply the “bad faith” and “active interference” exceptions to enforcement of NDFD clauses.  That, in turn, means a couple of things for you and your construction company:

  • The safest course of action is to strike NDFD clauses during the contract drafting stage.  If the party above you in the contractual chain won’t consent to that change, consider proposing language that would include the five exceptions to NDFD clause enforcement within the NDFD provision.
  • If you’re performing a contract containing an NDFD clause and are impacted by delays beyond your control, and for which one or more parties above you in the contractual chain might be responsible, document the facts and circumstances of the delay, as well as your damages, carefully.  Send notice letters, take pictures, keep impeccable logs and meeting minutes, segregate and track your delay costs, etc.  The better developed the factual record, the better the opportunity to successfully argue an exception to NDFD clause enforcement later on.

UPDATE 8:42 a.m. 1.15.2015.  My Twitter feed delivered this yesterday:

The linked article discusses a June 2014 decision of the Supreme Court of North Dakota refusing to enforce a no-damages-for-delay clause based on the active interference exception.  As in Zachry, the active interference in question was the owner’s meddling in the contractor’s means and methods.  Texas and North Dakota appear to be the 29th and 30th jurisdictions, respectively, to acknowledge the active interference exception to no-damages-for-delay enforceability.

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Inspiration to Help You Keep Your 2015 Construction Risk Management Resolutions

Well, the first full business week of 2015 is nearly in-the-books.  How are you doing with those risk management resolutions of yours?  Holding steady?  Or do you need a pep talk?  If it’s the latter, my Twitter feed is here to help.

Friday ForumThat’s because a number of my fellow AEC twerps had risk management, including successful project management, on the brain this week, and I’d like to use the Friday Forum to share some of their unique insights.

So without further ado, let’s get things started…

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It’s Not Enough to Read Before Signing; Always Strive to Understand Before Signing

An unpublished decision from the North Carolina Court of Appeals yesterday demonstrates how important it is to not only read, but also to fully understand, legally binding documents before signing them.

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Everything’s Bigger in Texas, Including the Construction Litigation (Part 1 of 3)

Because my practice is focused almost exclusively on construction projects in North Carolina, I focus far more attention on local case law developments than on appellate decisions from other states.  But every now and again, a decision from some far-flung jurisdiction gets published that is just too big, too fascinating and too important to overlook.

Zachry Construction Corp. v. Port of Houston Authority of Harris County, handed down by the Supreme Court of Texas (the “Texas Supreme Court”) on August 29, 2014, is just such a decision.

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New Year, New OSHA Injury and Illness Reporting Requirements

Happy new year, everybody, and for many of you, welcome to your first day of work in 2015.  Now that the champagne toasts have been made, sundry objects have been dropped from cranes and some old acquaintances have been forgot, it’s time to get down to business.  Serious business.

Specifically, the business of OSHA compliance.

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N.C. Supreme Court Reverses the Court of Appeals, Holds a 20-Year Warranty Means What It Says

In September 2013, I blogged about the decision of the North Carolina Court of Appeals (“COA”) in Christie v. Hartley Construction, Inc., which held that owners of an improvement to real property could not recover money damages under a supplier’s express 20-year warranty because the lawsuit was filed outside of North Carolina’s applicable six-year “statute of repose.”  That statute, codified at N.C. Gen. Stat. § 1-50(a)(5), bars damages actions arising from improvements to real property asserted more than six years after substantial completion.  The COA’s Christie decision effectively meant that the statute of repose trumped an express warranty of a longer duration.

As I mentioned in my prior blog post, however, one of three COA judges on the Christie panel dissented from the majority’s opinion, giving plaintiffs the right to appeal to the state’s Supreme Court.  They did.  And that Court reached the opposite conclusion of the COA majority, ruling that the protection provided by the six-year statute of repose could be waived without violating North Carolina public policy.

Let’s break down the North Carolina Supreme Court’s decision in Christie:

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Construction Bonds Come With Strings Attached. Make Sure You Know What They Are.

When serious trouble befalls a bonded contractor, its surety might be called upon to shoulder significant risk both downstream (i.e., payment obligations to subs & suppliers) and upstream (i.e., performance obligations to the owner, if the bonded contractor is prime, or to the prime, if the bonded contractor is a sub).

Yet even when adversity strikes, sureties don’t expect to suffer a loss, as counter-intuitive as that might sound.  That’s a feature of suretyship distinguishing it from insurance (for a handy, 1-page chart summarizing other distinctions, see page 6 of this 18-page surety primer by CNA Surety).

How do bonding companies seek to avoid losses on troubled construction projects?  One of the most significant weapons in the surety’s loss-avoidance arsenal is the “general indemnity agreement” or GIA, an instrument that virtually every surety requires each bonded contractor, the contractor’s owners and the owners’ spouses to sign as a condition of surety credit extension.  The GIA vests in the surety numerous rights and remedies against the corporate and individual indemnitors, which are typically triggered once trouble starts brewing.

Here are some of the key rights enjoyed by sureties under a typical GIA:

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Custom-Build Your Next Arbitration Clause

Image by Tingeling via Pixabay.com

Image by Tingeling via Pixabay.com

Of all the great AEC content in the Twitterverse this week, the following chirp from Kansas City construction attorney Rob Pitkin (@KCconstrlawyer) really piqued my interest:

Rob’s tweet links to this article from Gary Rubin, a New York construction lawyer, about how to make arbitration more cost-effective.  Gary discusses how parties can use the contract negotiation phase of their relationship to craft a better arbitration provision.  He even suggests helpful language aimed at curtailing the duration of the hearings and the arbitrators’ authority to award certain types of damages.

All of which crystallized something I’ve been thinking about in recent years: arbitration is not a “one-size fits all” deal.  While in theory arbitration presents construction industry stakeholders with an attractive alternative to the very public, very long and very expensive litigation process, in practice, arbitration procedures and costs often elude the parties’ control. These are by no means novel thoughts on my part; a number of other observers have raised similar concerns (see here and here for a couple examples).

Now for the good news.

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Paying Twice For the Same Work is Horrendous. What Can You Do About It in North Carolina?

If you’re a prime contractor on a private, commercial construction project, your contract with the owner likely includes a provision requiring you to bond off or otherwise dispose of real property liens filed by your subs & suppliers.  And if you’re a prime contractor on a bonded public project, the agreement of indemnity between you and your bonding company makes you ultimately responsible for any bond claim the surety might pay.

Either way, you’re exposed to financial loss arising from the lien & bond claims of second-tier and more remote subs & suppliers, even if you faithfully pay your first-tier subs each and every time payment is due.

So what can you do about the risk of double payment in North Carolina?

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Filed under Lien Law, Payment Bonds, Subcontractors