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The Supreme Court issued a ruling on May 5, 2009, which may further support Washington precedent holding non-signatories to binding arbitration. The ruling was first reported on Davis Wright Tremaine's Washington Construction Law Blog on May 6, 2009.

In Arthur Anderson LLP v. Carlisle, the Supreme Court found that clients of Arthur Anderson had set up small limited liability companies (LLC) as tax shelters for investments. Those LLCs entered into arbitration agreements with the brokerage as a resolution process for any disputes between the parties. But the individuals, themselves, had not personally executed these arbitration agreements.

The Supreme Court, acting under prior precedent, upheld enforcement of the provisions claiming that the agreement was intended to benefit and both the individual and the brokerage against the individual. Therefore, the court would mandate arbitration of the matter.

Washington Construction Law Blog's author, John Parnass, cites Davis Wright Tremaine's own case, McClure v. Davis Wright Tremaine, 77 Wn. App. 312 (1995), whereby the Supreme Court rendered a similar finding, permitting a non-signatory to take advantage of a binding arbitration clause.

The case's result should provide interesting options to lawyers and contractors wishing to push a less time consuming method of dispute resolution, perhaps even in the arena of lien litigation, which often involves third parties.

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As Chris Rock stated in his 2008 tour "Kill the Messenger,"  "yeah, I said it." 

Times are tough, and it's important for your company to make smart economic decisions. Legal costs are clearly an area where businesses would like to scale back. 

A legal budget is not like a marketing budget, where a business hopes to get a ROI.   In fact, the terms "legal expense" and "ROI" are rarely uttered together, and for good reason.   Legal expenses are usually a business' "necessary evil."

So in these tough economic times, what can those in the construction industry do to lower legal expenses?   A few solid ideas were published in the Portland Business Journal last week, among them:

• Handling more legal-related activities internally, rather than farming work out to law firms.
   
• Negotiating more cost-effective compensation structures with outside counsel, including contingency and incentive arrangements.
   
• Pursuing less risky and costly means of dispute resolution, such as arbitration and mediation, rather than litigation.

How Do These Apply to Construction Businesses?
When published in the Portland Business Journal last week, these ideas were intended to speak to businesses in general.   But how can these ideas be specifically used by a construction outfit?

It's a cinch.

Get educated about collection practices, and bring your collections department in-house.    Incorporate arbitration and mediation provisions into your contracts, or agree to arbitrate or mediate existing disputes with your adversaries.   Contact your attorney and request alternative billing arrangements, including contingency and mixed-fee agreements.

You can even hire a consultant to help lower your attorneys fees.

In the end, there are proactive and reactive measures that can be taken to lower your attorneys fees, and even avoid the need for an attorney on many matters.  

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Does Arbitration Have Warts?
Over the past twenty years, Alternative Dispute Resolution processes like arbitration have become mainstream in the American legal system.  

Once considered a creative solution to the expensive and unpredictable legal system, it appears that these ADR procedures may themselves have warts.

The question of whether the "vanishing trial" phenomenon is a good or bad thing is not necessarily a new question...but the latter description does seem to be gaining some steam.  

Take for example an interview in this month's ABA Journal with "Lion of the Bar" Joe Jamail, who had this to say about arbitration and mediation:

Do you know what the root of mediation is?  Mediocrity!  The move to replace jury trials with mediation and arbitration is actually an effort by elitist in our society to control how disputes are decided.

Mr. Jamail isn't the only one with this opinion of ADR.  In 2007, the Arbitration Fairness Act was introduced to the U.S. Senate and, according to the Wall Street Journal, would effectively do away with mandatory arbitration agreements used widely in many industries.

This legislation and opinion isn't unprecedented - take, for example, the Brazilian Arbitration Act and its disfavor for arbitration agreements in "contracts of adhesion."  These opinions, of course, notwithstanding the recent study that found arbitration to be mildly favorable to consumers.

Also, remember that one of the most significant changes to the AIA contracts documents in its 2007 edition was to the dispute resolution articles, now allowing parties the option of selecting ADR.

Arbitration Agreements Grow Stronger in 5th Circuit
Despite the rising controversy over whether arbitration and ADR are positive or negative alternatives to traditional litigation, the U.S. Fifth Circuit Court of Appeals published two important opinions this past month regarding agreements to arbitrate.

First, in Agere Systems, Inc. v. Samsung Electronics Co., Ltd, the 5th Circuit held that the question of arbitrability should be decided by an arbitatror, and not the court.

Second, just last week in Citigroup Global Markets, Inc. v. Bacon (appeal from S.D. Tex), the 5th Circuit reserved a district court decision vacating an arbitrator's award for "manifestly disregarding the law," stating that the manifest disregard of law by an arbitrator is not a reason to vacate an award.

Law.com published an article about this important ADR opinion, either underlining or exaggerating the ruling by stating:

Abandon all hope, ye who seek to overturn an arbitration award, because the 5th U.S. Circuit Court of Appeals has ruled that manifest disregard of the law by arbitrators is no longer a ground for vacatur under the Federal Arbitration Act.

The 5th Circuit's March 5 decision in Citigroup Global Markets Inc. v. Bacon will make parties think twice -- or three times -- before agreeing to submit to arbitration to settle their cases.

What Does It All Mean?
This much appears clear: (a) The role of ADR is growing; (b) the debate of its value rages; and (c) arbitration agreements are stronger than ever.

At the Construction Law Monitor, we have discussed ADR options and their pros and cons. When a dispute arises, it can be costly, lengthly and/or devastating to your company. It's important for all businesses to consider the dispute resolution options out there.

Whether arbitration is the best option for your business or construction project should not be a foregone conclusion.

Like litigation, arbitration and ADR has its fair share of warts, and with the most recent rulings from the 5th Circuit, those considering arbitration ought be cautious in case the nay-sayers turn out to be right.

 

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Arbitration is looking better and better everyday to consumers. Though it may not seem to have a major impact on the construction industry yet - arbitration agreements are commonplace in your agreements.

It doesn't matter whether you are a general contractor, subcontractor, supplier, renter, or consumer - the fact is you will likely run into a binding arbitration clause that will require you to bring your claims for product liability, design liability, delivery or installation before a private neutral.

But is this good for you as claimant, or is this one big bad frightening risk of loss? 

Recent legislation has been proposed by the federal legislature which would seek to limit arbitration "coercion." The bill is entitled the Arbitration Fairness Act and has been presented by Congressmen Durbin and Feingold.

The bill's supporters believe that U.S. consumers have been harmed by being forced to appear before hand-selected arbitration forums caused when vendors place binding clauses in their sales contracts, slips and invoices.The general belief, as put forth by Mr. Nathan Koppel of the Wall Street Journal's Law Blog, is that arbitration outfits tend to side with corporate defendants in order to shore up continual and future use of their venues.

But a new study by Northwestern Law School suggests that consumers generally come out on top and that their claims are heard in under seven months, far shorter than a state or federal court disposition, which may take up to two years. The study included an examination of a relatively small sample of over 300 cases, and it is uncertain how cases were selected.

The study does show that there is not such a wide discrepancy in rulings, as was once thought to be. You can read about the study on their website, and follow updates of commenting correspondents. 

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The construction industry is riddled with risk and disagreements, and some say it's only a matter of time before a construction organization finds itself in litigation. Regardless of its certainty, litigation is a fact of business and has the potential of costing your organization thousands, hundreds of thousands or millions.

Accordingly, your business wants to weather the litigation storm as painlessly and quickly as possible. Here are three principals to mind if your construction company is facing litigation.

1) Settlement Should Always Be An Option
If the dispute is in litigation, there were likely settlement attempts before formal filings. Simply because these pre-litigation settlement efforts have failed, however, does not mean post-litigation settlement efforts are without utility. To the contrary, the reality of litigation often hits parties only after filing and can be a powerful influence to settle.

Attorneys oftentimes are scorned by the public for their desire to settle cases rather than litigation. The practice, however, is not the result of laziness or a fear of the courtroom. To the contrary, attorneys are usually looking out for the best interests of their clients - and in most cases, it's in all parties' best interest to settle the case.

Litigation of all types is expensive. The associated legal fees, expert fees and court costs associated with taking a case to trial is going to be a minimum of $10,000 - $15,000.00, regardless of the amount in dispute. The more complex a case, the more expensive the litigation - oftentimes costing parties hundreds of thousands or millions of dollars.

As such, parties should make objective reviews of their legal positions and consult with attorneys to discuss the challenges of their case, its possible exposure, and estimated legal costs.

Judges and mediators often say, "a good settlement is when both parties leave unhappy." While unhappiness is not the most pleasant end to your legal dispute (in which you may be emotionally and personally invested), it may be the best. Depending on the associated risk of the case and your company's exposure, full-blown litigation may result in a much worse scenario than a mediocre settlement.

2) Explore Alternative Dispute Resolution
It's never, ever too late to explore alternative dispute resolution options. In the past, parties have chosen to mediate or arbitrate their differences even on the eve of trial - and successfully so.

In the event of litigation or arbitration, however, you shouldn't wait that long to explore the possibility to resolving the parties' differences through mediation or some other less expensive resolution program.

Mediation may be a great alternative to litigation since it is entirely driven by the will of the parties, voluntary and less expensive than a formal dispute. However, mediation is not free (depending on complexity of your case and length of mediation, it may cost between $2,500 and $25,000, or more). Accordingly, you want to agree to participate only if both parties come to the table in good faith to settle the case. Both parties, in other words, should be prepared to have a flexible settlement discussion.

Settlement discussions within mediation are confidential, allowing the parties to discuss details of the case frankly and to exposure each other's weaknesses. Furthermore, in the event mediation is not successful, it is a great way to prepare your for trial and to gain a stronger understanding of your opponent's position.

See: ADR Articles on Construction Law Monitor

3) Good Counsel is Priceless
The type of attorney you'll need to most effectively and least expensively litigate your claims will depend on your desires and circumstances. And unfortunately, there are so many shades of desire and types of circumstances that your company may face in the event of litigation.

A good counselor will review your claims, defenses and financial health to determine the best course of action for your company. While it's always important for an attorney to be a qualified litigator, "being right" or "litigating your claim" might not be best for your business. There are a number of factors to consider before setting forth on your litigation course.

Counsel should review the risk associated with your claim, your company's financial exposure and your ability or desire to go through to trial to properly advise an organization on its options to proceed.

Perhaps it is in your company's best interest to push the matter towards trial as rapidly as possible....but that it not always the case. Mediation may be a better option, or some other sort of settlement procedure.

In short, it's important to have a counselor to give solid and objective advice about your company's legal position and options. Your selection of legal counsel is perhaps the most important component of your claim. As such, be careful to choose wisely.

See: Is Your Counsel Helping or Hurting?

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This article is part of a three part series titled "Alternative Dispute Resolution - Why, When & How." To read the other parts in this series, or to read more articles about ADR, navigate to the Wolfe Law Group ADR page here: ADR.

Under most circumstances, discourse about Alternative Dispute Resolution centers around the construction contract and the importance of "ADR clauses." However, it's never too late for the parties to agree to an alternative dispute resolution process.

Agreeing to ADR before filing suit
At the onset of a dispute, the parties can simply agree to forego filing a traditional lawsuit and to engage in some type of ADR process. When this choice is made, the parties are still "contracting" to submit to binding arbitration, but the notion is sometimes forgotten when the original contract is already history and the dispute has already riled the parties.

It's advisable to include ADR clauses in the original contract to avoid this "heat of the moment" problem, but there are many circumstances when the parties - even at odds - can agree to ADR post-contract.

During the course of a construction project, there are many situations whereby the parties are amicably dealing with one another but encountering some disagreements. The ADR process can be very valuable to the parties in this scenario.

The parties can simply agree to submit to the decision of a neutral, or to participate in a speedy mediation on this issue. The decision of the neutral or compromise of the mediation can likely resolve the issue, prevent delay in scheduling and keep the parties on good terms.

It's oftentimes more difficult to engage an opposing party in ADR in a more mature dispute, as the parties are less likely to agree to anything at the beginning of a adverse proceeding. However, the benefits of the ADR process may outweigh any urge to agree with the adversary, and if litigation is actually commenced, the parties can still later suspend the suit in lieu of ADR.

Agreeing to ADR after suit is filed.
As suggested above, it's common for parties to submit to an ADR process even after suit has been filed. Depending on the county / parish of your litigation, there are different time requirements for when the parties may or may not participate in alternative dispute resolution. Across the board, however, these requirements are extremely liberal, and the parties are usually only limited when the action is close to trial.

While any ADR process may be elected during litigation, the most common ADR vehicle used by litigants is mediation. Mediation allows the parties to meet, express their position, and evaluate its pros and cons and the risks of litigation in hopes of reaching an acceptable compromise.

Mediation may be initiated most anytime, but litigants most often submit to mediation at the beginning of litigation or towards the end. There are pros and cons to mediation during both periods.

The pros and cons to mediating at the start of litigation:

Pros

• The parties have not incurred much expense and frustration, and therefore may be more willing to compromise to avoid the same;
• Even if a settlement is not reached, it provides the parties with an opportunity to analyze its case in-depth, and to get a better picture of the adversary's position.
• Usually, neither party has clear leverage over the other party. Oftentimes, at the end of litigation, certain facts have been exposed that weakens the position of one party. At the start of litigation, however, the party with the weaker position has a little more leverage than it will later in the proceeding.
  

Cons

• The parties are less willing to compromise. The emotional connection to the dispute is still clear and present, and the expenses of litigation have not been exposed;
• Stones are unturned - or, in other words, both parties are working on a limited set of facts and understanding of the issues at play. The litigation process allows the parties to research its and the opposing party's position, and a mediation immediately after suit proceeds before this researching opportunity.

The pros and cons to mediating later in litigation:

Pros

• The parties have incurred much expense and frustration throughout litigation, and they are more willing to compromise certain positions in exchange with "getting the matter behind them."
• Through the litigation process, the parties have an opportunity to develop their respective positions and to investigate their adversary's position, which gives them a good understanding of their risks in going to trial.
• The threat of trial is real and present, and the parties are more likely to make compromises to avoid the unpredictable event.
• The "demands" of the respective parties are more developed and understood.

Cons

• Since the positions of the parties are better developed and understood, the party with leverage will be aware of the fact and be less willing to make a significant shift in their position - and thus, settlement may be less likely.
• With trial around the corner, parties may be more willing to wait the extra few weeks or months and let a judge or jury decide.

Electing ADR Post-Contract
Electing ADR post-contract is easy, but the actual process will likely depend on the ADR provider chosen by the parties. Typically, the parties should agree with one another in writing, and then submit the written agreement to the ADR provider.

The American Arbitration Association provides the following clauses as example clauses for choosing ADR post-contract:

Construction Dispute Mediation Submission Clause:
The parties hereby submit the following dispute to mediation administered by the American Arbitration Association under its Construction Industry Mediation Procedures (the clause may also provide for the qualifications of the mediator(s), method of payment, locale of meetings, the tolling of the statute of limitations, pre-dispute resolution step clause with time frames and any other item of concern to the parties). If a party fails to participate in any scheduled mediation conference, that party shall be deemed to have waived its right to mediate the issues in dispute.

Construction Dispute Arbitration Submission Clause:
We, the undersigned parties, hereby agree to submit to arbitration administered by the American Arbitration Association under its Construction Industry Arbitration Rules the following controversy: (cite briefly). We further agree that the controversy be submitted to [one] [three] arbitrator(s). We further agree that we will faithfully observe this agreement and the rules, and that a judgment of any court having jurisdiction may be entered on the award.

Large, Complex Construction Dispute Submission Clause:
We, the undersigned parties, hereby agree to submit to arbitration administered by the American Arbitration Association under its Procedures for Large, Complex Construction Disputes the following controversy [describe briefly]. Judgment of any court having jurisdiction may be entered on the award.

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This article is part of a three part series titled "Alternative Dispute Resolution - Why, When & How." To read the other parts in this series, or to read more articles about ADR, navigate to the Wolfe Law Group ADR page here: ADR.

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