How To Make Arbitration “Worth It” Again

Arbitration has been the talk of the town amongst the legal community this week, and really, it should be.

One could say that arbitration is at a crossroads these days.   Over the years, the expenses and delays associated with arbitration have rivaled litigation.   From a personal level, I can tell you that arbitration is simply feeling more and more like ordinary litigation.   In recent arbitrations, the parties have engaged in a substantial amount of discovery, and the proceeding itself felt wrapped in a court-like formality with objections to evidence made left and right.

And let’s not even mention the costs associated with an arbitration.   I recently filed for arbitration with the American Arbitration Association paying a $4,500 filing fee, and then, just a few months later being asked to pay another $4,000 for our share of the arbitrator’s fee.   Even the AAA knows their fees are out of hand, as I’ve recently gotten a survey phone call from them where it seems the AAA’s administrative nightmare is looking for answers.

After all of this, you may think I’m opposed to alternative dispute resolution?   Well, I’m not .   Not yet.

Similar to the online discussion about arbitration this week, I believe there is a way to make arbitration worth it for the parties (despite the natural slippery slope tendency of things).   It requires some extra front end work and legal jargon, and yes, counsel from an attorney to predict which type of ADR situation will work best for your matter.

Part One:   Conversations on What’s Wrong (or Right) with Arbitration

There’s no shortage of complaints about arbitration (we’ve even done it!)   Just this week, the WallStreet Journal published this on its Law Blog:  Has Arbitration Become More Burdensome than Litigation? It starts with this revealing statement:

Arbitration was once known as a faster, cheaper, better way to settle disputes.

But has the process become as bogged down as conventional litigation?

And look at some of the comments to this article; scathing lawyers, of course:  “Of course Arbitration has become hugely expensive;” and “Arbitration is extremely more expensive than litigation;” and, my favorite, “So lawyers complicate arbitration and make it way more expensive.  Is this news?”

Are the criticisms true?   The National Arbitration Forum would argue they are not, and they even have a website dedicated to the issue:   Arbitration-Truth.com.   Pointing to surveys and empirical studies like one performed by John Chalk, Sr. of for the Texas Bar ADR Section, these anti-critics argue the “empirical studies do no support the current criticisms of arbitration.”

Whose right?   Well, both the critics (like me) and the anti-critics are probably part right, and that’s exactly why folks should look at their options in making arbitration work for them, and “worth it” again.

Part Two:  Tips to Make Arbitration Worth It

So, what can you do to make the arbitration process actually work as intended?    Here’s the good news – since the rules of arbitration are left to the parties, you can do a heck of a lot.   And where do you start setting these rules?   Your contract.

Take a look at the recent article by our friend Alan Haley on the Louisiana Construction Law Blog at Blogspot:  Should Arbitration be a Standard Clause in Construction contracts? Alan comments that he advises clients to “tailor arbitration clauses…to their specific desires and the needs of the parties.”   Want more specific instructions on how to tailor the contract – check out the related post here.

Another blog post this week helpful to those looking to make arbitration right again with better contracting comes from one of my favorite blogs, Adams Drafting (we’ve talked about this blog previously here).    Interestingly, Ken Adams refers to an article on law.com and not the one on the WSJ, but it’s just a different shade of gray.

Ken highlights the importance of making the ADR clause work specifically for you with the following:

Whatever arbitration clause you use….commentators on arbitration generally recommend that you supplement it.

Part Three:  Choose Your ADR Company After Thinking About It

I’ll make this point very quickly.   Do not choose the American Arbitration Association just because it’s the company you’re heard of.   The AAA has plenty of competition, and in most cases, the competition will be cheaper and offer a more pleasant ADR experience.    In fact, the AAA uses many of the same arbitrators as these other companies.

Look around and ask your lawyer about their positive and negative experiences with these companies, and select one that works.  It might be the most important thing you can do to make the arbitration process worth it.

Liens Make Your Payment Problem the Entire Project’s Biggest Problem

When you don’t get paid on a construction project, that is a big problem for you and your company. But, is it a big problem for the entire construction project? Not likely.

So, how do you make your problem an important problem to the other players working on a construction job? With a mechanic’s lien, of course.

The Wall Street Journal recently reported on a mega-project in Las Vegas (the $8.5 billion City Center), and a contractor dispute that is affecting the project’s finances. There was something really interesting about this report for those of us who follow mechanic lien law and news – and that’s this quote from City Center President Bobby Baldwin, referring to over $500 million in liens filed against the project:

Obviously everybody is concerned about the liens. They have to be explained in great detail to our residential buyers.

To resolve the concern about the liens, the property owner is slowly paying off all of the subcontractor and supplier claims while they proceed with their dispute against the prime contractor. Without those liens, those subs and suppliers would have to wait months or years for the main dispute to resolve, and payment to trickle down from the owner to them. Depending on the size of the contract, that’s something that could cripple their business.

The Wall Street Journal article and construction dispute at the City Center was the subject of a blog post on the Construction Law Monitor, which that blog called a “Large-Scale Example of an Everyday Construction Dispute.” And that summary is perfectly true when it comes down to mechanics liens.

Regardless of how large or how small the project, mechanics liens creates a problem for the project. If you’re not paid on a construction project, the best way to make your problem the construction project’s problem, is to file a mechanics lien.

This article was originally posted on Express Lien’s topic-specific Construction Lien Blog.

The Project in Las Vegas A Large-Scale Example of Typical Construction Dispute

A mega-project in Las Vegas is having real problems; mega-problems.   But when you look past the large numbers, all that is left is a simple construction dispute that is played out everyday across the nation between contractors, subcontractors and owners.   The dispute – reported recently by the Wall Street Journal – serves as a good, large-scale example of how things can go wrong in a construction project.

Here are three key components of this dispute:

• The general contractor claims the owner hasn’t paid according to the payment schedule, and the owner claims it is owed money because of construction defects.
• Failure to pay the prime trickled down to the subs, and they have filed liens.
• The owner further refuses to pay the prime because (i) they have a contractual duty to keep the project lien-free; and (ii) The liens are causing the owner damages in that it is more difficult to sell the condominium units.

Sound familiar?   Of course it sounds familiar, this is a summary of nearly every owner / prime contractor dispute across the country.

As your construction project approaches completion, keep these issues in mind.   Owners very frequently get tighter on the final payments because they’re afraid the prime contractor will bail before work is 100% complete.   But the budget squeeze results in subcontractor liens, animosity, catch-22s and the spark of a litigation war.

We usually recommend two ways to handle these frequent problems.

First, handle it in the contract.    Think about these issues before you sign anything, and make the contract clear about how the contract will reach final completion.

Second, set up a way to resolve the dispute out of court (mediations, initial decision makers, and the like).

What do you guys think?   Any other recommendations?

National Building Code with Green Building Implications on Horizon?

Late in 2009, the Wall Street Journal reported that the U.S. Congress in considering a national building code.   The national building code wouldn’t necessarily interfere with a state or county’s general building regulations, but would instead focus almost exclusively on setting national green building benchmarks.

Some have celebrated the idea of a national building code addressing sustainability goals for the country, others have condemned it, and still more have suggested that the proposal does not go far enough.

While the bill at question has passed the U.S. House of Representatives, the Senate has yet to really consider it, and so the idea of a national building code isn’t quite “on the horizon.”    I’m confident that before a national building code gets rolled out of Congress, a huge ideological fight between Republicans and Democrats will ensue…and we haven’t seen that yet.

However, the fact that it’s in a bill that has passed the U.S. House is significant.  The idea of having sustainable building requirements in private construction has obvious support, and so builders, developers and architects can expect this idea to stick around for a while.   It may not manifest in a national building code…but it may manifest in local codes, and who knows, maybe it will slip through the Senate without much controversy and be on its way to law as we approach 2011.

Stay tuned.

WSJ Reports Money Coming for Government Green Building Work…Just Not Yet

Just before Christmas, the Wall Street Journal published an article about how “Green Builders [are] Awaiting The Green.”

The article simply reminded us (and builders across the country) that the General Services Administration had until the end of 2009 to allocate $2 billion for green building construction projects.   And another $3.5 billion is waiting for distribution in 2010, as per the America Recovery and Reinvestment Act.

That’s the good news for green buildings.

The bad news?   The GSA is having trouble spending  the money.

The excuse is legitimate.  First, public projects generally move slower than private ones, and the slow movement on projects has resulted in most GSA funded projects being stuck in planning phases, leading to low-spending.   Second, bids are coming in lower than expected.

While this spells bad news for public contractors in 2009…it is a relief that 2009 is over (and good riddance).   The GSA has some extra cash burning a whole in its pocket, and more money to spend.   Hopefully, these public projects will get underway and more green building will ensue…and that it will happen in Louisiana.

Will The Health Care Bill Hurt Small Contractors?

At the eleventh hour, the U.S. Senate added a provision to the controversial health care bill pending in Congress that has the construction industry on edge.    The Associated General Contractors of America released a statement on their website complaining that “without debate or advance notice, language was added to the Senate health care legislation that singles out small construction firms for harsher treatment than any other industry.”

What is the rub?

Well, while employers with less than 50 employees are typically not required to provide health care coverage, the exemption for construction firms is only those with less than 5 employees!   Failing to provide health care coverage could subject the construction firm to fines.

The Wall Street Journal is running a great article about the construction industry’s reaction to the recent addition to the Senate bill.

39.8 Million Reasons Builders Need To Be Concerned about Chinese Drywall

Last week, the Wall Street Journal reported that powerhouse builder Lennar Corp. has identified 400 homes in Florida with Chinese Drywall, and has set aside $39.8 million to repair the homes.

This is an enormous amount of money, and it should be a wake-up call to builders and homeowners who have yet to clash over the Chinese Drywall saga.

Would Lennar Co. really spend $39.8 million to repair a problem that wasn’t its fault?  Or of which it didn’t have liability?

The answer is obvious, and here is the wake-up call.   To homeowners:  Seek remedy from your builders.   To builders:  Prepare to be sued.

Indeed, time is continuing to tick without an onslaught of suits between builders and homeowners, but one has to believe that this is only a matter of time.  Time, however, is on neither party’s side.

Homeowners are facing steadfast deadlines in any warranty claims made, or claims in redhibiation.   If they wish to seek damages from any insurer (theirs or the home builders), they are likely facing quickly approaching deadlines.

Builders have deadlines themselves.   Once they are sued by homeowners, builders will necessarily turn to their insurance companies and suppliers for reimbursement or indemnity.   These suits also have impending statutes of limitations, and questions will loom as to whether the builder successfully mitigated its damages.

Lennar Corp. has been a leader among builders from the get-go on the Chinese Drywall problem.

As Chinese Drywall reports became widespread, Lennar Corp. had already begun examining the problem, replacing faulty drywall, relocating residents, and asserting claims against its subcontractors, suppliers and insurance policies.

Lennar Corp. has a lot of liability in this Chinese Drywall crisis, but in the end, they will likely have a lot of protection.   That is due to their foresight and good management of the situtation.

Can the same be said for your company?

This article was originally posted on Wolfe Law Group’s topic-specific Chinese Drywall Blog.

The Shoe Drops for Lennar Co. in Chinese Drywall Crisis

The shoe has dropped for one builder who has been working hard to avoid entanglement in the Chinese Drywall defective drywall class actions.    According to reports all over the web, Lennar Co. has been officially named in a Florida class action suit over defective drywall.

The significance of Lennar Co.’s involvement with the class action is fairly great, as it begs the question of what exactly distinguishes it from smaller builders who may have also installed Chinese Drywall in homes.   Will these smaller builders soon be named in class actions as well?

It also begs the question of whether class action suits are the answer to homeowner’s woes in the Chinese Drywall crisis.   The question has been hinted here, and written about by Donald Brenner at the Construction Litigation Law Blog.

With regard to the class action suit, Lennar Co. said it had “already established reserves for the estimated cost of replacing the drywall” it has confirmed to be defective Chinese product “to the extent such costs are not covered by insurance.”

As the risk and exposure of builders opens up, the role of a company’s GL insurance will be examined.   More on this later…

China Speaks Out on Drywall Issues

It was really only a matter of time.

The Wall Street Journal’s “China Journal” has translated an article written in Chinese that provides us with some insight into how the U.S.’ Chinese Drywall crisis is playing out in Chinese media.

The verdict?   They blame America.

According to the report, China is simply confused (and I’m paraphrasing) that Knauf Plasterboard could supply 75% of the drywall for the Beijing Olympics and over a million tons of drywall to countries around the world in 2006 and 2007, yet only receive complaints from the United States.

Xu Luoyi, the head of the National Building Materials Industrial Technology Supervisory Research Center (real organization) offered this potential explanation:

It’s worth considering why this problem has only emerged in the United States.  The U.S. credit crisis has caused the real estate market to collapse, and as a result domestic drywall manufacturers have seen their sales suffer and their product is relatively expensive compared to the Chinese-made drywall, so we should also consider these issues.

Cryptic quote from Xu Luoyi, but the commentary does offer a perplexing thought:  Why is the United States the only ones complaining?   Is it a climate issue?  Is it because we’re more litigious than other countries?   Or did we coincidentally get the only contaminated drywall?

It is important to note that the concern from China (and its defensiveness) comes at the heels of 2 U.S. Senators proposing federal legislation to put a hold on certain Chinese imports.

Does Drywall Safety Act of 2009 Contemplate Help for Builders?

As reported by the Wall Street Journal and other news agencies, Louisiana Senator Mary Landrieu has joined Florida Senator Bill Nelson to propose legislation “aimed at initiating a recall and imposing an immediate ban on defective building products from China.”  The bill is the latest effort by agencies and legislatures to address problems caused by imported drywall.

The bill – aptly titled the Drywall Safety Act of 2009 – is summarized in a press release from Mary Landrieu’s office as follows:

The centerpiece of their legislation is a resolution pressing the Consumer Product Safety Commission (CPSC) for a recall on Chinese-made drywall, based in part on findings by a Florida homebuilder and state officials who have confirmed the presence of sulfide gases in homes built with the drywall. The Nelson-Landrieu legislation also asks the CPSC to work with federal testing labs and the Environmental Protection Agency to determine the level of hazard posed by certain chemicals and as yet unidentified organic compounds in the drywall. In addition, the legislation calls on the commission to issue an interim ban on imports until it can review federal drywall safety standards to ensure that consumers are protected in the future.

Rather than regurgitate the news, however, we wanted to comment on two things exposed in Sen. Landrieu’s press release.

1. That behind Florida, Louisiana is the second largest recipient of Chinese Drywall.  This is a bit of a revealing fact for builders in Louisiana who were a bit unsure of how likely it was that they encountered imported drywall.    The press release confirms that “Louisiana has received 60.2 million pounds of imported Chinese drywall, and it may have been used in an estimated 7,000 homes in Louisiana.”
2. That the federal government is not only interested in aiding homeowners, but has builders on its mind as well.    Sen. Landrieu’s very quote strikes at the heart of contractors’ concerns, stating “”This defective Chinese drywall represents an attack on our homeowners, a defrauding of our homebuilders and another obstacle on our road to recovery.”    While the legislation doesn’t provide any specific relief for homebuilders, the press release seems to consider the homebuilders as victims to the contamination as well, and hope that the bill will “provide clarity to businesses in the construction and homebuilding sectors.”

Good news that homebuilders are not off the federal government’s radar, but cautious news as well – since the primary focus is on the homeowners, and the government is looking for a remedy that doesn’t burden the U.S. taxpayer.

Check out this video from a Florida new-station, who landed an interview with Florida Sen Nelson: