International Arbitration

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The construction industry has been a leader in the use of arbitration to resolve disputes. In the past 30 years, it is fair to say that arbitration has outpaced litigation as the dominant method of dispute resolution. The protracted time for a construction case to get to trial and the attendant cost and expense has led the construction bar away from the courthouse and into the arbitration room. It not unusual for a lawyer bringing a construction case to court to receive a frosty reception from the judge, whose first remark is often akin to “why are you not in arbitration?” In other words, sitting through a construction trial is not among the court’s favorite pastimes.

The decision to arbitrate is made most typically, although not exclusively, by the parties’ agreement. The American Institute of Architects’ templates of construction agreements include an arbitration option wherein the parties agree that all disputes arising out of the agreement shall be determined in an arbitration to be administered pursuant to the Construction Industry Rules of the American Arbitration Association. These rules, well known to construction lawyers, provide for the orderly administration of an arbitration. Most construction lawyers, out of either lassitude or ignorance, pay scant, if any, attention to the arbitration clause. This is a mistake, perhaps a significant one, that can affect the outcome of the arbitration in numerous ways that cannot be predicted when the underlying contract is signed.

NFL Mgmt. Council v. NFL Players Ass’n, 2015 U.S. Dist. LEXIS 117662 (S.D.N.Y. Sept. 3, 2015)

“Arbitration has been proven to be an effective way to resolve disputes fairly, privately, promptly and economically.”  So provides the preamble to the Construction Industry Rules of the American Arbitration Association.  A large part of the advantage of arbitration is the finality of the result, stemming from the lack of a meaningful appeal rights on legal issues, contractual interpretation, factual determinations, or the dispute resolution process itself.  Indeed, the Federal Arbitration Act, 9 U.S.C. §10, provides that an arbitration award is to be confirmed as a judgment unless one of four specific and narrow conditions for vacatur is met.

Probably the most notorious instance of an appeal of an arbitration award (and certainly the one most likely to come up in cocktail party conversation) was decided in September 2015 by Judge Richard M. Berman of the United States District Court for the Southern District of New York – the successful appeal by All-Pro Quarterback Tom Brady and the NFL Players Association of Brady’s four game suspension based on accusations of complicity in a scheme to gain an unfair competitive advantage in an NFL playoff game.  NFL Mgmt. Council v. NFLPA, No. 15-Civ.-5916 (RMB) (S.D.N.Y. Sept. 03, 2015)  There, the Southern District applied the Federal Arbitration Act standard to its review of Brady’s suspension, the same standard of review usually applied to an arbitration award arising from a claim under a construction contract with an arbitration clause. [1]  But Brady, unlike the vast majority of parties disappointed with arbitration awards, succeeded in having his suspension vacated.  The NFL Management Council has appealed the Southern District’s decision, and the matter is currently on an expedited appeal track, with argument before the Second Circuit scheduled for March 1, 2016.

G.T. Leach Builders, LLC v. Sapphire V.P., 2015 Tex. LEXIS 273 (Tex. Mar. 20, 2015)

This action arose after 2008’s Hurricane Dolly caused extensive damage to a luxury condominium project that Sapphire V.P., L.P. (“Developer”) was in the process of developing on South Padre Island (the “Project”).  In 2009, the Developer sued insurance brokers for negligence and breach of contract, alleging that they let the builder’s risk insurance policy expire eight days before the storm struck and be replaced by a permanent policy even though construction of the Project was not yet complete.  The Developer sought to recover millions of dollars for water damage and other increased building costs it alleged that the builder’s risk policy covered or should have covered but the permanent policy did not.

BG Group PLC v. Republic of Argentina, 134 S. Ct. 1198 (Mar. 5, 2014) 

This action arose from an investment by British company BG Group PLC (“BG”) in Argentina and under the protection of a treaty between the United Kingdom and Argentina.  The treaty included a provision that required an aggrieved investor to submit their dispute to a local court in the country where the investment was made for a period of eighteen months prior to pursuing arbitration.   BG invoked the treaty for Argentina’s alleged breach of a natural gas distribution contract.  However, prior to exhausting the treaty’s local litigation requirement, BG proceeded to arbitration in Washington D.C.

Argentina argued that the arbitral panel lacked jurisdiction because BG had not complied with the local litigation requirement. The arbitral panel concluded that it had jurisdiction, finding, among other things, that Argentina’s conduct (such as enacting new laws that hindered recourse to its judiciary by investors in BG’s situation) had excused BG’s failure to comply with the local litigation requirement.  The matter proceeded through arbitration where BG was awarded $185 million in damages.

Argentina turned to American courts to overturn the award, again advancing the argument that the arbitral panel lacked jurisdiction.  The district court initially confirmed the award, but on appeal to the Circuit Court it was vacated.  The Circuit Court held that the gateway issue of arbitrability at hand—whether BG was required to commence litigation before the local courts and wait eighteen months before it could commence arbitration—was for a court, and not the arbitral panel, to decide.

Oakland-Macomb Interceptor Drain Drainage Dist. v. Ric-Man Constr., Inc.,
2014 Mich. App. LEXIS 204 (Mich. Ct. App. Jan. 30, 2014)

The Michigan Court of Appeals, applying the Federal Arbitration Act, 9 U.S.C. § 1, et seq., ruled that while a court generally will not entertain a suit to address pre-award objections to the impartiality or expertise of an arbitrator, pre-award relief is available where a third-party arbitration administrator appoints an arbitrator who fails to meet specific qualifications spelled out in the parties’ arbitration agreement.

The case involved a multi-million dollar dispute between a public sector drainage district and a construction company (the “parties”) arising out of a construction contract. The parties, by amendment to the construction contract added a detailed arbitration agreement. The new arbitration agreement submitted the parties’ dispute to the American Arbitration Association (AAA). The provision outlined arbitrator selection criteria to be followed by the AAA in the event that it had to appoint one of the three arbitrators contemplated by the arbitration agreement. Among other things, the agreement required that the attorney member of the panel be a member of the AAA’s Large Complex Construction Dispute panel with at least 20 years of experience in construction law with an emphasis in heavy construction.

Life Receivables Trust v. Syndicate 102 at Lloyd’s of London
2008 U.S. App. LEXIS 24977 (Nov. 25, 2008)

The Second Circuit held that section 7 of the Federal Arbitration Act (“FAA”) does not permit an arbitrator to compel pre-hearing document discovery from non-parties to the arbitration. However, the court noted that a non party could be subpoenaed to produce documents at a preliminary hearing on non-merits issues before one or more arbitrators.

Hall Street Associates, LLC v. Mattel, Inc.
2008 U.S. LEXIS 2911 (U.S. Mar. 25, 2008)
In a 6-3 decision, the Supreme Court held that in an arbitration case subject to the Federal Arbitration Act (“FAA”), the scope of judicial review of an award could not be expanded by agreement of the parties beyond the grounds for vacating or modifying an award specified in the FAA.
The case originally stemmed from a lease dispute between the toy maker Mattel and its landlord, Hall Street Associates. Mattel terminated its lease when the property’s water tested for high levels of contaminants, which was the result of the previous tenant’s use of the property as a manufacturing site. Hall Street filed suit claiming that a provision in the lease obligated Mattel to indemnify Hall Street for the costs of cleaning up the site.

Perdue Farms, Inc. v. Design Build Contracting Corp.
2008 U.S. App. LEXIS 2861 (4th Cir. Feb. 8, 2008)
The Fourth Circuit held that where a condition precedent to arbitration, in this case voluntary mediation, was not fulfilled, a party to a contract had no right to force arbitration of the…

Liberty Mutual Insurance Company v. N. Picco & Sons Contracting Co., Inc.
2008 U.S. Dist. LEXIS 4915 (S.D.N.Y. Jan. 16, 2008)
The United States District Court for the Southern District of New York (“SDNY”) recently had to decide whether a surety was entitled to assert subrogation rights against other project participants when the surety completed the construction work abandoned by the general contractor and performed remediation work. The SDNY determined that the surety did not voluntarily undertake the remediation work and, therefore, was entitled to assert subrogation rights.

C&I Steel, LLC v. Travelers Casualty & Surety Co.
70 Mass. App. Ct. 653, 2007 Mass. App. LEXIS (App. Ct. Nov. 6, 2007)
The town of Westford awarded Peabody Construction Company, Inc. (“Peabody”) a contract for construction of a middle school. The project required a payment bond which Peabody obtained from Travelers Casualty and Surety Company (“Travelers”) for the full value of the contract. Peabody, as principal, and Travelers, as surety, jointly and severally bound themselves “to [Westford] to pay for labor, materials and equipment furnished for use in the performance of the [c]onstruction [c]ontract.” The bond set forth that the construction contract incorporated the agreement between Westford and Peabody, including all the contract documents and changes thereto.