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Posts Tagged ‘arbitration’

Speak Now or Forever Hold Your Peace: Construction Claim Arbitration and Res Judicata

Posted on: August 20th, 2019

By: Catherine Bednar

The Supreme Court of Connecticut recently affirmed the Appellate Court’s determination that when a property owner and a general contractor enter into binding, unrestricted arbitration to resolve disputes, the subcontractors are presumptively in privity with the general contractor for purposes of precluding subsequent litigation against them. In Girolametti v. Michael Horton Assocs., 332 Conn. 67 (June 25, 2019), Connecticut’s Supreme Court joined other jurisdictions in adopting a rebuttable presumption of privity between general contractors and subcontractors on a construction project in applying the doctrine of res judicata.

The Plaintiffs in Girolametti owned a retail store and hired the general contractor, Rizzo Corporation, to construct an expansion. After completion of the project, Plaintiffs and Rizzo entered arbitration to resolve various disputes concerning the Project, including Plaintiffs’ claims for alleged construction defects and delay and Rizzo’s claims for additional payments owed. Perhaps believing they would fare better in separate litigation, Plaintiffs abandoned the proceedings on the thirty-third day of the arbitration, which concluded two days later, and failed to present their damages claim contrary to the arbitrator’s recommendations.  The arbitrator ultimately entered an award in Rizzo’s favor.

Plaintiffs then pursued two lawsuits against Rizzo and five subcontractors collectively, which focused on the design and construction of the building.  All defendants moved for summary judgment on the grounds that Plaintiffs’ claims had or could have been raised and resolved during the arbitration and were therefore barred. The trial judge granted Rizzo’s motion for summary judgment, but denied the subcontractors’ motions, holding the subs were not parties to the arbitration and not in privity with Rizzo. The Appellate Court reversed and granted summary judgment to the defendants.

In affirming the Appellate Court’s decision, the Supreme Court of Connecticut explained that “[w]hen applying the law to complex endeavors such as large-scale commercial construction, it often is desirable to adopt default rules, whether in the form of legal presumptions or standardized contracts.” The court reasoned the new default rule was an efficient and fair tool for resolving construction disputes.  A presumption of privity makes sense because not only is the general contractor in privity of contract with its subcontractors, but the general contractor is also responsible for the work of the subcontractors.  The court noted that absent a default rule, a property owner could relitigate its failed claims against the general contractor by bringing piecemeal, fact-intensive claims against subcontractors. The court also recognized that the default rule (which parties may contract around if they choose) is beneficial to both property owners and contractors by, resolving all outstanding disputes involving work on a project in the context of an owner-general contractor arbitration.

Having adopted the rebuttal presumption of privity between general contractors and subcontractors for the purposes of res judicata, the court found the facts and circumstances in the Girolametti case did not support an exception to the default rule. The court found the Plaintiffs reasonably should have understood the arbitration with Rizzo was the proper forum for addressing any claims against the subcontractors which were foreseeable at the time. In particular, the court pointed to the parties’ use of a standard form owner-contractor construction contract for their prime contract as evidence of their intent to abide by industry norms, making the general contractor responsible for all subcontractor work not separately contracted by the owner. The contract also contained a broad, unrestricted arbitration provision.

The Connecticut Supreme Court’s decision in Girolametti serves as a reminder to parties engaged in complex construction disputes to carefully consider the scope of their arbitration provisions and evaluate the potential need to add claims and join third parties.

If you have any questions or would like more information, please contact Catherine Bednar at [email protected].

Increasing Suits to Avoid Arbitrator Administrator Selection Clauses in California UIM Arbitration and Possible Responses

Posted on: July 11th, 2019

By: Timothy Kenna

Many automobile insurance policies designate an Arbitration Administrator to conduct UIM arbitrations under their rules.  Increasingly counsel for the insured are seeking to avoid arbitration under the rules of the selected Administrator arguing that there is an inherent bias created by the designation in the policy.  However, these objections are generally unsupported by any actual facts or credible legal arguments.

California Insurance Code section 11580.2, subdivision (f), provides that an uninsured motorist policy “shall provide that the determination as to whether the insured shall be legally entitled to recover damages, and if so entitled, the amount thereof, shall be made by agreement between the insured and the insurer or, in the event of disagreement, by arbitration.  The arbitration shall be conducted by a single neutral arbitrator.’”

The California appellate courts have routinely upheld arbitration clauses providing for the selection of neutral arbitrators by selected Administrators in a wide range of contexts outside of UIM disputes.  Additionally, Briggs v. Resolution Remedies (2008) 168 Cal.App.4th 1402 upheld the Administrator selection in the UIM arbitration clause involved in that case.  The fact that UIM arbitrations have been conducted under these same provisions for decades with few attacks on the fairness of the results is testament to the fairness of the selections under these policies.

Responses to suits seeking to avoid the selection of Administrator include demurrers and motions to compel arbitration in accordance with the provisions of the UIM arbitration clause and Insurance Code section 11580.2(f).  Sanctions may also be sought.  CCP Section 128.5 provides that “a trial court may order a party, the party’s attorney, or both to pay the reasonable expenses, including attorney’s fees, incurred by another party as a result of bad-faith actions or tactics that are frivolous or solely intended to cause unnecessary delay . . . .”

“Actions or tactics” can include, for example, the making or opposing of motions or the filing and service of a complaint, cross-complaint, answer, or other responsive pleading.  When a tactic or action utterly lacks merit the courts are entitled to infer the party knew it lacked merit and pursued it for some ulterior motive.  Dolan v. Buena Engineers, Inc. (1994) 24 Cal.App.4th 1500, 1505.

If you have questions or would like more information, please contact Timothy Kenna at [email protected].

Employers Should Consider “Prevailing Party” Language In Arbitration Clauses

Posted on: March 13th, 2019

By: Ken Menendez

Employers seeking to discourage frivolous claims by employees may wish to consider utilizing a “prevailing party” clause as part of their agreement to arbitrate.

Many employers utilize arbitration as a means of avoiding the generally greater cost and uncertainty of litigation in employment cases. Agreements to arbitrate are even more prevalent in employment agreements with highly compensated or professional employees.

One of the advantages of arbitration is the ability of the parties to the agreement to establish the rules governing the arbitration and arbitration award. In addition to procedural and logistical guidelines, the parties to an arbitration agreement may also authorize the arbitrator or arbitrators to award the costs, including attorney’s fees, of the arbitration to the prevailing party in the arbitration.

Such a clause might read as follows:

The arbitrators shall award the costs and expenses of the arbitration, including attorney’s fees, to the prevailing party as determined by the arbitrators in their discretion.

A “prevailing party clause” such as the foregoing may reduce the number of baseless claims against an employer, as potential claimants will have to weigh the risk of paying the employer’s costs in the event that the arbitrators rule that the employer was the prevailing party.

The foregoing arbitration clause requires the award of costs to the prevailing party. The drafters of the clause could, if they wished to do so, also make the award of costs discretionary simply by changing the word “shall” to “may.” It is also important to note that the foregoing clause requires the arbitrators to determine which party is the prevailing party. Because many employment cases contain both claims and counterclaims, placing the responsibility for identifying the prevailing party on the arbitrators eliminates subsequent disputes between the parties regarding which party was the prevailing party.

If you have any questions or would like more information, please contact Ken Menendez at [email protected].

Latest FINRA Rules to Regulate Expungement Actions

Posted on: February 19th, 2019

By: Margot Parker

FINRA recently announced its approval of enhanced training and guidance for arbitrators hearing expungement requests, an issue under increasing scrutiny as over 90% of such actions are currently granted. The proposal is now under review by the SEC and represents a step toward making it more difficult for brokers to have customer complaints expunged from their public records. The proposed rules also include a ban on compensated non-attorney representatives (NARs) from representing clients in FINRA arbitrations, as part of another step to strengthen the arbitration process.

While a ban on NARs has been widely supported, critics of the expungement process believe more should be done to take the burden away from customers to fight expungement actions. FINRA states that it shares these concerns. To reduce the high volume of expungements in the past, it codified a rule stating: “expungement is an extraordinary remedy that should be recommended only under appropriate circumstances.” With these recent steps, we may continue to see changes in the regulation of FINRA expungement actions in the near future.

If you have any questions or would like more information, please contact Margot Parker at (310) 937-2066 or [email protected].

The Supreme Court Weighs in on Arbitrability, But Questions Remain

Posted on: January 31st, 2019

By: Ted Peters

As reflected in a prior article, the United States Supreme Court recently agreed to take another look at the issue of arbitrability. In the case of Henry Schein, Inc. v. Archer & White Sales, Inc., the Fifth Circuit concluded that the court, and not an arbitrator, had the power to decide the threshold issue of arbitrability. In its ruling, the circuit court embraced the “wholly groundless” argument, concluding that submission of the dispute to the arbitrator was unnecessary because the assertion of arbitrability was “wholly groundless.” This decision underscored the ongoing split of authority among the lower courts wherein some courts, but not all, recognize the “wholly groundless” exception. On appeal, the appellants sought to have the Supreme Court reject the exception as inconsistent with the Federal Arbitration Act (“FAA”), the purpose of which is “to ensure that private agreements to arbitrate are enforced according to their terms.”

On January 8, 2019, newly appointed Justice Kavanaugh delivered the opinion of the court vacating and remanding the Firth Circuit’s decision. Writing for a unanimous court, Kavanaugh determined that the “wholly groundless” exception to the general rule that courts must enforce contracts that delegate arbitrability questions to an arbitrator is inconsistent with the FAA and Supreme Court precedent. Not surprisingly, the opinion revisited a number of prior cases in which the Court repeatedly held that the “agreement to arbitrate a gateway issue is simply an additional… agreement the party seeking arbitration asks the federal court to enforce, and the [FAA] operates on this additional arbitration agreement just as it does on any other.” (Opinion at p. 4, quoting Rent-A-Center, 561 U.S. 63, 70 (2010)). Kavanaugh noted that the Court had frequently rejected the argument that a claim of frivolity can derail the parties’ agreement to vest questions of arbitrability with an arbitrator and not a court. Citing Steelworkers v. American Mfg. Co., 363 U.S. 564, 568 (1960), Kavanaugh stated: “A court has ‘no business weighing the merits of the grievance’ because the ‘agreement is to submit all grievances to arbitration, not merely those which the court will deem meritorious.’”

On January 15, 2019, the Court issued a ruling in yet another case involving arbitration, New Prime Inc. v. Oliveira. Justice Gorsuch delivered the opinion of the court. In an 8-0 decision (Kavanaugh took no part in the consideration or decision of the case), the high court affirmed the First Circuit’s determination that a court should determine whether the Federal Arbitration Act’s Section 1 exclusion for disputes involving the “contracts of employment” of certain transportation workers applies before ordering arbitration. Unlike Henry Schein, which addressed the delegation of “gateway” questions of arbitrability, New Prime Inc. involved the judicial assessment of a statutorily based objection to arbitration.

But wait… there’s (one) more: Lamps Plus Inc. v. Varela, Dkt. No. 17-988. That case, argued on October 29, 2018, addresses whether the FAA forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements. An opinion is expected at any time.

Coming full circle, it is fairly clear that the high court seems to remain firm in its embrace of arbitration agreements without permitting judicial meddling, provided there is “clear and unmistakable evidence” that the parties affirmatively agree to delegate the decision of arbitrability to the arbitrator. (Henry Schein at p. 6, citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944). Yet, at the same time, the Justices appear receptive to judicial involvement as long as there is a reasonable statutory basis for it.

The takeaway? Parties to arbitration agreements should rest confident in their ability to affirmatively delegate disputes to arbitration provided that the statutory framework upon which arbitration is based leaves no basis for judicial tinkering. This may provide solace for some, but for many it leaves unanswered questions along with the risks and costs associated with uncertainty.

If you have questions or would like more information, please contact Ted Peters at [email protected].