Should I Have an Arbitration Clause in My Construction Contract?

Posted in Construction

Although it is typical for AIA form contracts to contain arbitration clauses, as a contractor you should consider whether you should have an arbitration clause in your construction agreement. As discussed below, there are numerous factors to consider in determining whether mandatory arbitration is the preferred dispute resolution mechanism, or whether the state court system is preferred. Although arbitration may have some advantages, there are also disadvantages which must be considered rather than simply adopting the AIA form.

Costs of the Arbitration Proceeding

If an action is filed in either state or federal court, there is a filing fee for the complaint which is typically not more than $250 if you are the plaintiff. If you are the defendant, the filing fee is somewhat less. In a commercial arbitration matter, however, the amount of the filing fee paid by the claimant depends upon the monetary value of the claim being filed. In general, the higher the dollar value of the claim, the higher the filing fee for the claimant. If you are the respondent in an arbitration proceeding, no filing fee is charged unless you intend to pursue a counterclaim. As such, compared to a state court matter, the filing fee in an arbitration proceeding is substantially higher, and perhaps exponentially higher, if it involves a substantial claim. Thus, the initial filing fees in an arbitration proceeding are more costly than a state court action.

Judge or Jury vs. Arbitrator(s)

When an action is filed in a commercial arbitration matter, the parties must select an arbitrator, or a panel of arbitrators, to decide their matter – depending upon the size or complexity of the claim. In a state court proceeding, either a judge or jury will decide the matter on the merits. In the context of an arbitration proceeding, arbitrators are compensated their normal hourly rates throughout the course of the arbitration proceeding. In general, these rates are commensurate with the level of experience of the arbitrator and can surpass $500 to $800 per hour. This billable time includes all prehearing time, which can be extensive, if the value of the claims are substantial. Thus, the fees which are payable to an arbitrator are substantial and must be paid by both the claimant and the respondent. In a typical state court proceeding, the parties are not required to compensate the judge or jury for any pre-trial time or trial time. Therefore, the costs associated with an arbitration proceeding, both during the prehearing stage and during the hearing stage, are substantially greater.

Furthermore, if a party to an arbitration proceeding wishes to obtain a transcript of the proceeding, he or she is required to pay a court reporter to be present to record the proceedings. In either forum, a claimant or plaintiff will need to decide whether they feel comfortable with a judge or jury deciding the case, or an arbitrator or a panel of arbitrators. While arbitrators may be trained legal professionals, there is no guarantee that they possess superior knowledge to a judge, who may also possess extensive experience in construction litigation. Obviously, a jury is an entirely different matter and requires laymen to decide the merits of the case. With that being said, however, at times the decisions of an arbitrator or a panel of arbitrators can seem equally confusing or unreasonable.

Discovery During an Arbitration Process vs. State Court Process

In arbitration matters, interrogatories, document requests, and depositions are generally limited. In fact, in some proceedings, other than exchanging documents, no additional discovery is permitted. The extent of discovery which is permitted, however, is entirely within the discretion of the arbitrator.

On the other hand, in a state court proceeding the parties are free to serve interrogatories, document requests, requests for admissions and other discovery vehicles. They are also able to take as many depositions as are reasonably necessary. As such, the discovery process in a state court proceeding is generally more extensive and costly than would occur in a typical arbitration proceeding. This conclusion, however, assumes that the arbitrator does not permit the same amount of discovery that would be permitted in a state court action. As a caveat, at times an arbitrator may permit extensive discovery, and thus, the cost savings would be lost. In general, an arbitration proceeding does save the parties money in the discovery process, however, less extensive discovery can leave a party feeling somewhat ambushed as they may not be fully aware of the merits of their adversary’s claims prior to the hearing.

Timeliness of the Proceeding

In general, arbitration proceedings are resolved faster than state court actions. It is not unusual for a state court case to take a minimum of two to four years before a trial is heard. On the other hand, it is unusual for an arbitration proceeding to go on beyond one year, unless the claim is extensive or complex. Depending upon whether you are the claimant or the respondent, the timeliness of the resolution may or may not benefit you. Nonetheless, an arbitration proceeding tends to move significantly faster to a hearing on the merits than a state court action.

Judgments

Once a judgment is obtained in an arbitration proceeding, an action still must be filed with the state court to confirm the judgment. The judgment will be confirmed by the state court unless a party can demonstrate that there was a miscalculation made by the arbitrator, or that the arbitrator rendered an award on an issue not before him which was outside the scope of the demand for arbitration. Also, if an award is so poorly written and unclear that its terms require further verification, the state court may ask the arbitrator to correct or modify the award. On the other hand, once a judgment is entered in a state court proceeding, that judgment is immediately valid. In either matter, once a judgment is confirmed or entered by a state court, the parties may commence executing upon the judgment.

Appeals from an Arbitration Proceeding or a State Court Proceeding

Appealing the decision of an arbitrator is much more than difficult than appealing the decision of a state court matter. In general, in order to obtain a reversal of a decision rendered by an arbitrator, the party would have to demonstrate fraud or undue means by either a party to the arbitration, or partiality by the arbitrator, or a patent excuse of discretion by the arbitrator which prejudices one side. As such, the grounds to appeal an arbitrator’s decision are narrow. On the other hand, while a state court proceeding is simpler to appeal, the party must nonetheless demonstrate that a reversible error was made by the trial court in order to succeed on an appeal. In the absence of a clear error of the law, or other prejudicial error by the state court, the judgement entered by the state court will be affirmed by the Appellate Division.

Conclusion

Although an arbitration clause appears in most AIA form contracts, contractors should consider whether they should the strike this clause and simply allow parties to proceed in state court. Whether a contractor should include an arbitration clause is an issue the contractor should discuss with their counsel, or an attorney from a reputable firm who has knowledge in this area. In my experience, at times an arbitration clause is not preferred. Furthermore, depending on the nature of the case, an arbitration proceeding may be too abbreviated or more costly. For the foregoing reasons, a contractor should consult with an attorney as to whether to include an arbitration clause in their construction agreement because once the clause is included in the agreement, it is binding unless both parties elect to void the provision.

Condominium Association Cannot Collect Unpaid Fees from Lender’s Assignee

Posted in Community Associations

On June 6, 2017, the New Jersey Appellate Division ruled that a foreclosing mortgagee is not liable for unpaid condominium maintenance fees simply because it winterized the unit and changed the locks.

In the published decision Woodlands Community Association Inc. v. Mitchell, the Appellate Division reversed a trial court verdict in favor of the condominium association. The three-judge panel went onto offer guidance as to what specifically constitutes a “mortgagee in possession” of a property, a determination the judges noted required a case-by-case approach.

In this case, the lender’s assignee, defendant Nationstar Mortgage LLC, took possession of a condominium unit when the owner/mortgagor defaulted on the loan. It then winterized the unit and changed the locks. The unit owner also owed the condominium association for unpaid monthly fees and other condominium assessments. The condominium association instituted an action against the owner to recover the unpaid fees. Thereafter, the association amended its complaint to include defendant, alleging that the lender’s assignee was responsible for the association fees as it was in possession of the property.

The trial court found in favor of the association, determining that defendant was a mortgagee in possession, and therefore, liable for the maintenance fees. The trial judge reasoned that defendant held the keys, and no one else could gain possession of the property without its consent. This, the trial court held, constituted exclusive control, giving defendant the status of mortgagee in possession.

On appeal, defendant argued that changing the locks and winterizing the condominium unit did not render it a mortgagee in possession of the property.

The actions of a mortgagee determine whether possession and management of the premises have been undertaken by it. After considering case law addressing the definition of a “mortgagee in possession,” the appellate panel assessed “whether defendant exercised the necessary level of control and management over the property to deem it a mortgagee in possession.”

The panel found that the minimal efforts taken by defendant to secure its interest in the mortgaged property were not sufficient to convert it into a mortgagee in possession. Thus, defendant was not liable to the condominium association for the unpaid fees.

The panel explained that where a mortgagee has not occupied the unit, is not collecting rents or any other profits, nor making repairs, it will not be considered a “mortgagee in possession” responsible for paying condominium fees and dues. Winterizing the property and changing the locks is not the “equivalent of the multitude of actions and responsibilities undertaken by” a mortgagee in possession.

Wiretapping in the Workplace

Posted in Employment

The recent turmoil, investigation and controversy surrounding President Donald Trump’s firing of former FBI Director James Comey has thrust the issue of wiretapping into the public and political spotlight. “James Comey better hope that there are no ‘tapes’ of our conversations before he starts leaking to the press!,” President Trump tweeted on May 12, 2017, suggesting that “tapes” of his private conversations with Director Comey might exist. Most recently, the White House, responding to bipartisan criticism, has been pressed to divulge whether there really are any secret recordings of the president’s private conversations with the former FBI Director. Time will tell whether the Trump Administration comes clean and whether any recordings actually do exist (and, if so, what the implications might be).

All of this commotion prompted me to think about wiretapping in the workplace and, specifically, the issue of audio recordings or, as President Trump has expressed, “tapes” of conversations secretly recorded by an employer of its employees. What types of audio or tape recordings are legally permitted in the employment environment?

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Craft Beer Wholesaler to Pay $2 M Fine to Settle Trade Practice Violations

Posted in Beer & Spirits

Attorney General Christopher S. Porrino and the Division of Alcoholic Beverage Control announced a settlement with a Hunterdon county craft beer wholesaler, resulting in a record $2 million fine for alleged trade practice violations.

The Division alleged that Hunterdon Brewing Company LLC sold draft beer tap systems below fair market prices and mislabeled the charges as “miscellaneous” on invoices to conceal them. The Division alleged that the company also ignored credit regulations for at least 700 retail customers. In addition to reviewing thousands of documents, the Division compiled sworn statements from more than two dozen retail licensees.

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Can Community Associations Regulate the Use of Drones?

Posted in Community Associations

Drones are the latest craze to hit the market and chances are someone in your community has a drone, or your community deals with a vendor that uses drones. Drones are small, unmanned aircraft that respond to the commands of a remote operator or follow a pre-programmed trajectory. They are technically known as “unmanned aerial vehicles” or “UAVs”. Initially developed by the military, drones are now available to the general public and are used by many businesses and individuals alike.

drone in sky

As drone technology develops and evolves, it is important for your Community Association’s rules to develop and evolve to protect the health, safety and welfare of residents.

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Does a Foreclosure Complaint Prevent a Community Association from Enforcing Rules and Regulations?

Posted in Community Associations

A New Jersey Chancery Court was called upon to rule whether the filing of a foreclosure complaint by a condominium association prevents the association from taking other actions to enforce its rules and regulations as they would apply to the defendant in the foreclosure action.

Specifically, a condominium association had started a foreclosure action against an owner, seeking to foreclose its liens. During the pendency of the foreclosure case, the Association decided to enforce its parking revocation policy, as set forth in the association’s Governing Documents. It sought to revoke parking privileges of the owner because of the substantial arrears.

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Ignite Restaurant Group Fires Up Chapter 11 Bankruptcy Case

Posted in Bankruptcy & Creditor's Rights

Ignite Restaurant Group (“Ignite”) filed a voluntary petition for Chapter 11 bankruptcy protection in the Southern District of Texas, Houston Division today (Case no. 17-33550). Ignite operates 137 Joe’s Crab Shack and Brick House Tavern + Tap restaurants, including three international franchise locations in Dubai. Ignite employs 8,400 people, including 2,900 full-time (both salaried and hourly) employees. Ignite’s bankruptcy schedules list $197 million in liabilities and $153 million in assets.

In its bankruptcy filings, Ignite cites to declines in comparable restaurant sales and income from operations at both Joe’s and Brick House. The company also notes that it has closed underperforming restaurants, including a location in Newark, NJ which had opened in 2013.

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NJ S181-Act Concerning Snowplow/De-Icing Service Contracts in Community Associations

Posted in Community Associations

The New Jersey state Senate passed the bill 181, authored by Senator Christopher Bateman(Hunterdon, Mercer, Middlesex and Somerset), by a vote of 35-0 on January 23, 2017.

The bill, if passed by the Assembly and signed into law by the Governor, will render void and unenforceable any indemnification/hold harmless language in a contract with a snowplow vendor. This bill will not apply to the State or any municipal government.

Passage of New Jersey Senate bill 181 will have dire consequences for community associations. Continue Reading

Foreclosure an Effective Method to Recoup Unpaid Condo Assessments

Posted in Community Associations

Foreclosure rates for residential properties continue to drop. Black Knight Financial Services reported that in 2016, the national foreclosure rate dropped by 30 percent. The first quarter of 2017 reports the lowest rate of foreclosure activity since 2006.

As the inventory of foreclosed properties lessens, housing markets will see an increase in value. Owners should start to see home values on the rise.

While foreclosure rates nationwide are the lowest they have been in 11 years, foreclosures in New Jersey remain among the top ten highest in the country. Continue Reading

Rue21 Files for Chapter 11 Bankruptcy

Posted in Bankruptcy & Creditor's Rights

Rue21 Inc. (“Rue21”) filed for Chapter 11 bankruptcy protection in Pittsburgh, PA on Monday (case no. 17-22045-GLT, Western District of Pennsylvania).

This was another bankruptcy filing I saw coming back in January, when I wrote my blog Retailers to Watch for Possible Bankruptcy Filings in 2017. In the bankruptcy petition, the teen fashion retail chain lists more than 1,100 stores in the U.S. and assets and liabilities in the range of $1 billion and $10 billion.

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