Assume an Owner (O) hires a General Contractor (GC) to do work on a construction site, and the standard AIA form contract is executed containing a mandatory arbitration clause providing that "all disputes between the parties arising out of this agreement shall be resolved by binding arbitration under then applicable commercial arbitration rules". Plaintiff-worker (P) trips and falls while working on the site and sues both O and GC, alleging negligence, as well as violations of the New York State Labor Law (the "Lawsuit"). O and GC each answer the Lawsuit and assert cross-claims against each other for contribution, defense, and indemnification.
All of the above is standard fare and occurs almost reflexively. But then something unusual happens: O's counsel files an arbitration demand, demanding that GC arbitrate the issue of whether GC owes O defense and indemnification in the Lawsuit (the "Arbitration"). Inter-defendant arbitration of an indemnity obligation in the context of a pending personal injury lawsuit is an unusual tactic, and raises a host of procedural problems. For example, what happens to the rest of the case as the arbitration proceeds? What if the arbitration requires the resolution of other issues that have not yet been decided by the court? What if the arbitration takes the case beyond “standards and goals”? New York courts have come up with methods of dealing with the procedural problems. See, e.g., Weiss v Nath, 97 A.D.3d 661, 664 (2d Dep't 2012); County Glass & Metal Installers, Inc. v. Pavarini McGovern, LLC, 65 A.D.3d 940, 940-941 (1st Dep't 2009); and 624 Art Holdings, LLC v. Berry-Hill Galleries, Inc., 2012 N.Y. Misc. LEXIS 6440, 26-27 (N.Y. Sup. Ct. June 7, 2012). But even assuming counsel is willing to navigate the attendant procedural problems, in our opinion inter-defendant Arbitration of part of a Supreme Court action can only be justified in one of two circumstances:
1. Where a quicker resolution of the indemnity issue would occur in the Arbitration as opposed to the Lawsuit, and that speed is worth the arbitration fees; and/or
2. Where a more favorable resolution of the indemnity issue would occur in the Arbitration as opposed to the Lawsuit.
It is likely that New York counsel always will conclude that a quicker resolution would occur in the Arbitration. Counsel could also conclude that a more favorable resolution would occur in the Arbitration under the following scenarios:
1. If the rules applicable to the Arbitration (but not applicable to the Lawsuit) generate a better result -- of course then Arbitration would be advisable. But to make this decision counsel must retrieve the applicable Arbitration rules, review them for application to the indemnity issue, and compare the result with that obtained via the Lawsuit.
2. If the particular arbitrator used comes from a construction background and therefore knows or “feels” that such indemnity obligations should regularly be enforced -- here too Arbitration would be advisable.
So the conclusions are these: If the Arbitration would yield a more favorable result, choose inter-defendant arbitration regardless of the fees for arbitration. If the arbitration would yield a quicker result, and a result no worse than that yielded in Supreme Court, choose to arbitrate if you are willing to pay the cost to arbitrate in exchange for a speedier decision. In all other cases, bide your time and wait for the assigned Justice to make the decision on summary judgment.
The afternoon culminates with a jousting event between knights on horseback! Yes, they do knock each other off their horses!
Yesterday, the New York State Appellate Division, First Department, had the opportunity to consider a case involving an agreement containing both clauses. A limited liability company's operating agreement contained both an arbitration clause and a choice of law (New York) clause. But the commercial arbitration rules (mandated by the arbitration clause) conflicted with New York State law (mandated by the choice of law clause) in one important respect: commercial arbitration rules permit an arbitrator under some circumstances to assess punitive damages against a party to the arbitration. New York State law, on the other hand, does not permit an arbitrator to assess punitive damages. So when an agreement contains both clauses (commercial arbitration rules, and New York State choice of law), may an arbitrator award punitive damages?
Yes, said the Appellate Division in a sharply divided 3-2 decision. Matter of Flintlock Constr. Servs. LLC v. Weiss, 2014 NY Slip Op 05818 (8/14/2014). The majority held that the operating agreement's choice of law provision, in the absence of additional limiting language, "is insufficient to remove the issue of punitive damages from the arbitrator".
The Flintlock decision is problematic for two reasons: First, what do contracting parties do about their already executed agreements that now have conflicting clauses? It is barely overstatement to say that the overwhelming majority of shareholder agreements, operating agreements, asset sale agreements, and even employment agreements contain both of these clauses. Second, how should such agreements be drafted going forward? Pending an appeal of the Flintlock decision, attorneys should follow the First Department's direction and place limits on the arbitrator's power to impose punitive damages. The new clauses might read as follows:
"ARBITRATION. Any dispute arising under this agreement shall be resolved by arbitration before the [NAME OF ARBITRATION TRIBUNAL] in [LOCATION]. The arbitration shall be conducted under commercial arbitration rules then in effect, but the arbitrator(s) shall resolve the dispute in accordance with the laws of the State of New York without giving effect to principles of conflict of laws. The arbitrator(s) shall have the limitations on his, her and their power and authority as are found in New York State law, including without limitation no power or authority to award or assess punitive damages."
"CHOICE OF LAW. This agreement, its validity, construction, and enforcement, shall be governed by the laws of the State of New York, without giving effect to principles of conflict of laws."
Some background: the plaintiff in Cornell alleged that throughout her occupancy of a co-op apartment, the co-op building's "basement was in a wet, damp, musty condition"; that the radiator in her apartment's living room "leaked on numerous occasions" and "continued to leak and also released steam into the Apartment" despite the co-op’s attempts at repair; that in July 2003 she first noticed and notified the co-op that "there was mold growing in the [apartment's] bathroom," but the co-op "ignored" this condition; and that beginning in the first week of October, 2003, the landlord and/or its contractor performed demolition and/or construction work in the basement of the co-op building, permitting noxious dust, dirt, mold and debris to be released, which infiltrated her first-floor apartment. What were her injuries? The Cornell plaintiff claimed that "[i]mmediately after" the landlord and/or its contractor performed the work in the basement, she became dizzy, disoriented, covered with rashes, unable to breathe, light-headed, congested, experienced tightness in her chest, had severe headaches, had shortness of breath, had a metallic taste in her mouth, and experienced other physical symptoms.
At the Frye hearing (brought on by defense motion), the defendants used an immunologist/epidemiologist who assessed plaintiff’s claim that "a significant portion of her physical and psychological problems is related to adverse reactions stemming from exposures to molds," and, after review of her medical records and the relevant science, opined with reasonable medical certainty that there was no relationship between the medical problems experienced by Ms. Cornell and exposures to molds (i.e., no specific causation). The defendants’ expert also opined that a causal relationship between indoor residential mold and Ms. Cornell’s injuries was not generally accepted in the medical community (i.e., no general causation).
Plaintiff’s medical expert opined to the contrary, and pointed to numerous studies that supported an association between indoor residential mold and illness. But as the Court of Appeals explained, “studies that show an association between a damp and moldy indoor environment and the medical conditions that [plaintiff's medical expert] attributes to Cornell's exposure to mold (bronchial-asthma, rhino-sinusitis, hypersensitivity reactions and irritation reactions of the skin and mucous membranes) do not establish that the relevant scientific community generally accepts that molds cause these adverse health effects.” (The causation/association battle line was explained in detail in our January 16 entry.)
The Court of Appeals could have ended its decision there (since without proof of general causation, plaintiff must be turned away), but it went further: even assuming that the plaintiff in Cornell demonstrated general causation, she did not show the necessary specific causation. (For a theory of causation to survive under Frye, both prongs of causation – general and specific – must be proved.) The Court of Appeals decision alludes to the fact plaintiff failed to show specific causation because she did not set forth “exposure to a toxin, that the toxin is capable of causing the particular illness and that plaintiff was exposed to sufficient levels of the toxin to cause the illness (specific causation)." The Cornell plaintiff’s expert had tried to prove specific causation by differential diagnosis. The Court of Appeals dismissed that attempt: “Differential diagnosis, of course, 'assumes general causation has been proven'". This last pronouncement is of incredible importance to the defense of toxic tort claims, as the number of clinicians who use differential diagnosis to support an opinion on causation is legion.
This Firm already has had opportunity to use the Cornell decision at the trial court level to our client’s advantage (see Benton v 80 Cranberry Street, in “Publications” above). Absent a major change in the science of mold illness, there is every reason to believe the next few years will see many more summary judgment decisions in favor of land owners and against mold plaintiffs.
In the case of a general contractor ("GC")insured, the procedure runs generally as follows: a GC that intends to develop land purchases a general liability insurance policy from an insurance carrier. As part of the insurance binder, the GC is obligated to meet with an attorney to review the subcontract agreements used by the GC, and to review the safety of its operations. (The carrier if it wishes can charge the GC a sum in addition to the premium to cover the cost of the meeting.) The meeting is then held between the attorney and the GC, during which subcontracts and insurance certificates are reviewed, and safety measures on the construction site are looked at (particularly those that might trigger New York State Labor Law liability). The attorney then makes suggestions to improve the GC's paperwork and its safety measures.
Rather than rewriting the insured's subcontracts entirely (an expensive, and likely vain pursuit), the attorney will want to leverage the time spent by focusing on three areas during the meeting with the insured: (1) the quality of the indemnity language in the insured's subcontracts; (2) the accuracy and proper wording of any insurance certificates from the subcontractors; and (3) the responsibility for safety on the construction site. It is these three areas that will pay the most dividends in the event of a loss.
In our experience conducting risk management meetings, not more than half of the contractor insureds we meet have both a valid indemnification provision in their favor, and a properly drafted insurance certificate from their subcontractors. Following a well run risk management meeting, however, the insured's subcontracts will have a valid and unambiguous indemnification clause running in favor of the insured, the insured's subcontractors will have made the insured an additional insured on the subcontractor's liability insurance policy, the insured will have received a tutorial on the strict safety rules applicable to owners and contractors on a construction site, and the carrier's adjustment of a future claim will be a matter of passing the defense and indemnity of the insured to the subcontractor and its insurance carrier.
So a proper risk management meeting will benefit both carrier and insured. For these reasons, all general liability insurance carriers should consider utilizing risk management meetings. Four points, however, should be kept in mind: (1) the insured is not always receptive to such meetings, even if the insurance binder requires it. Consequently, you will find that the meeting often takes place long after the insured starts work on the site; (2) you are counting on the insured taking the advice of the attorney. There is little recourse, however, if the insured does not do so (other than perhaps a non-renewal of the policy); (3) it is not a requirement that an attorney conduct these meetings -- an experienced adjuster can be just as effective; and (4) the average time to prepare for and conduct the meeting is six hours. The amount charged to the insured, if any, should reflect that anticipated cost.