Most construction disputes are resolved, not in a court of law, but in an arbitration proceeding in which experienced, construction attorneys and other construction professionals work diligently, examine the evidence, make rulings before hearings, conduct hearings and ultimately issue highly technical detailed decisions. Diligence notwithstanding, a validly filed parallel proceeding can ensure thorough discovery and may provide a basis for vacatur of an award. The stakes are high because an award in arbitration can only be overruled on the narrowest of grounds. Ensuring rigorous disclosure of the facts both supports just decisions and preserves the ability to challenge a determination when fraud in the process is alleged.
It is axiomatic that as long as an arbitration hearing has taken place, an action to confirm or vacate the arbitration award is straightforward. The grounds to vacate an arbitration award are narrow and the climb is steep. That is because there is a strong presumption in favor of enforcing arbitration awards, especially in the context of construction.
The court’s standard of review of an arbitration decision is extremely deferential.
The 3rd Circuit recently found that an arbitration award obtained by perjured testimony constituted fraud that would allow a vacatur of an arbitration award under the Federal Arbitration Act as “procured by fraud.” Under this standard, a party knowingly concealing evidence during the discovery process is analogous to perjured testimony. Keep in mind that a party seeking to vacate an arbitration award must show three things with respect to the fraud. First, it must provide clear and convincing evidence of fraud in the arbitration. Second, it must demonstrate that the fraud was not discoverable through reasonable diligence before or during the arbitration. Third, it must show that the fraud was materially related to an issue in arbitration.
Therefore, a construction litigator in arbitration must vigorously pursue discovery and, to the extent any doubt exists as to compliance with their discovery requests, vigorously advocate to the fullest extent of the applicable rules. Pre-hearing discovery is paramount and the use of authorized subpoenas, for example, is not only a sound practice but essential.
At the arbitration hearing, again recognizing the need to not turn a hearing into a discovery proceeding, counsel must vigorously pursue all lines of questioning to establish that the opposing parties have complied with all discovery requests. If counsel does not engage in discovery for the hearing, as well as vigorous examination during the hearing, they may not meet the requirements of the three-part test. After all, counsel who is not diligent in discovery cannot say that they did all things possible to discover the documents in question. Reasonable diligence is frequently taken for granted in arbitration, where parties can be discouraged from conducting thorough discovery by an arbitration panel. It is a common refrain that the parties have selected arbitration because they do not want to engage in extensive discovery. However, if it is possible that one party is not going to comply with its discovery obligations, a vigorous advocate can make a difference.
Sometimes, a creative, zealous advocate can increase the probability of compliance with discovery obligations in arbitration by conducting a parallel action. Such a parallel action may enable counsel to obtain more effective discovery and more thorough responses. For example, it can be considerably easier to obtain discovery in a parallel action filed in federal court under the Federal Rules of Civil Procedure. Likewise, depending on the jurisdiction, magistrates can play a very effective role with respect to discovery disputes in a parallel action. Vigorous counsel can obtain discovery that might otherwise not be obtained in the arbitration and, if necessary, be prepared to pursue an argument that an award was procured by fraud.
That very thing happened recently in a case recognized and published in the 3rd Circuit. While it was not a construction case, the counsel seeking to vacate the award in arbitration was successful in obtaining discovery in a parallel action. That discovery allowed counsel to establish that fraud was committed. Yet, that was not the end of the analysis by the 3rd Circuit. In fact, the 3rd Circuit applied the three-part test and examined the conduct of counsel to determine whether the fraud could have been discovered through reasonable diligence in the arbitration proceeding. Therefore, counsel can never let up on pursuing discovery.
Likewise, the court examined whether the fraud was material to the case. Again, counsel must understand what matters and what does not matter when it comes to the case in arbitration so that the discovery conducted in both the arbitration and the parallel case is strategic.
By using a valid, parallel action, counsel can access remedies in terms of discovery that are not typically available in arbitration. In a standard arbitration, the parties depend upon their own counsel to be diligent in discovery, opposing counsel to be forthcoming, and the arbitrators to be ready to enforce the discovery rules. However, given the expectation that arbitrations will not generally be as robust in terms of discovery, using a parallel action may be a real difference-maker.
Fox Rothschild LLP is home to one of the deepest Construction Practice Groups in the United States. With offices in major construction hubs nationwide, Fox’s experienced team advises on major construction and infrastructure projects, including drafting and negotiating contracts and litigating disputes involving such projects. Harnessing the combined strength of a nationally recognized construction practice and a deep bench of lawyers focused on Federal Government Contracts, we provide business-friendly advice to help our clients complete projects in the United States and internationally. Fox construction law practice is backed by a national firm of 950 attorneys providing a comprehensive suite of legal services from 27 offices coast to coast. For more information, visit foxrothschild.com/construction.
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