The revisions serve three basic purposes. First, they fill in a few holes that have become apparent over the years. Second, some provisions are added to expedite the arbitration process—like adding a requirement that the tribunal establish a “provisional timetable for the arbitration.” Finally, they update the original rules to account for changes in technology. This recap is from front to back, not in order of significance. Some of the most significant changes are noted at the end, so read on!

Notices and Other Communications

The 1976 Rules (Article 2) required notices to be physically delivered, while the 2010 Rules provide that notices and other communications “may be transmitted by any means of communication that provides or allows for a record of its transmission.” E-mails and facsimiles are subject to two special rules. First, the communication is deemed received only if sent to a person specifically designated for receiving such communications. Second, they are deemed received on the day sent, except for a notice of demand for arbitration, which is deemed received on the day it reaches the recipient’s electronic address. Accordingly, you may wish to add a line to your UNCITRAL arbitration clause to designate an individual for receipt of a notice of arbitration, in addition to designating the place and language of the arbitration.

While Article 3 setting out the requirements for a notice of arbitration did not change, a new provision was added clarifying that the constitution of the arbitral tribunal will not be hindered by any controversy about the sufficiency of the notice, and giving the tribunal jurisdiction over such controversies.

Response to the Notice of Arbitration

A response to the notice of arbitration was not previously required, and Article 19 simply required the respondent to provide a statement of defense by a date determined by the tribunal. Article 4 of the 2010 Rules now requires the respondent to respond within 30 days of receipt of the notice of arbitration, with the response to include the name and contact details of each respondent, and any response to the items in the notice regarding the arbitration agreement, the relevant contract, the claimant’s description of its claim and requested remedy, and proposal with respect to the number of arbitrators.

The response may also include any objections to jurisdiction, a brief description of any counterclaims, and a notice of arbitration with respect to other parties to the agreement (beyond claimant). As the language is permissive instead of mandatory, it appears that counterclaims or crossclaims are permitted but not compulsory.

The Appointing Authority

The 1976 Rules contemplate the parties designating an Appointing Authority to assist with the appointment of arbitrators and any challenges to arbitral appointments. The procedures for determining an Appointing Authority are consolidated in Article 6 of the 2010 Rules with a few modifications. The new rules reduce the amount of time one must wait before making a request that the Secretary-General of the Permanent Court of Arbitration at the Hague resolve disputes regarding the Appointing Authority — from 60 days to 30 days. Additionally, asking the PCA to act as the Appointing Authority is now expressly permitted.

The Number of Arbitrators

The 2010 Rules retain the default position of having three arbitrators if the parties fail to agree on use of a sole arbitrator. However, Article 7.2 now provides more flexibility by allowing the Appointing Authority to appoint a sole arbitrator if one of the parties asks for this, or either party fails to appoint a second arbitrator and using just one is “more appropriate” under the circumstances of the case.

Arbitrator Challenges

The 2010 Rules add two innovations. First, a new annex provides a model statement of independence to be provided by proposed arbitrators. Second, a schedule is added for resolving any challenges (the original rules had a deadline for raising a challenge but no timetable for resolution). Per the new Rules, if the appointing party does not agree to the challenge, or the challenged arbitrator does not withdraw, in either case within 15 days, then the challenging party has 30 days from the date of the challenge to pursue it with the Appointing Authority, and otherwise it is waived.

Arbitrator Liability

Article 16 of the new Rules adds a waiver of liability for the arbitrators “save for intentional wrongdoing.” This waiver also applies to the Appointing Authority and to experts appointed by the panel.

Joinder

Article 17.5 now permits the tribunal to allow other parties to the arbitration agreement to be joined, unless the third party would be prejudiced by joinder. This is a significant advance over the prior rules that were silent on the subject.

Arbitral Fees

The 2010 Rules attempt to address the problem of excessive fees by requiring that the fees be reasonable, requiring the arbitrators to explain how they have fixed the fees and costs, and allowing the parties to appeal the fees and costs to the Appointing Authority. Previously, the tribunal members set their own fees, and there was no real provision for oversight, since UNCITRAL arbitration is non-administered. This addresses one of the most common criticisms of non-administered arbitrations generally.

Andrew Ness
William DeVan

After finishing the project 467 days late, Maropakis had sent letters asking for a time extension but failed to turn them into a formal, certified claim. Maropakis then brought a claim against the Navy for the unpaid contract balance, which the Navy had withheld as partial payment for claimed LDs. The Navy counterclaimed for the full 467 days of LDs. The court granted summary judgment on the Navy’s counterclaim, on the basis that since Maropakis had never formally sought (in the form of a certified claim) a time extension, the court had no jurisdiction to consider such a claim in defense of the LD assessment. The trial court agreed, as did the Federal Circuit on appeal.

The Federal Circuit’s ruling on appeal was as follows: “we hold that a contractor . . . must meet the jurisdictional requirements and procedural prerequisites of the CDA [Contract Disputes Act-the U.S. law that requires claims to be certified before they can be litigated], whether asserting the claim against the government as an affirmative claim or as a defense to a government action.” The Court saw no reason to distinguish between affirmative claims and matters of defense to government claims in applying the requirement for a certified claim prior to litigation, at least when the defense would involve an adjustment to the contract terms, as in the case of a time extension.

The dissenting opinion argued in vain that there is a clear distinction between presenting an affirmative claim for relief, where claim certification is required, and simply defending against a government claim, where no affirmative relief is sought.

The simple lesson of Maropakis is that whenever completing a U.S. government contract late, it is vital to submit a formal claim for a time extension so as to preserve your right to dispute a possible LD assessment (which may not come for several years). There are also two broader concerns. First, this is another brick in the wall of recent decisions by the Federal Circuit hostile to the position of Contractors. Contractors should be learning that they are not dealing with a tribunal at all inclined to give them the benefit of the doubt. Second, developments in the law relating to U.S. government contracts frequently spread to the U.S. private sector. Where private contracts require some sort of formalities associated with asserting a claim, the Owner may raise similar arguments, seeking to bar any ability to dispute its later assessment of LDs when the claim formalities were not followed to seek a time extension.

Andrew Ness
Christian Henel

The Rent-A-Center decision is complex, and well illustrates the very fine distinctions being made in the U.S. law of arbitration, but which have the net effect of strengthening the arbitrators’ role at the expense of the courts. The underlying broader issue is whether it is for the arbitrators or the courts to decide questions going to whether there is in fact a valid contract and a valid agreement to arbitrate (so called “arbitrability” or “gateway” questions). Under the longstanding Prima Paint rule, a challenge to the validity of the entire contract (including, but not specifically directed at, the arbitration clause) is to be decided by the arbitrators. But a challenge specifically to the validity of the agreement to arbitrate, or as to whether that arbitration agreement covers a particular dispute, is normally for the courts to determine. This, however, can be altered by the parties if they “clearly and unmistakably” demonstrate their intent to delegate such gateway questions to the arbitrators.

In Rent-A-Center, a former employee (Jackson) sued his former employer (Rent-A-Center) for employment discrimination. Rent-A-Center sought dismissal in favor of arbitration, based on an arbitration agreement signed by Jackson at the outset of his employment. That agreement (which covered only arbitration; other employment terms were in other documents) not only specifically provided that discrimination claims were to be arbitrated, but contained a separate “delegation” sentence giving the arbitrator “exclusive authority to resolve any dispute relating to the . . . enforceability . . . of this Agreement.” Jackson countered by asserting that the agreement to arbitrate was unconscionable and thus unenforceable.

The Supreme Court resolved the dispute in favor of arbitration by, in effect, extending the Prima Paint rule. It held, by a 5-4 margin, that since Jackson’s challenge to the enforceability of the arbitration agreement went to the entire arbitration agreement, and not specifically to the “delegation” sentence, then it was up to the arbitrator to determine the unconscionability challenge to the enforceability of the arbitration agreement. It was not a matter for the court to decide. This extension of the Prima Paint concept thus appears to further narrow the situations where the court gets to determine “gateway” issues, at least if the arbitration agreement is worded so as to delegate gateway issues to the arbitrators.

The lesson for construction practitioners is thus that the particular wording of the arbitration clause, and how, if at all, it delegates the arbitrators to determine arbitrability issues, is more important than ever. The specific wording, if deemed “clear and unmistakable,” may indeed immunize the parties from any scrutiny by the court of all but the narrowest and specific of challenges to the clause’s enforceability.

Andrew D. Ness

Under current Rule 26 of the Federal Rules of Civil Procedure, all communications between legal counsel and a testifying expert who has been specifically retained to provide expert testimony, as well as drafts of that expert’s report, are subject to discovery by the opposing party. It is routine, not surprisingly, for the opposing party to request these documents. This then leads
lawyers and their testifying experts to go to great lengths to communicate in a manner that does not create a discoverable record, often at considerable expense and loss of efficiency. For example, substantive discussions about complicated and highly technical issues are limited to oral conversations, and the expert takes no contemporaneous notes. E-mails are similarly confined to purely administrative matters. Drafts of the expert’s report are not prepared. Sometimes, a duplicative “consulting” expert who will not testify has to be hired to provide assistance on issues where, if the testifying expert gets involved, the associated communications would all have to be produced. All this makes the process of retaining experts more costly and less efficient, and puts parties who cannot afford duplicate experts at a disadvantage.

This is all about to change, as the U.S. Supreme Court has recently approved amendments to Rule 26 that significantly alter current practice. (Congress can alter or block the amended rules, but this is not expected).

Under new Rules 26(b)(4)(B) and (C), most communications between the attorney and a testifying expert, as well as drafts of that expert’s report, will be covered by the work-product privilege and will no longer be subject to broad discovery rights. This will permit the attorney and the expert to communicate more freely about substantive issues, without the fear of those communications being obtained by the opposing party. The new rule has three exceptions, however: 1) the expert’s compensation; 2) the facts or data provided by the attorney and that the expert considered; and 3) the assumptions that the attorney provided and that the expert relied on; must all still be disclosed.

Another change relates to expert witnesses who are not required to provide a written report stating their opinions, because they are not retained or specially employed to provide expert testimony. Such “non-retained” experts are often used in construction disputes because project personnel are often subject matter experts, and therefore are permitted to testify as “hybrid” witnesses who provide factual testimony about events on the project, plus opinion or expert testimony in their specific area of expertise. While these experts do not need to provide a report, the rule changes include a new requirement to disclose the subject matter on which the witness is expected to testify as an expert, and to provide a summary of the facts and opinions that the witness is expected to offer. Draft versions of these disclosures, however, will be protected to the same extent as draft reports by “retained” experts. The revised portions of the Rules of Civil Procedure that will become effective December 1, 2010 can be found at:

http://www.supremecourt.gov/orders/ordersofthecourt.aspx

Todd Wagnon
Andrew Ness

Neil MacBride, the U.S. Attorney leading the prosecution team, noted, “Bribery isn’t just a cost of doing business overseas. Today’s sentence makes clear that this is a serious crime that the U.S. government is intent on enforcing.” This statement succinctly illustrate the US DOJ’s commitment to prosecute individuals who violate the FCPA.

Assistant Attorney General Lanny Breuer has made no secret that the “prosecution of individuals is a cornerstone of [the DOJ’s FCPA] enforcement strategy.” “Put simply,” Breuer said in a November speech, “the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations.” Thus, the FCPA poses a hazard not just for corporate reputations and profits but also for the individual executive. Companies can be fined, but only individuals can be put in prison, and DOJ well knows that the prospect of a stretch in the Federal pen can have considerably greater deterrent effect than the possibility of your employer having to pay a fine. Look for more such announcements in the months and years to come, as FCPA enforcement efforts continue to escalate.

Fiona Philip
Andrew Ness

Most construction disputes are contract cases not involving federal law, so a federal court will only have jurisdiction if the suit involves more than $75,000 and is between citizens of different U.S. states. The key question is usually: where is a corporation a “citizen” for the purpose of determining whether such “diversity of citizenship” exists?

By statute, a corporation is a citizen of both the state (1) where it is incorporated, and (2) where it maintains its “principal place of business.” While the state of incorporation is obvious, for nearly 60 years, federal courts have struggled to define a corporation’s principal place of business. Last month, the United States Supreme Court reconciled divergent tests and clarified this at last. In Hertz Corp. v. Friend, No. 08-1107, slip op. (Feb. 23, 2010), the Court held that a corporation’s principal place of business is just one place, its headquarters. By limiting corporations to one static principal place of business, Hertz increases the number of states where a corporation is not a citizen, meaning it increases the likelihood of getting access to the federal courts in a particular case.

For 60 years, the Circuit Courts of Appeal have been split over where a corporation had its principal place of business. Some circuits held it was the state containing the corporation’s “nerve center.” Others held it was any state where the corporation conducted significant activities. Thus, in the Ninth Circuit a corporation had a principal place of business wherever the corporation conducted “significantly larger” or “substantially predominant” operations. Under such fluid standards, corporations with a presence in all 50 states might be considered a citizen of most or even all 50 states, effectively precluding access to federal courts. What’s worse, the fluidity of the tests made it impossible to predict the outcome from one case to the next.

In Hertz v. Friend, Hertz was sued by California residents in state court. Hertz removed to federal court, asserting it was not a California citizen. The lower court concluded Hertz’s principal place of business was California under the Ninth Circuit test, Hertz was a California citizen, and thus there was no jurisdiction in federal court. The Ninth Circuit agreed.

The Supreme Court reversed, concluding that a corporation’s principal place of business is best interpreted as “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities.” The Court noted in most cases, this should be the state containing the corporate headquarters, “provided that the headquarters is the actual center of direction, control, and coordination.” Id. Hertz’s headquarters is in New Jersey, so it was not a citizen of California and the federal court thus had jurisdiction.

With this relatively simple test for determining principal place of business, Hertz reduces the likelihood that a corporation will be deemed a citizen of more than two states, and makes predictable what those states are. So corporations should have relatively predictable access to federal courts in the remaining 48 states.

Michael McNamara
Andrew Ness

The proposed AFA would limit the scope of the Arbitration Act to exclude from its coverage: a) disputes between an employer and employee arising out of their employment relationship; b) consumer disputes between an individual and the seller or provider of real or personal property, services, money, or credit for personal, family, or household purposes; and c) disputes between a franchisor and a franchisee.
More significantly, the AFA would take away in all arbitrations the arbitrators’ authority to determine the validity and enforceability of arbitration agreements. This is a hallmark of U.S. arbitration law that has been generally successful in keeping courts from interfering in the interpretation and enforcement of arbitration agreements. It would be a major departure from current federal policy and several decisions of the United States Supreme Court.

Supporters of the proposed change believe that mandatory arbitration is being used in ways unfair to parties of unequal bargaining power who routinely fail to read the “fine print” mandating arbitration in many consumer transactions, such as when opening a bank account or obtaining a credit card. Among other objections, opponents fear that adding such restrictions would have the unintended consequence of reducing the effectiveness of arbitration as a cost effective remedy for commercial disputes. In reality, the pending legislation is likely to undergo significant revisions in both House and Senate committees before any final votes are taken.

While the construction industry is not specifically targeted by the AFA, concerns have arisen that subcontractors and suppliers, for example, may attempt to claim unequal bargaining power when confronted with standard arbitration clauses contained in many form subcontracts. As a result, those concerned about cost effective and efficient dispute resolution in the construction industry, both within the U.S. and internationally, are following the AFA’s progress through Congress closely.
Laura Kamas
Andrew Ness

To be eligible for an FCL, a company must: (1) need access to the classified information; (2) be organized under the laws of the United States; (3) have a reputation for integrity and lawful conduct; and (4) “not be under foreign ownership, control, or influence (FOCI) to such a degree that the granting of the FCL would be inconsistent with the national interest.” NISPOM ¶ 2-102. Factors considered here include the amount of foreign ownership, the type and sensitivity of information that will be accessed, and the company’s record of compliance with U.S. laws and regulations. NISPOM ¶ 2-301.

Translated, this means that the contractor needs to be a U.S. corporation, but that corporation can be foreign-owned or controlled (that is, a U.S. subsidiary), so long as it complies with the FOCI mitigation rules.

The FOCI mitigation rules are security measures to mitigate the extent of foreign control. One of the most commonly used measures is a Special Security Agreement (SSA). NISPOM ¶ 2-303(c). An SSA allows the foreign owner to maintain inside directors on the Board of the U.S. subsidiary/contractor, while excluding them from all decisions affecting the firm’s classified work. A Government Security Committee of independent, outside directors, approved by the U.S. government, oversees and ensures the proper handling of classified materials. What this means as a practical matter is that the foreign parent can have no influence or control over any decisions relating to the secure/classified project. For example, during the bidding phase the costs of the potential project can be discussed generally with the foreign parent, but the parent cannot be told of the security issues or the potential costs to comply with the security issues. Similarly, during performance, the parent can be told in general terms how the project is going, but cannot be told about a specific issue such as a blast-proof security wall that is causing a project delay.

Another mitigation method sometimes used is the establishment of a Proxy Agreement (PA) or Voting Trust Agreement (VTA). NISPOM ¶ 2-303(b). Under a PA or VTA, the voting rights regarding the foreign-owned stock of the U.S. subsidiary are vested in cleared U.S. citizens approved by the U.S. government. These Proxy Holders or Trustees become the directors of the corporation, to act independently from the foreign parent. Although the Proxy Holders must obtain approval from the foreign parent for major decisions, such as the sale of corporate assets or a corporate merger, the Proxy Holders or Trustees otherwise retain complete control, but the foreign parent still gets the financial benefit of its subsidiary’s operations.

Approval of FOCI mitigation measures is at the discretion of the government agency letting the contract, so there is no sure-fire guarantee of success. But by working with the government and being willing to implement those FOCI mitigation measures the government suggests, it usually is possible to obtain an FCL and compete for secure/classified U.S. Government projects.

Barbara Werther
Andrew Ness

 Hefty penalties are the order of the day – In the past year, companies have settled with regulators to the tune of billions of dollars in penalties, fines and disgorgement.

• Halliburton/KBR paid $600 million;
• Siemens paid $1.6 billion;
• BAE paid $450 million; and
• It is reported that Daimler will pay an estimated $200 million.

Not factored in here is the cost of these investigations. Technip recently reported a charge of approximately $500 million related to government investigations into its involvement in the TSKJ joint venture in Nigeria (the Halliburton/KBR settlement). By contrast, investment in a comprehensive compliance program and FCPA due diligence on agents and consultants looks like an inexpensive way to protect a healthy bottom line.

 Sting operations – In a very aggressive move, the US Dept. of Justice’s sting operation in conjunction with the UK authorities caught everyone by surprise. In tactics often reserved for crime syndicates, the DOJ and UK police arrested 22 individuals who allegedly attempted to make improper payments to FBI agents posing as representatives of procurement officers for a top minister of an African country. The improper payments were intended to obtain the award of contracts to sell military and law enforcement supplies. In an unusual twist, no actual foreign officials were involved.

 Intergovernmental cooperation – On February 5, 2010, BAE settled with both the DOJ and the UK’s Serious Fraud Office. In addition to pleading guilty to one count of conspiracy to making false statements to the U.S. government, BAE also pled guilty to a charge that it failed “to keep reasonably accurate accounting records in relation to its activities in Tanzania.” BAE’s settlement included a payment of $400 million to the US and £30 million to the Crown Court (with a designated use to benefit the people of Tanzania). The Siemens settlement of $1.6 billion included a payment of approximately $560 million to the Munich Public Prosecutors Office for corporate failure to supervise officers and employees.

The February 11, 2009 Halliburton/KBR settlement only resolved issues with U.S. regulators, and investigations by French, British and Nigerian authorities remain unresolved. Additionally, as mentioned above, the FBI and City of London Police coordinated efforts in the January 19, 2010 sting operation that captured 22 individuals.

According to public reports, the US SEC made over 750 requests for assistance from foreign regulators in fiscal 2009, an increase of almost 200 requests from the prior year. Geographic and economic boundaries have all but dissolved, making it more difficult to hide corrupt payments in offshore entities and far flung subsidiaries.

 Individual prosecutions and more litigation – The U.S. government has also sent a clear signal that it is willing to go after individuals and to litigate when necessary. Regulators are pursuing the middlemen and agents (as in the Siemens and Halliburton investigations) who conceal the corrupt payments to government officials. 2009 alone saw three FCPA trials against four individuals. That equals the total number of trials in the prior seven years.

 Increased scrutiny on agents and consultants – Companies subject to the FCPA need to exercise due diligence to ensure that they form business relationships with responsible and qualified agents and consultants. The DOJ has provided companies with a list of “red flags” which, if present, should trigger heightened scrutiny. Red flags include unusual payment patterns, high commissions, a refusal by the agent or consultant to provide FCPA certifications, a lack of qualifications or expertise to perform the services being offered, and a referral to the agent or consultant by an official of a potential governmental customer. As highlighted in the Siemens, Halliburton and BAE settlements, failure to conduct comprehensive due diligence, or turning a blind-eye to any one of these “red flags” can be highly damaging to a company’s reputation and bottom line.

Multinational construction companies take note – enforcement of the FCPA is here to stay!

Fiona Philip
Andrew Ness

Most of these standards are privately owned and promoted, but on December 11, 2009 at the Climate Change Summit in Copenhagen, the United Nations Environmental Programme (UNEP) unveiled the “Common Carbon Metric” for measuring energy use and reporting greenhouse gas emissions from building operations. UNEP proposes establishment of the Common Carbon Metric to measure the weight of carbon dioxide equivalent (kgCO2e) emitted per square meter per year by different building types and climate regions. While the Common Carbon Metric has yet to be adopted by any governing body, entities such as BRE and the USGBC may well incorporate the metric in their rating systems.

The diversity in rating systems means that parties wishing to build green projects in diverse locations need to be familiar with different standards for use in different countries, or even regions within a country. The different rating system requirements also need to be compared to local building codes and regulations, to ensure that there are no conflicts between them.

This diversity also undermines one of the principal business reasons for green building. A recent study sponsored by the World Green Building Council determined that the top business reason for green building is because it is the “right thing to do.” Positive publicity is the most obvious commercial benefit from “doing the right thing,” and a common standard for assessing a project’s “greenness” makes garnering that positive publicity much easier. The Sustainable Building Alliance (SBA) is working to solve this problem by developing common minimum standards for adoption by the different rating systems. SBA’s goal is to ensure consistency among the systems and to promote “dual certification.” But because each rating organizations has its own commercial interest in promoting its system, SBA has a difficult task ahead of it. Uniformity is certainly in the interest of engineers, architects, builders, and owner/developers, and there are early signs of progress, as SBA has reportedly fostered an agreement between BRE and HQE to create together a common standard for the European Union.

William Devan
Andrew Ness