Sometimes, there's no way to avoid arbitration
Development projects gone awry can produce some costly consequences, but you can protect your business interests by being prepared if arbitration is unavoidable
The credit crisis, which Alan Greenspan referred to as a “once-in-a-century credit tsunami,” has had a major effect on large construction projects throughout the United States and in our own backyard. Lenders have tightened their belts and are often unwilling to negotiate extensions on loan maturity dates or to provide developers additional funding to address cost overruns.
Thus, in many cases, projects are underfunded, personal guarantees become due, and developers are left without funds to pay contractors for work already performed, much less for work necessary to complete the project. From a litigation standpoint, this has resulted in some developers’ getting quite “creative” (read: unscrupulous) to avoid their obligations.
For example, Donald Trump made national news when he tried to convince a court that he was not obligated to honor a $40 million personal guaranty relating to the $640 million construction loan for his Trump International Hotel & Tower Project. His reasoning? The credit crisis constituted a force majeure event under his loan commitment. At least “The Donald” had the courage to go to a trier of fact. Indeed, the strategy du jour for some developers on troubled projects is to take any position to avoid having claims against them tried.
One such example involves a $90 million hotel and condominium project in the Great Lakes region. In that case, the developer ran out of money in the midst of construction and could not pay ongoing construction costs. His lender refused his requests for additional funding. Desperate, he withheld millions in funds owed to the contractors for work already performed, default-terminated the general contractor and apparently planned to use the improperly withheld funds to complete construction using another entity. His conduct became more unseemly after the general contractor initiated arbitration with the American Arbitration Association.
The developer hired counsel and participated in the arbitration process for over a year. In addition, he sued his lender in court for fraud. Then, a week before the arbitration hearings were to start, the developer’s attorneys withdrew, citing a lack of funding. The developer then sought a continuance alleging he needed to obtain new counsel. In reality, the withdrawal of counsel was an attempt to create grounds for a continuance. The request was denied, but on the eve of the hearings, the developer appeared with the lender’s attorney—the same lender he had sued for fraud—to re-request the continuance. This was denied. So the lender ran to court with the developer and sought a temporary restraining order to stop the hearing, arguing that the lender’s interests would not be protected should the arbitration proceed. The court denied this request, too. Then, with all delay tactics thwarted, the developer’s original counsel miraculously reappeared ready for arbitration and the case was tried.
Another questionable tactic employed to avoid hearings that has gained popularity in these troubled times is refusing to pay AAA arbitration fees and deposits. In addition to the filing fee required to commence the action, the AAA collects from each party a pro rata share of deposits to cover anticipated fees and costs the arbitration panel will incur. Deposits can reach six figures and normally are not collected until well into the process—and sometimes on the eve of the hearing. If the deposits are not paid, the AAA will suspend the hearing as they have a “no pay,
no play” policy.
So some developers faced with claims simply refuse to pay the deposits, hoping the AAA will terminate the proceedings. If this occurs, there is little one can do to keep the case in arbitration and avoid delay, aside from paying the non-paying party’s share and hoping to recover it via an award or seeking court intervention.
We can hope that the worst of the credit crisis and such unscrupulous tactics are behind us. However, it certainly helps to know these tactics are being employed so you can develop a plan to proactively deal with them. 
Kyle Bogdan is a partner in the firm Warden Grier Triplett.
P | 816.877.8100
E | kbogdan@twgtlaw.com
Return to Ingram's November 2009