First, try to name a business that relies more heavily on email and electronic records than the construction industry. Then, try to name a business that has more claims and disputes involving critical information contained in those emails and electronic records.
Are you stumped?
If so, then you already know why the new federal rules governing pre-trial discovery of electronically stored information (“ESI”) will have a greater impact on construction than almost any other industry. In fact, to be ready for claims and disputes under the ESI amendments, contractors will need to make changes to ways of doing business that seem far removed from the courthouse or arbitration hearing room.
To cope with the brave new world of electronic discovery under the ESI amendments:
• Contractors must be aware of the ways in which their contractual commitments can affect their legal duty to preserve electronically-stored project information for use in court or arbitration.
• Contractors must pay close attention to the impact that their data management procedures – especially their ESI purging and deletion programs – can have on their ability to pursue claims and defend themselves from the claims of others.
• Construction attorneys and information technology personnel must gain a thorough understanding of the legal and technical aspects of their clients’ protocols for electronic data creation, storage, management and reproduction.
• Procedures must be put in place so that when disputes arise and claims are asserted, relevant ESI can be identified, preserved and produced without disrupting the orderly conduct of day-to-day business.
• Appropriate technology must be employed to streamline the discovery of ESI in litigation and arbitration and to address issues relating to privileged and work-product information.
All of these steps require close cooperation between legal counsel who are well-versed in the applicable law and technology and project personnel who understand the importance of electronic data management and preservation.
History of the ESI Aamendments
After years, if not decades, of drowning in paper, the construction industry has energetically embraced information technology and electronic document generation and storage. Today, virtually every construction project has a dedicated server for storage and distribution of electronic communications between the project participants. Emails have replaced letters, and ESI has replaced most of the paper records.
The explosive growth of ESI has not gone unnoticed by the courts. Judges have struggled to apply pre-trial discovery rules and standards created for a paper-intensive environment to discovery issues in an electronic age. Despite their efforts, rulings of the courts have been inconsistent and confusing, and no uniform standards have developed.
All of this changed on December 1, 2006, when extensive modifications to the Federal Rules of Civil Procedure became effective. In addition to governing the production of ESI in litigation, these amendments also impose wide-ranging obligations to identify and retain ESI where the potential for a dispute exists, but no claim has yet been asserted.
The ESI Aamendments Will Aaffect Aall Construction Disputes
Although the ESI amendments apply only to cases pending or filed in the federal courts after December 1, 2006, the effects of the new rules will be felt far beyond the federal courthouse. New Jersey has already adopted the changes imposed by the amendments, and at least 10 other states are considering them for adoption. Since most states model their state court discovery rules and decisions on the federal rules and cases, the substance of the amendments will probably be adopted in most, if not all, of the 50 states.
The amendments will also have an impact on arbitrations. A pre-arbitration exchange of documents is often required in accordance with the provisions of the Federal Rules of Civil Procedure, and arbitrators frequently look to the federal rules for guidance on what documents must be produced and the required means of production. Many states also have arbitration acts or codes that entitle arbitration participants to wide-ranging document productions. The federal ESI amendments will have a profound impact on all of these proceedings, and virtually every construction dispute.
Production of ESI to Opposing Parties
Not long ago, discovery in a construction case consisted primarily of copying reams of paper documents. Those days are gone. Contractors and their counsel must now know about ESI and the various formats and methods by which it can be stored, retrieved, reviewed, copied, altered and corrupted. Terms such as “native files,” “exported formats,” “hosted data,” “metadata,” “PDF” and “TIF” will become common in written document requests and in orders of courts and arbitration panels.
Contract negotiations will also include discussions of provisions regulating the storage, retrieval and routine destruction of ESI. Terms such as “litigation hold,” “preservation notice,” “accessible ESI” and “inaccessible ESI” will find their way into construction contracts. Contractors must appreciate the limitations that these requirements may impose on their day-to-day handling of ESI.
Most importantly, contractors must be aware that if they destroy ESI in violation of a retention obligation imposed by contract, they may be found by a court to have acted in bad faith. Bad faith failure to comply with document retention requirements can lead to significant strategic and tactical consequences in litigation. In the most egregious cases, a default judgment may be entered and monetary penalties imposed.
Early Consideration of ESI Issues
The exchange of documents in litigation traditionally has been accomplished through written discovery requests issued after a complaint has been filed and an answer submitted. ESI issues have arisen only after written discovery requests have been issued and answered, which is frequently two or three months after the complaint was filed.
The ESI amendments require the parties to identify and address ESI issues much earlier in the discovery process. Now, even before formal discovery requests are issued, the parties must provide to each other a copy, or a description by category and location, of all ESI.
The new rules also require the parties to meet and confer shortly after the filing of the lawsuit, to discuss and resolve issues related to the discovery of ESI. At this early meeting, the parties must identify any ESI that is “inaccessible” due to undue burden or cost in retrieving it. The parties may then agree upon the process to produce, or the court may enter an order governing the production of, this inaccessible ESI.
To comply with the early identification and meet-and-confer requirements, counsel will need the assistance of a client representative familiar with the dispute, as well as a client representative who has knowledge of the client’s information technology systems. Because of the potentially complex technical issues, information technology specialists or consultants may also be involved, particularly in multiparty cases.
The contractor’s counsel will need to understand the client’s ESI systems, including the amounts and nature of data in both accessible and inaccessible storage, any ESI destruction or deletion programs, and any other limitations on the client’s ability to produce relevant ESI. The attorney must be prepared to discuss with opposing counsel the forms in which ESI can be produced, what ESI might be considered by the court to be inaccessible and the formats that are preferred for purposes of searching and analyzing ESI.
All of these activities will require considerable advanced planning and coordination between the contractor, its information technology staff and counsel.
Privileged or Work-Product Materials in ESI – “Quick Peeks” and “Clawbacks”
It is not unusual for a contractor’s project management team to consult with in-house and outside counsel on an ad hoc basis during the course of a project. In the old days when paper records predominated, notes and correspondence with counsel were often kept in separate files. In the new age of electronic record keeping, however, emails with counsel are usually commingled with all other project documents on the project server. This commingling makes it very difficult to determine where in a database privileged or work-product communications might be located.
Long strings of emails with numerous addressees and attachments can fill several gigabytes of ESI. Finding the ones involving in-house or outside counsel, or that are otherwise privileged and protected from production, can be a difficult and expensive task. A privilege review of just one gigabyte of electronic data is the equivalent of scouring 166 banker’s boxes of paper documents.
The amendments to the federal rules attempt to address this practical problem by allowing the use of “quick peeks” and “clawbacks.” A quick peek gives the opposing attorney access to all of the producing party’s ESI for a limited period of time for the sole purpose of browsing through the available electronic data to determine what should be produced for further review and copying. A clawback allows the producing party to demand the return of any privileged or work-product material that is produced in the form of ESI.
While quick peeks and clawbacks sound like reasonable solutions to a vexing problem, contractors and their attorneys should not be lulled into thinking that they make privilege reviews obsolete. To the contrary, privilege is a matter of state law, not federal law. Many states do not recognize either quick peeks or clawbacks as an effective antidote to the waiver that typically occurs when privileged or work-product materials are shared with another party.
For example, under the waiver rules of many states, the production of privileged ESI by a contractor in a suit filed against it by one of its subcontractors will make the same ESI subject to disclosure in a separate suit filed by the contractor against the owner. This waiver will occur even though the original production was subject to the quick peek or clawback provisions of the ESI amendments.
For this reason – as well as the practical difficulty of “unringing the bell” once privileged materials are disclosed – privilege reviews of ESI must be conducted prior to production. Performing privilege reviews on ESI requires not only sophisticated software capable of organizing ESI for review by counsel, but also the capability of counsel to perform privileged reviews in a timely and expedited fashion. The volume of documents subject to production, and the time limitations imposed by courts or arbitrators, may require larger teams of attorneys to review and analyze ESI for both privilege and relevancy objections.
The Rule 37(f) Safe Harbor and Good-Faith Purging of ESI
The ESI amendments provide a “safe harbor” that is intended to allow reasonable company-wide ESI purging procedures and to protect companies that use them from the harsh sanctions that can accompany intentional destruction of ESI.
Document retention programs that include frequent purging of ESI will, however, come under greater scrutiny as these safe harbor provisions are interpreted by the courts and applied to real-life situations. Whether a purging program falls within the safe harbor will turn on numerous individual facts, including the retention requirements imposed in the contract between the parties and the use of change orders or claim notices throughout the project. A finding of bad faith in using such a program can have dire consequences. Sanctions for the bad faith destruction of ESI can include the dismissal of claims and defenses and the imposition of substantial monetary penalties. In addition, the safe harbor will not apply if there are “exceptional circumstances” warranting the imposition of sanctions. What constitutes “exceptional circumstances” is not defined and will be developed by the courts on a case-by-case basis.
Surviving Electronic Discovery under the ESI Aamendments
Because of the prominence of ESI in the construction industry, and the relatively high incidence of claims and disputes, contractors and their attorneys are sure to be on the cutting edge of implementation of the ESI amendments. As always, there will be winners and losers from the changes in the rules. Many forward-looking contractors will take the necessary steps to make sure they will be able to use ESI to their advantage when the need arises. Other contractors will ignore the new realities, and harsh lessons may await.
For now, at least, all contractors can choose which group they wish to join. By employing legal counsel who are well-versed in the applicable law and technology, and project personnel who understand the importance of electronic data management and preservation, contractors can greatly increase their chances of being ready for any ESI issues that arise.