Litigation Update: Arbitration issues

by Erik Missio | January 20, 2017 12:55 pm

LAW
Werner Sabo, FAIA, CSI
Arbitration is an important topic in construction. Standard-form contracts used in the construction industry, such as the American Institute of Architects (AIA) documents, specifically reference the possible use of arbitration, although the parties may have to check a box on a form to make this the final dispute resolution process. Every year, several reported construction cases revolve around arbitration issues. This article examines a few recent cases discussing situations where one party claimed it was not required to arbitrate.

Under what circumstances can a party who did not sign the agreement containing the arbitration clause be compelled to arbitrate? In WBCM LLC v. BCC Properties LLC (2016 WL 5122310 [Ct.Spec.App.MD Sept. 21, 2016]), the owner contracted with a design-builder, WBCM-CS, to design and build an office and maintenance facility. The contract was a design-build agreement, AIA A131 CMc-2003, Standard Form of Agreement Between Owner and Construction Manager Where the Construction Manager is also the Constructor and Where the Basis of Payment is the Cost Plus a Fee without a Guarantee Maximum Price, which incorporated A201-1997, General Conditions of the Contract for Construction, and identified the architect as WBCM.

Apparently, the owner did not sign a separate agreement with the architect. The architectural firm and design-builder are separate legal entities, although closely related. After a dispute arose, the owner filed two demands for arbitration—one against each of these entities. The architectural firm filed a court petition alleging:

• it was not a party to the agreement with the owner;
• the owner was not a third-party beneficiary of the contract between the architect and design-builder; and
• the architect did not consent to arbitrate.

The issue for the court was whether the architect was equitably estopped to refuse to arbitrate the dispute if it directly benefitted from the contract to which the owner was a party. The court found in the affirmative, but the appellate court reversed, finding in favor of the architect. Here, the architect was neither a signatory to the contract nor the party seeking relief under the contract. Equitable estoppel would apply if the non-signatory were attempting to enforce provisions of the contract. That was not the case where the contract expressly excluded the architect from any arbitration.

In Schneider Electric Building Critical Systems Inc. v. Western Surety Company (2016 WL 6996290 [Ct. App. MD, Nov. 30, 2016]), the issue was whether the surety that issued a performance bond on behalf of a subcontractor was required to arbitrate. The contract between the general and sub required the latter to provide a performance bond, which it did. Later, the sub refused to perform some work, and the general filed a demand for arbitration against the sub and another against the surety.

The surety wanted to litigate the matter and not arbitrate. It argued it did not sign any agreement to arbitrate. However, the bond incorporated the subcontract, which, in turn, incorporated the general contract containing an arbitration clause. Although there are several older cases that would require the surety to arbitrate, the court in this case held the mere incorporation by reference of a contract containing an arbitration clause did not obligate the issuer of that bond to arbitrate.

In an earlier surety case, Developers Sur. & Indem. Co. v. Resurrection Baptist Church (759 F. Supp. 2d 665 [D. Md. 2010]), the court held an incorporation by reference of the building contract into the performance bond incorporated the mandatory arbitration clause contained therein. Equitable estoppel applied, because the surety asserted claims for breach of the building contract, but simultaneously sought to avoid enforcement of the arbitration clause contained in the same contract.

Finally, one must use the standard AIA forms with some degree of common sense. In G&G Builders Inc. v. Lawson (2016 WL 6833984 [Ct. App. W. Va., Nov. 14, 2016]), the contractor submitted to the owner an AIA A111-1997, Standard Form of Agreement Between Owner and Contractor Where the Basis for Payment is the Cost of the Work Plus a Fee with a Negotiated Guaranteed Maximum Price. The form contained language on the first page of the agreement in the right-hand margin that “AIA Document A201-1997, General Conditions of the Contract for Construction, is adopted in this document by reference.” There were references to A201, but none of these references were about arbitration. Several exhibits were attached to the agreement, but not the A201. Further, the homeowner was never provided with a copy of A201—the only document containing an arbitration agreement.

When a dispute arose, the contractor filed suit against the owner seeking substantial damages for breach of contract. After the homeowner filed a counterclaim, the contractor filed a motion to dismiss the counterclaim and compel arbitration. The homeowner argued he should not be required to arbitrate because he was neither given a copy of the arbitration clause nor told of the requirement.

The court noted transactions among experienced business entities are to be viewed differently than situations where one of the parties, such as here, is not sophisticated about contracts or construction. It held the note on the first page of the agreement was insufficient to incorporate AIA A201 and the homeowner was not required to arbitrate.

There are several lessons in these cases. First, any contract needs to be clear. If another document (e.g. a proposal, general conditions) is to be made a part of an agreement, this must be clearly spelled out—and preferably attached directly to the agreement. This is particularly important when dealing with non-professionals, such as homeowners. Second, a party that did not sign the agreement containing the arbitration clause can, under the right circumstances, be compelled to arbitrate. Generally, this occurs when the reluctant party tries to take advantage of the agreement, while at the same time trying to avoid the arbitration provision. (One cannot have it both ways.)

Finally, courts are not always consistent. There is often a split among various jurisdictions over particular issues. Litigation should be a last resort, as even the best case can result in a loss, and no competent attorney can ever guarantee a particular result.

Werner Sabo, FAIA, CSI, concentrates his practice with Bryce Downey & Lenkov in construction, copyright, and real estate law. A licensed architect, he is a member of CSI (a past-president of the Chicago Chapter) and a Fellow of both the American Institute of Architects (AIA) and Association of Licensed Architects (ALA). Sabo is a construction arbitrator and mediator for the American Arbitration Association (AAA), active on several bar association committees, and a lecturer on construction law to a variety of professionals and students. His book, Legal Guide to AIA Documents, published by Aspen Publishing, is in its fifth edition. He can be contacted via e-mail at wsabo@bdlfirm.com[1].

Source URL: https://www.constructionspecifier.com/litigation-update-arbitration-issues/

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