Problems with Arbitration in Design-Build
November 2001
In this article, Kent Holland explains that
when arbitration is the main means of dispute resolution under a design-build
contract, why it is so important for all parties to a design- be subject to
a single arbitration action.
by J.
Kent Holland, Jr.
ConstructionRisk.com LLC
If arbitration is to be included in the design-build contract as the mandatory
means of dispute resolution, the parties to the contract need to be careful
that the language drafted for inclusion in prime and subcontracts requires (without
exception) that all claims by all parties be subject to arbitration. Unless
all parties can be joined in a single arbitration action, the matter may become
convoluted, expensive, and time consuming as it is resolved piecemeal, with
some parties being in litigation before courts and others being in arbitration
before arbitration panels.
In Cunningham Hamilton Quitter v B.L. of Miami, Inc.,
776 S2d 940 (Fla App 2000), the owner/developer of an entertainment complex
initiated arbitration proceedings against the design-builder ("Contractor"')
but filed suit against the architect/engineer subcontractor ("A/E" or "Cunningham")
in state court. The design-build contract provided for arbitration of "any controversy
or claim arising out of or relating to this Agreement or its breach."
It also provided that, "All parties necessary to resolve a claim shall be
parties to the same arbitration proceeding. Appropriate provisions shall be
included in other contracts to the Work to provide for the consolidation of
arbitrations." The contractor subcontracted Cunningham to perform the A/E services.
This subcontract provided for arbitration.
The owner argued that it could not be compelled to arbitrate its claim against
the A/E since it had no contract directly with the A/E. In rejecting this, the
court explained that courts broadly construe arbitration clause phrase, "arising
out of or relating to," such that in certain instances, the clause will include
non-signatories to the contract.
Since, by its own terms, the design-build contract arbitration clause provided
for the inclusion of "necessary parties," and since the owner's claims against
the A/E were intertwined with the design-build contract, the court held that
the A/E was a necessary party to the arbitration. In addition, the court found
that the parties intended to settle disputes by arbitration rather than litigation.
Factors leading the court to this conclusion were that the design-build contract:
- Specifically named the A/E to be retained by the contractor;
- Provided that subcontracts must contain an arbitration provision similar
to that in the design-build contract;
- Obligated the A/E to agree to arbitration.
Other persuasive factors were that the subcontract did, in fact, contain
the required arbitration clause and incorporated by reference the prime design-build
contract.
An additional argument that was rejected by the court was the owner's assertion
that its claims against the A/E did not "arise out of or relate to" the design-build
contract. As seen by the court, the owner's claims for professional malpractice,
negligent misrepresentation, and fraud stemmed from the same allegations, "namely,
that [A/E] negligently failed to perform its duties during the pre-design stage
and that [A/E] 'self-servingly' misadvised" the owner to retain contractor,
its own affiliate, to perform the construction.
What the owner argued was that its claims against the A/E arose solely from
a prior oral argument, unrelated to the design-build agreement. In rejecting
this argument, the court found that the D-B contract outlined the very duties
the owner alleges the A/E breached, and provided a payment schedule allotting
payments for architectural services to be provided by the A/E. The final clincher
was that during deposition, an owner's representative was asked whether the
design-build contract provided for "preliminary evaluation of the site, . .
. preliminary schedule, . . . [and] schematic design" services within the A/E's
duties. He answered, "the . . . agreement calls for everything."
For these reasons, the court found that all the claims against the A/E, including
the allegations that the A/E wrongfully induced the owner to enter into the
design-build contract with its affiliated contractor, were claims relating to
the design-build agreement and were, therefore, subject to arbitration.
Risk Management Commentary
This author would prefer that the contract leave it to the parties to decide
at the conclusion of project whether arbitration or litigation will be used
for resolving a claim. In some matters, litigation may be preferable to arbitration
and may lead to more prompt and intelligible results. In complex construction
disputes (particularly large design-build projects), litigation allowing discovery
of documents and deposition testimony may be critical to ascertaining the facts
and liability. Disputes that will be decided in foreign jurisdictions, on the
other hand, may be resolved more appropriately by independent arbitrators than
by a court.
Serious insurance coverage ramifications may result if an arbitration panel
issues a decision on a claim that alleged liability based on multiple legal
theories such as negligence, breach of contract, warranty, and performance guarantees.
Lack of a decision by arbitrators explaining the factually and legal basis for
their decision may render it impossible for the insurer to determine whether
an award against the insured arises out of insurable causes and damages. In
the opinion of this author, it is ill advised to agree to arbitration without
a contractual commitment of the arbitrators to render a detailed decision analyzing
the facts and the legal basis for the decision.
This article first appeared in the Design-Build Institute
of America (DBIA) newsletter, Dateline,
August, 2001.
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