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Design and Professional Liability

Problems with Arbitration in Design-Build

Kent Holland | November 17, 2001

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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.

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:

  1. Specifically named the A/E to be retained by the contractor;
  2. Provided that subcontracts must contain an arbitration provision similar to that in the design-build contract;
  3. 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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