John R. Owen
Harman Claytor Corrigan & Wellman Richmond, Virginia
Significance of the Clause:
Arbitration is no longer mandatory in either the AIA 2007 A201 Documents or the Consensus DOCS 200. Nonetheless, parties still have the option of selecting arbitration as a method of binding dispute resolution. Under the AIA Documents, parties must submit their claims to an Initial Decision Maker (IDM) and, if that fails, to mediation as conditions precedent to arbitration. The Consensus DOCS provide similar conditions precedent to arbitration, requiring that the parties first try to resolve their claims through “Direct Discussions” between representatives of the parties and, if that fails, the parties can try to resolve their disputes through “Mitigation” with either a Project Neutral or a Dispute Review Board. The Consensus DOCS then provide for mandatory mediation if Direct Discussions and Mitigation fail. Only after mediation has failed are the parties required under the Consensus DOCS to participate in arbitration or litigation, whichever of the two binding dispute resolution procedures is selected. Often construction contracts still contain mandatory arbitration provisions making arbitration compulsory for the parties to the contract and, in some cases, even non-signatories to the contract (discussed below). For purposes of this discussion, it is assumed that the contract has selected arbitration as a mandatory dispute resolution procedure. Arbitration is often more cost-effective and efficient than litigation. The arbitration discovery process can range from being very limited to being broader than what may ordinarily be permitted under state and federal procedural rules, which do not apply to arbitration. There is great flexibility in dictating the terms under which an arbitration can proceed, such as through the use of “high-low agreements” whereby the parties can choose the limits within which an award must be rendered. Moreover, arbitration is a non-public proceeding that can be made confidential.
Sample Clauses:
AIA “General Conditions of the Contract for Construction” (2007)©:
15.4.1 If the parties have selected arbitration as the method for binding dispute resolution in the Agreement, any Claim subject to, but not resolved by, mediation shall be subject to arbitration which, unless the parties mutually agree otherwise, shall be administered by the American Arbitration Association in accordance with its Construction Industry Arbitration Rules in effect on the date of the Agreement.
(Published by the American Institute of Architects).
Consensus DOCS 200 “Standard Agreement and General Conditions Between Owner and Contractor”©:
12.5 BINDING DISPUTE RESOLUTION If the matter is unresolved after submission of the matter to a mitigation procedure or to mediation, the Parties shall submit the matter to the binding dispute resolution procedure selected below.
Arbitration using the current Construction Industry Arbitration Rules of the AAA or the Parties may mutually agree to select another set of arbitration rules. The administration of the arbitration shall be as mutually agreed by the Parties.
Litigation in either the state or federal court having jurisdiction of the matter in the location of the Project.
(Published by Consensus DOCS).
Practice Notes:
Arbitration provisions are subject to the normal rules of contract law and a written agreement to arbitrate will generally be enforced according to its terms. Consultants and Builders, Inc. v. Paducah Federal Credit Union, 266 S.W.3d 837 (Ky. Ct. App. 2008). However, any ambiguities in an arbitration agreement will be construed against the party who drafted the agreement. Blimpie Intern., Inc. v. Choi, 822 N.E.2d 1091 (Ind. Ct. App. 2005). Public policy strongly supports enforcing arbitration provisions, and courts will generally construe any uncertainties regarding whether a dispute falls within the scope of an arbitration agreement in favor of compelling arbitration. Auchter Co. v. Zagloul, 949 So.2d 1189 (Fla. Dist. Ct. App. 1st Dist. 2007). This is certainly also true under the Federal Arbitration Act. Suburban Leisure Center, Inc v. AMF Bowling Products, Inc., 468 F.3d 523 (8th Cir. 2006).
As a general rule, only parties to an arbitration agreement can invoke an arbitration provision. Horseshoe Entertainment v. Lepinsky, 923 So. 2d 929 (La. Ct. App. 2d Cir. 2006). Nonetheless, courts have shown a willingness to compel non-signatories to arbitration agreements to arbitrate their disputes in certain instances. There are essentially five doctrines through which a non- signatory can be bound by arbitration agreements entered into by others:
(1) assumption, (2) agency, (3) estoppel, (4) veil piercing, and (5) incorporation by reference. Zurich American Ins. Co. v. Watts Industries, Inc., 417 F.3d 682 (7th Cir. 2005).
In practice, it is not always clear under what circumstances courts will compel a non-signatory to arbitrate a dispute. For instance, in Associated Glass, Ltd. v. Eye Ten Oaks Investments, Ltd., 147 S.W.3d 507 (Tex. App. San Antonio 2004), a building owner who asserted claims against a glass subcontractor and a masonry subcontractor was compelled to arbitrate its disputes even though the building owner was not a party to the subcontract. The court reasoned that the building owner was bound by the arbitration provisions in the subcontracts because the disputes arose out of the subcontractors’ contractual duties to the general contractor and the subcontract contained an arbitration provision. Conversely, in MPACT Const. Group, LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d 901 (Ind. 2004) subcontractors were not compelled to arbitrate their disputes against a general contractor even though the subcontracts contained provisions stating that the subcontracts were to be complimentary to the general contractor’s contract with the owner, which contained an arbitration provision. The court found it significant that the subcontracts did not conform to the requirements of the general conditions concerning the general contractor and the owner.