General Practice, Solo, and Small Firm Division The Compleat Lawyer
Winter 1997, Volume 14, No. 1 copyright American Bar Association. All rights reserved.
BY KENNETH G. MENENDEZ
Kenneth G. Menendez is a senior partner at the Atlanta law firm of Vincent, Berg, Stalzer & Menendez. His expertise is in commercial litigation, concentrating in construction, financial, and general corporate litigation. He also has extensive experience with mediation and arbitration.
Construction is a highly technical area of the law--construction contracts contain voluminous clauses and subclauses. Moreover, there is typically more than one operative contract and the various contracts often form a confusing, overlapping matrix of legal obligations.
The contract for construction between the owner and the general contractor is the single most important document in any construction dispute. This contract is typically referred to as the general contract, and it establishes the rights and obligations of the most important parties of the construction project.
While the owner's contract with the architect and the general contractor's subcontracts with its subcontractors can be significant, the general contract between the owner and the contractor provides the framework for everything that happens on the project (and in the courtroom).
Most construction contracts incorporate by reference numerous additional contractual provisions known as "General Conditions." While some General Conditions are tailored to the particular construction project, in most cases the general contract will incorporate by reference American Institute of Architects Document A201 (1987). Like most General Conditions, A201 contains many of the specific requirements that define the obligations of the owner and the general contractor. Certain law libraries have access to the AIA Citator Service, which provides a helpful guide to the ways in which specific clauses found in AIA documents have been construed by courts and other triers of fact.
The general contract may also incorporate by reference certain "Special Conditions." Special Conditions may address any topic related to the project, but often involve technical requirements. The general contract often incorporates certain plans and specifications pertaining to the project by reference. Such plans and specifications are voluminous and bulky, and are almost never attached to the general contract. Be sure to check the general contract's incorporation clause carefully to determine which additional documents may affect your client's rights and obligations.
The Warranty Clause
Many lawyers are confused by warranty clauses, believing that the presence of a warranty clause in a construction contract means that any claims regarding the workmanship on the project must be brought within one year of substantial completion of the project. This is not the case.
In most construction contracts, the warranty clause states that the owner must notify the contractor of any nonconforming work within one year of substantial completion in order to trigger the contractor's obligation to make repairs without any additional cost to the owner. In most instances, the owner may assert a claim against the contractor for negligent, nonconforming, or defective construction, or for cost overruns, at any time within the applicable statute of limitations.
The Arbitration Clause
Arbitration has long been the dispute resolution method of choice in the construction industry. Most construction contracts contain an arbitration clause. Even if an arbitration clause does not appear in the body of the contract, such a clause may have been incorporated by reference. Paragraph 4.5 of A201 is an arbitration clause.
If your client has signed a construction contract that incorporates A201 by reference, your client has agreed to arbitrate any dispute arising out of the construction contract. Such an arbitration clause is enforceable and requires your client to submit the dispute to binding arbitration conducted pursuant to the Construction Industry Rules of the American Arbitration Association (the Rules).
Sidebar: Bonded Projects
Most construction contracts require the contractor to provide performance and payment bonds. A performance bond is a separate contract in which the surety promises the owner that the work described in the general contract between the owner and the contractor will be performed--either by the original contractor, the surety, or a substitute contractor. In a payment bond, the surety promises that the subcontractors and materialmen who have contracted with the general contractor will be paid for their services and materials.
The surety company that issues the bonds can be a useful partner in the search for resolution of a construction dispute. It is in the surety's interests for the contractor to meet all of its obligations and complete the project in accordance with the contract. When a dispute arises prior to the completion of the construction project, the surety can be a valuable asset in fashioning a settlement. The contractor is much more likely to listen to his or her surety (who often controls the contractor's ability to work) than to the owner or the architect. Bring the surety into the case at an early stage to increase your chances of resolving the dispute. The Arbitration Process
The procedures applicable in an arbitration conducted by the American Arbitration Association (AAA) are outlined in the Rules. A copy of the Rules can be obtained from an AAA office, which are located in major cities. The Rules are self-explanatory, but be sure to note a number of specific features of such an arbitration.
Your case will be placed in one of three categories by the AAA, depending on the amount of money in dispute. If the case involves a dispute in which no claim or counterclaim exceeds $50,000, the AAA's Fast Track procedures will apply. If your case involves a dispute in which the claim or counterclaim of any party is $1 million or more, the Large, Complex Track procedures will apply. All other cases are designated as Regular Track cases.
The classification of your case will determine the procedures to be followed. In all cases, the arbitration is initiated by filing a one-page form called a "Demand for Arbitration by the Claimant." At the time the Demand for Arbitration is filed, the claimant must pay the AAA a nonrefundable filing fee. The filing fee ranges from $500 to $7,000, depending on the amount of money in dispute.
The respondent is given an opportunity to file a written response, but is not required to do so. The AAA office administering the arbitration will then send each party a list of potential arbitrators. Each party is allowed to strike certain arbitrators from the list on a peremptory basis. In a single arbitrator case, each party may strike up to three names. In multiple arbitrator cases, each party may strike five names.
The AAA will then appoint the arbitrator (or arbitrators) from the remaining names on the list. Fast Track and Regular Track cases are decided by a single arbitrator, unless the parties have provided otherwise in the arbitration agreement. In Large, Complex Track cases, a single arbitrator will be used unless one of the parties objects. If one party to a Large, Complex Track case objects to the use of a single arbitrator, three arbitrators will be used.
The parties are responsible for the fees of the arbitrators. Arbitrator fees vary widely depending upon the geographic location of the arbitrator, but in most major metropolitan areas, arbitrators charge anywhere from $500 to $1,500 per day.
After the arbitrator is appointed, the arbitrator may hold a pre-hearing conference (either in person or by telephone) to discuss the logistics and administrative issues associated with the arbitration. Such a conference is required in Fast Track cases. In Large, Complex Track cases, the AAA will conduct an administrative hearing.
Unless specifically provided for in the arbitration agreement, no formal discovery is conducted prior to the hearing. The arbitration clause contained in A201 does not provide for any pre-hearing discovery. In cases in which A201 governs, the parties may request the opportunity to conduct pre-hearing discovery, but the decision is completely within the discretion of the arbitrators. The parties are required by the Rules to exchange the exhibits that the parties plan to use at the hearing two days before the hearing. If your claim involves less than $10,000, the claim can be resolved on the basis of documents alone (as long as neither party requests a hearing).
At the hearing, each side is allowed to present its evidence and to cross-examine adverse witnesses. Rules of law (including rules of evidence) typically do not apply. This invariably results in the admission of a wide array of evidence, only some of it credible.
Upon completion of the hearing, the arbitrator's award must be issued within 30 days of the close of the hearing in Regular Track and Large, Complex Track cases, and within seven days in Fast Track cases. In the absence of fraud or some other egregious conduct, the award is not subject to appeal. While parties regularly seek the award of costs and attorney fees in arbitration, arbitrators seldom award such fees.
The Architect's Contract
On most construction projects, the architect has a separate contract with the owner. This document is often AIA Document B141. If left unmodified, B141 contains a clause that prohibits the owner from adding the architect as a party to an arbitration between the owner and the contractor. While this is good news for the architect, it can often produce duplicative proceedings and inconsistent results.
For example, if the contractor brings a claim against the owner pursuant to the arbitration clause in A201, the architect cannot be made a party to the arbitration. Even if the contractor's primary complaint is the performance of the architect, the absence of a contract between the architect and the contractor forces the contractor to proceed against the owner rather than the architect. In such a case, the contractor argues that the owner is liable for damages caused by its agent, the architect.