Your client is a sophisticated design-build contractor. Their general counsel has been through litigation a few times and strongly believes that arbitration is the right choice for resolving construction disputes, but she wants to make sure that all parties involved in the dispute will be included in the same case. Your client has done everything right. They have an arbitration clause in their contract with the owner and a clause in their standard form subcontract requiring their subcontractors to participate in any dispute resolution process with the owner. Yet their subcontractors – especially their design professional subcontractors – keep fighting arbitration. The subcontractors have even tried to stop arbitration proceedings by filing lawsuits and contesting jurisdiction of the arbitration panel over them. Why is this happening? What can they do about it?
This article addresses the importance of having a mechanism built into contracts and subcontracts – specifically a joinder clause – that will allow contractors to bring all of their subcontractors together into one dispute resolution process with the owner when the subcontractors' scope of work is at issue in a dispute with the owner. The specific context includes a contract between the owner and prime contractor that describes the dispute resolution process that will apply to claims and disputes between owner and contractor. While the article focuses on cases involving disputes with design subcontractors to a design-build contractor, the principles discussed in the article have broader application. This article does not address the related but distinct issue of consolidation of separate arbitrations, although the right to consolidate multiple arbitrations may also be dictated by appropriate subcontract provisions.
Why Use a Joinder Clause?
Why is having a joinder clause in your agreement important? A joinder clause is a mechanism for ensuring that all parties involved in a dispute are in the same forum. A joinder clause is often unnecessary if the dispute is in litigation. In that instance, litigants typically may use third-party practice to add subcontractors and others who are involved in the dispute. But arbitration is a different animal.
Arbitration is a creature of contract. If you do not have a joinder clause in your contracts, you may wind up in multiple arbitration proceedings, and some could be administered under conflicting rules. Facing multiple parties in different arbitrations that all arise from the same project and dispute is far from ideal, as it can become costly, complicated, and could yield inconsistent results among the different arbitrations. The same is true if a dispute with one subcontractor goes to arbitration while a dispute with another contractor arising from the same facts winds up in litigation. Additionally, if one of the forums decides to stay the proceeding to allow the other forum to proceed first (in most instances, a court would stay the case in order to allow any related disputes in the arbitration to be resolved before proceeding), this could significantly slow down the process and result in more costly litigation. The prospects for settlement may also be reduced without joinder. If the parties are dispersed across multiple forums, this may hinder any settlement negotiations or mediation. Some parties may choose to sit on the sidelines and use their isolation in a separate arbitration as leverage against the design-build contractor.
An unambiguous construction contract should be able to avoid this headache, but that is not always the case.
Even When You Do Things Right, You May Have To Fight About Jurisdiction
Recently we have seen subcontractors attempting to contest joinder even though they signed contracts with joinder clauses. Most often the subcontractor who resists arbitration is an architect or engineer on a design-build project. Design professionals appear to have a bias against arbitration. Maybe they believe that their favorite special defenses, such as the standard of care, or a certificate of merit law, statute of limitations, or some other technical legal defense will be taken more seriously in court. If so, they should have thought of that before they signed a contract with a joinder clause. When subcontractors resist joining arbitration, this often leads to long, costly litigation that ends up with the same result – the subcontractor being compelled to join the arbitration.
Sometimes the subcontractor will file an action in court in an attempt to stay the arbitration, dispute being joined to the arbitration, and/or dispute a party bringing direct claims against them in the arbitration. Don't do it. Unless there is a serious question of whether the subcontractor signed the subcontract at issue, arbitrators decide these types of issues. Arbitrators generally have the ability to: (1) address joinder (see, e.g., AAA Rule R-7; CPR Rule 3.10; JAMS Rule 11), (2) interpret and apply the rules as they relate to the arbitrator’s powers and duties (see AAA Rule R-8; CPR Rule 22; JAMS Rule 11), and (3) decide jurisdiction, including whether an arbitrator has jurisdiction over a party and the scope of the agreement between the parties (see AAA Rule R-9; CPR Rule 8; JAMS Rule 11).
If the issue of joinder goes to court, the presiding judge will almost always compel subcontractors to participate in a pending arbitration where there is a valid and enforceable arbitration provision and the dispute falls within the subcontractor's scope of
In two recent arbitration decisions, the arbitrators found that the subcontractors had agreed to arbitration in the subcontract and therefore were proper parties in the arbitration proceeding. Specifically, one arbitration panel found that the design-builder's engineering subcontractor was a proper party to the arbitration, and all claims and defenses pertaining to the subcontractor’s work on the project were arbitrable, including a third-party beneficiary claim that had been asserted directly against the engineer by the owner. The arbitration panel therefore denied the engineering subcontractor’s request to stay the arbitration. The panel found that the engineer's “underlying basis for its request for a stay – that it is not a proper party to the proceeding – is not supported by the submissions of the parties. The claims alleged by the [parties] relate to the work of [the engineering subcontractor] on the project. [The design-build contractor] has asserted claims directly against [the engineer], which indicates [the design-builder’s] intent that [its engineering subcontractor] be joined in this arbitration as a party. The two conditions of arbitrability…have beenThe specific subcontract language considered by the panel was as follows:
To the extent that any arbitration proceeding or legal action between Owner and [Design-Builder] involves any act or omission of Subcontractor or any Work required to be performed hereunder by Subcontractor, Subcontractor shall, if requested by [Design-Builder], join in such arbitration proceeding or legal action as a party, it being specifically understood and agreed that Subcontractor expressly consents to the jurisdiction and venue of, and agrees to be bound by, any decision rendered in connection with, any such arbitration proceeding or legal action.
A few weeks later, the federal court, where the engineer had also moved for a stay of arbitration, reached the same conclusion as the arbitration panel.
In another arbitration proceeding, the arbitration panel found that the prime contractor had properly invoked the joinder clause when the subcontractors, one a consulting engineer and the other a design-build subcontractor “agreed, via the incorporated arbitration provision, to be joined in any dispute resolution process that relates to their work on the [project]. Neither [subcontractors] claim their work did not relate to the [project] or that [the owner’s] claims against [the prime contractor] did not relate to the work performed by [the subcontractors]. [The subcontractors] also both agreed, ‘at [the prime contractor’s] sole discretion, to join and to participate in any dispute resolution process required by [the prime contractor’s] contract with the Customer and/or Owner if any dispute relates to the Subcontractor’s” (emphasis added) This language from the subcontracts was found to be clear, unambiguous and enforceable, even though the subcontracts also contained a different arbitration process under different rules for separate disputes (not involving the owner) between the prime contractor and the subcontractor.
Ways to Avoid Joinder Issues
How can you and your client best avoid issues with joinder? If you have an arbitration clause in the prime contract, make sure all subcontracts also include a clause requiring the subcontractor to join the arbitration proceedings. In addition, you should specifically incorporate the dispute resolution terms of the prime contract into any subcontract. This will avoid any ambiguity in your contract. You should also avoid citing to differing arbitration in the prime contract and in, or among, the subcontracts. Even if that technically makes no difference because the subcontracts at issue say the terms of the owner-general contractor agreement controls, references to differing arbitration rules may cause confusion.
When drafting your contracts, make them clear so that all parties understand the dispute resolution process. This is a simple step to take to make sure that the parties don’t end up wasting time and money fighting about this later. As discussed earlier, this is particularly important for design professional subcontracts in the context of a design-build project, as your design professional is the party most likely to resist arbitration when a dispute arises. Do not let the design professional carve out a separate dispute resolution process as this will cause confusion, add additional expense, and potentially create conflicting results.
The owner in a traditional design-bid-build framework should also be wary of potential impediments to bringing the owner's designer into an arbitration if the contractor's claims focus on alleged design defects or the conduct of the owner's designer. Do not allow inconsistent dispute resolution processes to creep into your contracts with the designer and general contractor – i.e., litigation with the designer and arbitration with the contractor or vice versa. If you do, and you fail to include a joinder clause that allows you to bring everyone into the same forum, courts are not likely to require all parties to participate in one dispute resolution process againstUsually a court or arbitrator will only join a party to an arbitration if the party agrees to arbitrate.
If you are representing the prime contractor, implement a strict process to ensure compliance with the terms of your contract. Correct joinder language must be included in every subcontract. Avoid allowing subcontractors to begin work without signed subcontracts, but if it happens, execute the written subcontract as soon as possible and insist that the joinder clause be included.
If you are representing a subcontractor or design professional on a design-build project that has a joinder clause in their contract, don’t fight it! If your client insists that they don’t want to arbitrate with the owner, prime contractor and/or subcontractor in the same arbitration, explain to them that this is a losing battle. There is a time and place to make creative arguments, but this is not one of them. Resisting arbitration in this instance will only drag out the process and cost your client money. In the end, your client likely will find itself in arbitration anyway and may even be forced to pay their adversaries attorneys’ fees to boot. Educating your client about these issues before disputes arise will save yourclient time and money.