Inside This Issue:
* Architect’s Decision Final where Contractor Failed to Satisfy Arbitration Filing Requirements
* Testing Your Ethical Barometer
ARTICLE # 1
Architect’s Decision Final where Contractor Failed to Satisfy Arbitration Filing Requirements
By: Kent Holland
Where a contractor failed to comply with arbitration notice and filing requirements, the architect’s decision became final and binding, and the contractor had no further recourse to arbitrate or litigate its dispute with a homeowner.
The AIA form contract that was at issue in the case of Martel v. Bulotti, 65 P.3d 192 (2003), provided in relevant that in the event of a dispute, the parties were to submit the dispute to the architect for decision; either party could demand arbitration after the architect submitted a written decision; written notice was required to be filed by the party seeking arbitration with the other party to the Agreement, the American Arbitration Association [AAA], and the architect. The contract stated that failure to demand arbitration within thirty days would render the “Architect’s decision … final and binding.”
In this case, a dispute arose concerning the contractor’s performance. The parties submitted the dispute to the architect for decision, and the architect issued a written decision in favor of the homeowner against the contractor. The decision stated that it was final but subject to arbitration. The contractor submitted a notice and demand for arbitration to the architect in the time permitted by the contract but failed to file it with the homeowner and the AAA as required by the contract. The homeowner then took the architect’s award to court and applied for confirmation of that award and moved for summary judgment. In response, the contractor argued that he had substantially complied with the requirements for demanding arbitration and that the architect’s decision was , therefore not final and binding.
The court found that the contractor failed to substantially comply with the terms of the contract because “substantial compliance” means that one party receives the important and essential benefits of the contract clause in question despite the deviation or omission by the other party. In this case, the court found that notice to the architect, (or even to the architect and the homeowner) would not trigger the arbitration process since it was not filed with the AAA. This denied the homeowner of an essential benefit of the contract, that being that disputes would be settled expeditiously and efficiently through arbitration with the AAA. This caused the architect’s decision to become final and binding.
Risk Management Note: This case demonstrates the seriousness with which parties to a construction contract must take the terms and conditions addressing notice and filing requirements. In this particular case the contractor lost its right to contest an architect’s decision because it failed to mail copies of the arbitration request to the homeowner and AAA when it faxed it to the architect. Numerous other decisions have been reported by courts in which a contractor is denied a change order because it failed to submit its request for a change within the period of time (e.g. 10 days) that is specified by the contract. Other cases have denied relief to contractors that submitted change order requests to individual other than the individual that was specifically named in the contract as having authority to grant change orders. And this has been true even where there was no evidence that the project owner was harmed by the contractor’s notice to the wrong individual.
There are also numerous cases holding that where a contractor proceeds to do changed work resulting from a differing site condition without giving prior notice to the architect (or in some cases the owner) as required by the contract, the contractor waives its right to recover its additional costs related to the changed work. Even where the parties have gotten into the habit, during the course of construction, of ignoring the niceties of notice and filing requirements, once a dispute ends up in court and attorneys get involved, the course of fair dealing and reasonableness between the parties often comes to a quick end as the attorneys read the contract documents and seek to strictly apply them to win their client’s case.
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ARTICLE # 2
Testing Your Ethical Barometer
By: Michael Loulakis
The barrage of corporate misdeeds reported over the past year makes one wonder how things could have possibly gotten so out-of-hand. How could Enron’s management get away with “cooking the books” and reporting phantom revenue so easily for so long? Why didn’t someone at Arthur Andersen look at the big picture and figure out that bad things (like going out of business!) would happen if they caved into the pressures of satisfying a big client?
Many of us in the design-build community look at these events and shrug them off as shenanigans played by “the big boys” on Wall Street, where the term “business ethics” is an oxymoron. After all, design-build has gained market share over the past decade because of what it sells – professionalism, honesty and teamwork. But is it fair to say that design-builders possess only the purest of business ethics? Probably not.
Consider how design-build is marketed. It is easy to sell an owner about the concept of single point responsibility – if something goes wrong, the design-builder will take care of it. But is this really what the design-builder means? Are contractor-led design-builders really willing to offer the owner more protection than what the contractor can get from their design teammates or insurance? Will design-led design-builders agree to warrant that their design will achieve performance guarantees in the contract? Will they pick up responsibility to the owner if the contractor fails to perform?
What about the process of selecting the design-builder and its team? The Design-Build Institute of America (DBIA) and design-builders extol the virtues of qualifications-based selection (QBS) for design-build services. Yet how many design-builders practice what they preach and select subcontractors and professional consultants on the basis of QBS? The reality is that the design-builder’s team is often selected through the same low price / bid shopping mentality that has led to so many problems under other delivery systems. Is this in the best interests of the project?
Consider project execution. Design-builders often follow the same pattern as low bid general contractors in preparing and updating project schedules. The design-builder may keep three different schedules on a project – one for the owner, one for the subcontractors, and the “real” schedule. Schedule graphics can be easily manipulated to hide logic ties and show activities as “critical” when they are not. How many design-builders are willing to provide owners with copies of their electronic schedules and allow the owner to see the true picture of the job?
What happens if the owner is a tough negotiator? Is it wrong to add a little bit extra here and there in a change order request to give some bargaining room? And if you know that you are going to have a dispute, do you create a few claims so that you can horse-trade later? Is this fair, open and honest?
It is likely that the management teams of Enron viewed their conduct as being within the rules of the game. I suspect that some design-builders operating in today’s environment feel the same way. Those working in the public arena may not have heard about statutes like the Truth in Negotiations Act and the False Claims Act. Violations of these statutes carry heft fines and potential debarment. Do design-builders working in the private sector every think about the prospect of being sued for fraud or under a state deceptive trade practices statute? Do they ever think that what happened to Arthur Andersen in terms of loss of reputation and confidence can happen to them?
It may be impossible to test an industry’s ethical barometer. My own experience tells me that most in the design-build community go out of their way to ensure that they are being fair, open and honest with their counterparts. What does your ethical barometer tell your colleagues about you?
About the Author: Michael Loulakis is President of Wickwire Gavin, P.C., and a shareholder in its Virginia office, located at 8100 Boone Blvd. , Vienna , VA 22182 . He devotes his legal practice to representing parties in the construction industry, including owners/developers, sureties, contractors, and design professionals. He can be reached at 703-790-8750 or by e-mail at firstname.lastname@example.org. This article is reprinted from the February 2003 issue of Design-Build DATELINE (Design-Build Institute of America).
ON-LINE RISK MANAGEMENT COURSES BY KENT HOLLAND
Currently available risk management courses written by Kent Holland for RedVector, (http://www.redvector.com/instructors/view_related_courses.asp?id=195) include the following: Risk Management for the Design Professional; Contract Guide for the Design Professional, Design Build Professional Liability Risk Management and Insurance; Site Safety Risk and Liability; Managing Communication, Documentation and Reports; Insurance for Design-Build and Complex Projects; Construction Contract Law; Contract Claims against Design Professionals; Insurance Coverage Disputes; and Environmental Claims.
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This newsletter Report is published and edited by J. Kent Holland, Jr., J.D., a construction lawyer and risk management consultant for environmental and design professional liability. The Report is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law. Further, the content and comments in this newsletter are provided for educational purposes and for general distribution only, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.
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