Contracts between owners and contractors often state that the contractor must submit any claim to the architect for final determination. Most contracts state that this must be done as a condition precedent to further review by a dispute resolution board or a court. But some contracts purport to eliminate any right of the contractor to appeal the architect’s decision or to file suit against the owner after receiving an unfavorable decision by the architect. As a result of such contracts, some A/Es have found themselves defendants in actions brought by contractors alleging that the dispute process was unfair and unenforceable because the A/E was biased against the contractor due to the A/E’s responsibility and allegiance to the owner. I have always thought it inappropriate for an owner to attempt to cut off a contractor’s rights in this manner and have advised A/E’s against allowing themselves to be put into this position because it seems almost guaranteed to lead to problems.
In the case of Blount Excavating, Inc. v. Denso Manufacturing, No. 03A01-9903-CV-00112 m 1999 Tenn. App. LEXIS 779, a contractor successfully sued to get out from under the requirements of a contract clause designating the architect’s decision as “final and binding on the parties.” The contractor’s underlying change order claim was that it had to remove 200,000 square yards more of earth than specified in the contract, due to inaccurate information provided by the owner’s architect. The architect rejected the change order. The contractor submitted a claim to the architect as required by its contract and when the claim was denied, the contractor filed suit against the owner. The owner filed a motion for summary judgment, asking the court to dismiss the suit because the contract made the architect’s decision final and precluded any further action by the contractor. The court rejected that motion and allowed the contractor’s suit to go forward. The owner then filed an “Application to Confirm Arbitration Award.” It argued that the architect’s final decision was equivalent to an arbitration award and was, therefore enforceable by the court. The court disagreed and rejected the owner’s motion.
In analyzing why it did not consider the architect’s decision to be an “arbitration award” that could be confirmed by the court, the court explained that the contract did not anywhere describe the architect as an arbitrator. Whereas arbitration requires three parties (a claimant, a defendant and a neutral), only two parties were involved in this dispute resolution because the architect was the owner’s agent. Thus, there was only the contract and the owner through its agent, the architect. The court also alluded to the fact that the architect would not be qualified in any event to be an arbitrator since the contractor’s claim for entitlement was based on alleged inaccurate site information by the architect. A party with an adverse interest in the matter cannot qualify as an arbitrator.
Risk Management Note: Owners who attempt to deprive the contractor of its day in court (arbitration or mediation) are, in the opinion of this author, ill-advised. This leads to adversarial relationships that hinder communication and good will on the project. Architects and Engineers who sign contracts agreeing to make final (non-appealable) decisions for owners are also ill-advised for the same reasons. In the case discussed, the contractor sued the owner, but A/Es are just as likely to be a target when the contractor’s rights and remedies have been unfairly cut off by an onerous contract.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 2, No. 4 (Apr 2000).
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