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Dispute resolution provisions in public contracts empowering the public owner to render binding, final decisions on all disputes arising under the contract, subject to limited judicial review, have been upheld in numerous states as not being in violation of public policy.  New York is one such a state.  In contrast, such a provision has been held to violate public policy in other states such as New Jersey.  Recently, in the case of Ferguson Elect. CO. v. Kendal At Ithaca, Inc., 274 A.D.2d 890 (2000), New York extended the rule from the public contract to the private contract context and held that such a provision in a subcontract between a general contractor and its subcontractor did not violate public policy.

Christa, the general contractor for a nursing home project owned by Kendal, subcontracted the plumbing and heating work to Tougher.  The subcontract contained the following dispute resolution provisions:  (1)            Christa’s representative was authorized “to decide all questions of any nature whatsoever, arising out of, under, or in connection with, or in any way related to or on account of, this Contract and his decision shall be conclusive, final and binding;” (2)  If Tougher protested the determination of Christa’s representative, “the Contractor [sic] may commence a lawsuit . . . it being understood the review of the Court shall be limited to the question of whether or not the . . . determination is arbitrary, capricious or grossly erroneous to evidence bad faith;”  and (3) “Exhaustion of these procedures shall be a precondition of any lawsuit.”

Tougher and another unpaid subcontractor filed mechanic’s liens.  The other unpaid subcontractor commenced a lien foreclosure action and, as required by the Lien Law, named Christa and Tougher as defendants in that action. Tougher interposed a claim to foreclose its lien, and cross-claimed against Christa for breach of subcontract. On motion by Christa, the trial court held that the subcontract’s dispute resolution provisions were mandatory and obligatory.  The Appellate Court agreed, holding: “Clearly, the public policy of this State favors and encourages arbitration and ADR resolutions . . . and ADR mechanisms reflecting the informed negotiation and endorsement of the parties are valid and enforceable. . . .  Tougher chose, “with its business eyes open, to accept the terms, specifications and risk of the [subcontract], including the ADR clause.”

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This article by William J. Postner of the law firm of  Postner & Rubin, has been edited and abridged from an article appearing in the Spring 2001 issue of the firm’s newsletter, Construction and the Law.  The firm is a nationally recognized firm with an emphasis in construction law.  Mr. Postner may be contacted at Battery Place, New York, NY 10004 – (212) 269-2510.  The website is http://www.postner.com.

This article is published in ConstructionRisk.com Report, Vol. 3, No. 4 (Jul 2001).