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By:  J. Kent Holland, Jr.

A Design/Builder that was sued by project owner for alleged design and construction defects was barred from bringing a third party claim or separate legal action against its subcontractor architect, because the AIA sub-contract document required that claims first be submitted to arbitration.

Third Party Claim

In the case of The Hillier Group, Inc. v. Torcon, Inc., (Case No. 2D05-4615, Florida District Court of Appeal,  2006),  when Torcon was sued by the project owner, Torcon, in turn, filed a separate action against its architect, Hillier, as well as against several other subcontractors – asserting actions for indemnity and breach of contract.  Hillier responded by moving the court to dismiss the complaint on the basis that Torcon had failed to first submit its claim to arbitration as required by the contract.

Torcon responded to Hillier’s motion by arguing that judicial economy required the court to decide all matters related to the owner’s claim against Torcon, including Torcon’s claims against its subcontractors, in a single judicial proceeding.  Torcon also argued that Hillier waived any right it may have had to arbitration by failing to timely serve a demand for arbitration as required by the contract.  And Torcon argued that the arbitration provision of the AIA contract did not require binding arbitration but could have contemplated nonbinding mediation or arbitration instead.  One final argument by Torcon was that by filing an answer to an action for declaratory relief that had been filed by Torcon, Hillier waived any right to arbitration. The trial court rejected Hillier’s motion and allowed the third-party claim to proceed in the litigation.

The appellate court reversed the trial court for a number of reasons.  The court found the language of paragraph 6.1 of the AIA form is sufficient to create an enforceable agreement for binding arbitration.  The language states that disputes “shall be subject to and decided by mediation or arbitration.”   In reaching its conclusion concerning the adequacy of the language, the court said it declined to adopt a rule requiring an arbitration clause to contain one or more “magic words” to be enforceable.

With regard to the argument concerning judicial efficiency, the court followed the precedent of another appellate district in Florida that in a similar case concluded “we cannot accept the proposition that a party to a contract calling for arbitration may avoid that undertaking by the simple device of joining as defendants in its lawsuit others with which the party has no such agreement to arbitrate.”   A party cannot avoid a contractual duty to arbitrate, says the court, by asserting claims against additional parties.   Thus, considerations of judicial economy have no role to play in determining whether the parties’ dispute is subject to arbitration.

In rejecting Torcon’s argument that Hillier waived its right to arbitration by failing to make a timely arbitration demand, the court found that all that was required under the AIA language was: “A demand for arbitration shall be made within a reasonable time after the claim, dispute or other matter in question has arisen.”  No specific time frame is established by the contract.

The trial court found that Hillier’s failure to demand arbitration prior to being sued amounted to a waiver of its arbitration right.  But since Hillier had no claim against Torcon, it had no reason to file a lawsuit or initiate arbitration against Torcon.  Consequently, the appellate court concluded that it was sufficient that Hillier promptly opted for arbitration instead of litigation after Torcon initiated its suit against Hillier.  The way the appellate court explained its reasoning is as follows: “We think that the adoption of the rule that a defending party waives the right to arbitration by failing to demand it prior to being sued would be unwise.  Such a rule would enable one of the contracting parties to circumvent an arbitration provision by filing a lawsuit before the other party filed a demand, thereby encouraging the immediate resort to litigation as soon as a dispute became a glimmer on the horizon.  This would upset the established expectations of contracting parties who have chosen arbitration as the preferred means of settling their disputes.

For these, and other reasons, the court reversed and remanded the case to the trial court for the entry of an order compelling arbitration of the parties’ dispute.

Comment

This case demonstrates once again how important it is that the dispute mechanism specified in subcontracts be consistent with that which is set forth in the prime contract with the project owner.  It is possible that on this project, the design-builder utilized the AIA subcontract containing arbitration language without giving any thought to whether that language needed to be modified due to the prime contract provisions.   Form contracts serve an excellent purpose but they need to be carefully reviewed on a project by project basis to determine what terms and conditions may need to be deleted, added or modified in order to provide appropriate allocation of risks for the specific project—particularly in light of any conflicting terms in other contracts applicable to the work.    One possible way to remedy the language of the subcontract form that created the problem in this case is to add a sentence stating that in the event that either party is sued in court, on a matter arising out of or relating to the project, by someone that is not party to the subcontract,  it will be agreed that for the purposes of judicial economy either party to the subcontract may assert  third-party claims or other causes of action against the other party in that judicial proceeding.

About the author: Kent Holland is a construction lawyer  in Tysons Corner, Virginia, and is a risk management consultant for environmental and design professional liability insurance and contracts.   He is also publisher of ConstructionRisk.com Report.  He may be reached at Kent@ConstructionRisk.com.  This article is published in ConstructionRisk.com Report, Vol. 8, No. 6.