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By J. Kent Holland Jr., Esq.
ConstructionRisk Counsel, PLLC

Where a condominium association filed suit against the Architect that designed certain repairs for balconies, summary judgment was properly granted to the architect on the basis that previous arbitration by the condo association against its construction contractor fully decided the issues in the current claim and constituted collateral estoppel, meaning that the issues had been fully considered and decided, and the outcome was binding on any future dispute, even though the Architect was not a party in the arbitration.  Casa Del Mar Association, Inc. v. Gossen Livingston Associates, Inc., 434 S.W.3d 211 (Tex. Ct. App. 2014).

The architect had provided a design for balcony repairs and also performed some limited construction administration services.  Rather than using that design, the condo association had its contractor build a modified, less expensive, version of the design – replacing a single piece of stainless steel flashing called for by the design with a lesser-grade steel that was in two pieces.  The architect highly discouraged the condo from accepting the revised designs, but ultimately the condo association and architect “approved the construction of the balconies to proceed based on a mock up constructed by the contractor.”

This flashing, as constructed, apparently allowed water to infiltrate, but the arbitration panel found that none of the four major alleged construction defects “were shown as causing or contributing to the staining of the walls.” The panel concluded that the construction deficiencies “taken all together do not arise to a ‘material breach of contract” and would, therefore, not afford the condo a monetary remedy.

The condo association had asked the arbitration panel to award it over a million dollars that it expended in repair costs for the balconies.  The arbitration panel concluded, however, that the contractor would not be liable for the expense of the remedy sought by the condo that was “based on a repair protocol that far exceeds the ‘bath tub’ design and agreed upon mock up.”  The panel stated that while the condo association may choose to install the new “fix” it proposed, that “fix incorporates many of the attributes of the originally proffered design which was rejected as too costly by the Owner’s representative.  While [condo] may choose to install the fix, there is extreme ‘betterment’ in the fix as contrasted with the Detail 4 and/or the installed design. [Condo] cannot recover from [contractor the construction] costs for these betterments.”

The arbitration panel concluded that the proper measure of damages was the cost of cleaning the outside wall and applying “elastrometric paint.”  It held the contractor responsible for $24,000, or 30 percent of the painting costs and the condo association itself responsible for the other 70 percent.

The architect was named in the original arbitration claim by the condo association, but it succeeded in having itself dismissed from that action on the basis that there its contract with the condo association did not include an agreement to arbitrate.

The panel issued a “Reasoned Award” that addressed the construction defect claims against the contractor as well as the contractor’s argument that the alleged problem was caused by a “design defect” of the architect.

Being unsatisfied with the arbitration damages, the condo association proceeded to file suit against the architect alleging it failed to properly design the balcony and exterior siding system by failing “to properly perform contract administration to the standard of a competent architect” when “it allowed deviations from the plans to occur without objection.”

The architect answered with an affirmative defense of collateral estoppel, along with other defenses.  It argued that the arbitration proceedings addressed the same legal and factual issues as the law suit and that the panel’s dismissal of the architect on summary judgment and its subsequent reasoned award against the contractor were “conclusive on the parties to all matters of fact and law submitted to the arbitrators.”

In response, the condo argued the panel could not have ruled on the merits of the claim against the architect since it had been dismissed from the proceedings a month before the hearing.

In holding that collateral estoppel did, indeed, apply to prevent the condo association from bringing its claim against the architect in court, the appellate court explained that the question of design defect had been decided during arbitration because one of the contractors key defenses was that the condo association’s expert report criticized the balcony design, and the contractor itself submitted expert witness testimony that the design was not appropriate and that the drawing were defective.

The court found, “the issues regarding [architect’s] provision of the bath tub design, the sufficiency of that design, and the role that design played in the actual construction of the balconies were fully and fairly litigated in the arbitration proceeding, and they are also issued of ultimate fact in the current proceeding….” The court also found that the nature of the condo’s claims against the contractor and the fact that the contractor argued that the problem was due to design defect rather than construction defect, made this fact determination essential to the panel’s Reasoned Award.”

The condo association argued that collateral estoppel does not apply since the architect didn’t participate in the arbitration hearing.  But the Court concluded that the only thing that mattered in this regard was that that the architect demonstrated that the party against whom collateral estoppel is being asserted [the condo association] was a party in the prior proceeding.  The court concluded that each essential element of the collateral estoppel defense had been established and precludes the condo association from prevailing in a subsequent lawsuit against the architect.  In any event, the court also found that because the architect’s “design was not actually used in constructing the balconies, [the condo association] cannot establish that the design provided by [architect] caused any damages.”

Comment:  This decision provides valuable education in many respects.  It does a nice job of addressing “betterment” and explains that the condo association cannot expect to recover from its contractor the costs of implementing the original architectural design that the condo association rejected in favor of a cheaper remedy, and eventually, after the water problems, decided was needed for the balconies afterall.  Instead, the arbitration panel (as explained by the court) limited the recovery to just the amount incurred by the condo association to get the quality of work from the contractor it paid for under the limited scope of work actually agreed upon in the contract with the contractor.

It is also interesting that the condo association suit against the architect appears to be, at least in part, based on an argument that the architect should not have approved the design change that was proposed by the contractor and accepted by the condo association, and is somehow negligent for doing so.  If an AIA B101 (2007) contract form had been used here, it would have been clear that the architect had no responsibility since a provision in the contract states, “The Architect shall not be responsible for an Owner’s directive or substitution made without the Architect’s approval.”

Generally when the doctrine of collateral estoppel is applied, the parties involved in the subsequent litigation were also involved in the previous arbitration or litigation.  In this case, the architect was not part of the actual hearing on the merits of the case during the arbitration proceeding, but the court found that because the condo association was part of that hearing, and the issues it wanted to claim against the architect had been fully argued in that proceeding, the arbitrators’ findings against the condo association on the design issues applied against the condo association in any subsequent litigation.

It is not a matter of barring a suit by the condo association against the architect, but rather a matter that when the suit is brought, the condo association gets stuck with the binding affect of the findings from the arbitration decision.  The court does not address (and indeed did not need to address) an arbitration determination of whether design defects could have been used against the architect in subsequent litigation.  That is a different issue.

 

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. 16, No. 8 (August 2014).

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