The problem of inconsistent dispute resolution mechanisms is widely acknowledged in the construction industry. An owner-contractor agreement calls for binding arbitration, but the subcontracts do not, allowing suits in court. The designers have no agreements with the constructors and no incentive to coordinate dispute resolution mechanisms.
Given the multi-party nature of a construction project, inconsistent contract provisions make it difficult and expensive to get all responsible parties to the table. This increases the likelihood of inconsistent or inequitable results. Sometimes the results are surprising.
In a recent case, a mechanical subcontractor claimed the prime contractor had breached the subcontract by furnishing a faulty design – prepared by the project owner’s design team – and by failing to properly manage the project in light of those problems. The dispute was submitted to arbitration in accordance with the terms of the subcontract. The sub presented extensive evidence of design errors. The panel of arbitrators awarded the sub direct contract damages such as the increased cost of labor and materials. But the arbitrators ruled that claims for any other damages were “not supported legally or factually.”
The subcontractor then sued the designers for professional negligence. A federal appeals court ruled that the suit was properly dismissed. The sub had already litigated the matter of design errors and resulting damages before the panel of arbitrators. The sub was precluded from litigating the matter again in court.
It is very difficult for any one party to a construction project to impose consistency on the dispute resolution process. The project owner has the most leverage, but even owners are constrained in what they can and cannot do in this regard. And, the problems continue. Your comments are welcomed.
