Construction Defect Litigation And Arbitration/Mediation

Construction Defect Litigation And Arbitration/Mediation Of Construction Disputes

Broad arbitration provisions are typically included in many construction industry contracts, including owner-contractor agreements and owner-architect agreements. Despite increasing legislative and judicial support for arbitration as a dispute resolution forum, parties in construction defect litigation with enforceable arbitration agreements may fail to consider arbitration of disputes. Instead, these parties unintentionally waive the right to arbitration, sometimes out of a lack of understanding of the process. Understanding the arbitration process and its application in construction defect litigation is essential before the right to arbitration is waived by any party.

Timely assertion of the right to arbitration.

When one party to an arbitration agreement commences litigation against another party to that agreement, the defendant has an opportunity to stay the litigation and require the dispute be arbitrated. The longer the defendant waits before filing a motion to stay litigation pending arbitration, the chance increases that the court will find a waiver of the agreement to arbitrate as a result of participation in litigation. In a case of first impression, the Second Circuit held that a "no waiver" clause, included in arbitration rules that were incorporated by reference in the parties' contract, did not preclude the trial court from finding a waiver of arbitration due to the claimant's active participation in the litigation. S&R Co. of Kingston v. Latona Trucking, 159 F.3d 80 (2d Cir. 1998). But see Wasserstein v. Kovatch, 261 N.J. Super. 277 (App. Div. 1993) ("The court has the power, anytime before judgment, to refer the dispute to arbitration.").

Scope of the arbitration agreement.

While courts favor arbitration as an alternative means of dispute resolution, they will look to the actual language of the arbitration agreement to determine the scope of disputes that can be decided in arbitration. Distinction may be made between narrow and broad form agreements to arbitrate. In a recent opinion by Judge Brotman, claims of fraud in the inducement and unjust enrichment were referred to arbitration because the court found the arbitration provision was not limited to a narrow range of disputes.

Defendants rely on Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967), for the proposition that claims of fraud in the inducement of a contract are subject to arbitration. In Prima Paint, the Supreme Court construed a portion of [Section 4 of the Federal Arbitration Act], which reads, in relevant part: The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. 9 U.S.C. § 4.

The Court interpreted this provision to mean that "if the claim is fraud in the inducement of the contract itself . . . the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of contracts generally." Prima Paint, 388 U.S. at 403-04, 87 S. Ct. at 1806. Defendants contend that this pronouncement mandates arbitration of Plaintiff's fraud and negligent misrepresentation claims, since Plaintiff does not allege fraud in the inducement specific to the arbitration clause. The rule of Prima Paint is of limited application, however. The contract in that case contained a clause providing for arbitration of "[a]ny controversy or claim arising out of or relating to this Agreement, or the breach thereof." Id. at 398, 87 S. Ct. at 1803. In contrast to that broad provision, the clause at issue in this case provides only for arbitration of disputes that "arise[] as to interpretation" of the contract. Courts have consistently drawn a distinction between "narrow" clauses covering disputes "arising under" a contract and "broad" clauses covering disputes "arising under" as well as "relating to" the agreement. See, e.g., Pennzoil Exploration & Prod. Co. v. Ramco Energy Ltd., 139 F.3d 1061, 1067 (5th Cir. 1998); Mediterranean Enters. v. Sangyong Corp., 708 F.2d 1458, 1463-64 (9th Cir. 1983); Carro v. Parade of Toys, Inc., 950 F. Supp. 449, 453 (D.P.R. 1996); Michele Amoruso E Figli v. Fisheries Dev. Corp., 499 F. Supp. 1074, 1080 (S.D.N.Y. 1980).[ ] The Court in Prima Paint held that in the case of a broad clause, FAA § 4 mandates that allegations of fraud in the inducement of the entire contract be decided by arbitrators, not a court. Carro, 950 F. Supp. at 453. But Prima Paint does not require arbitration of a fraudulent inducement claim where parties have specifically ruled out such a result by agreeing to a narrow arbitration clause. See id.; Figli, 499 F. Supp. at 1080.

RCM Technologies, Inc. v. Brignik Technology, Inc., et als, __ F. Supp. __ (D.N.J. 2001).

Mixtures of arbitration and litigation on the same project.

Multi party disputes concerning the same construction project can present particularly difficult procedural issues where only certain of the participants are bound to arbitrate. In Gelber v. The Zito Partnership, 151 N.J. 561 (1997), Justice O'Hern announced the role of the Superior Court Judge as manager/coordinator of the combined litigation/arbitration process. The failure of a litigant to give appropriate notice of pending arbitration proceedings involving the same project, in this instance, supported the dismissal of claims asserted in litigation.

We need not decide whether, if informed of the pending arbitration, the trial court could have required joinder in either forum. The notice requirements of Rule 4:5-1 require conduct on the part of attorneys for reasons not limited to joinder of actions. Joinder is but one goal of the entire controversy doctrine. Quite aside from joinder of the controversies in either the arbitral or judicial forum, a trial court, once informed of related actions, can employ various procedural tools to prevent excessively complicated or unfair litigation. See Zirger v. General Accident Ins. Co., 144 N.J. 327, 676 A.2d 1065 (1996) (authorizing modification of arbitration agreement to limit duplicative litigation). The court could have taken measures to clarify the case before it through stipulations, authorizing discovery relating to the nature of the claims being addressed in the arbitration proceedings (including the extent to which the claims overlapped or paralleled those in the judicial proceedings), and the extent to which witnesses and evidence would be the same in both proceedings. It could have considered the applicability of collateral estoppel in respect of factual determinations bearing on the claims and defenses of the respective parties. The court could have required the homeowner to obtain a transcript of the arbitration hearing and to provide it to the architect and the court in the judicial proceeding. It could have further entertained applications to stay one or the other proceeding to assure consistent results in both proceedings. Even if the trial court could not have controlled the disposition of the arbitration, it could have sought to foster mediation among the parties.

At a minimum, therefore, the homeowner's failure to give notice deprived both the architect and the court of the opportunity to have the Superior Court manage or otherwise coordinate the two proceedings. Hence, we agree that on this record there has been a sufficient showing of prejudice to the architect, resulting from violation of the notice requirements of Rule 4:5-1, to warrant a measured application of the entire controversy doctrine.

Id. at 568.

Scope of the arbitration award.

AAA Rule 43 states as follows:

"The Arbitrator may grant any remedy or relief, including equitable relief, that the Arbitrator deems just and equitable and within the scope of the Agreement of the parties. The arbitrator shall, in the award, assess arbitration fees, expenses, and compensation, as provided in sections R-49, R-50 and R-51 in favor of any party and, in the event that any administrative fees or expenses are due the AAA, in favor of the AAA."

The New Jersey Appellate Division in Commerce Bank v. DiMaria Construction, 300 N.J. Super. 9 (App.Div. 1997), set forth various principles which help define an arbitrator's authority. Specifically, the Court in Commerce Bank upheld prior decisions of the New Jersey Supreme Court enforcing arbitration awards rendered pursuant to the Construction Industry Arbitration Rules of the American Arbitration Association in Perini v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479 (1992) and Tretina Printing, Inc. v. Fitzpatrick & Associates, Inc., 135 N.J. 349 (1994). The Court reviewed an arbitration award that awarded a party counsel fees, lost profit damages, and interest of 10% on the amount of the award until same was paid in full. In upholding the arbitrator's decision, the Court discussed the role of the arbitrator:

Commerce argues that the award of counsel fees was improper because it was contrary to "[t]he traditional American Rule ... that attorneys fees are not awardable to the winning party unless statutorily or contractually authorized." Similarly, Commerce argues that the award for lost profits due to DiMaria's loss of bonding capacity, lack of capital required to purchase materials, and damage to its corporate name, violated the rule of Hadley v. Baxendale, 9 Ex. 341, 145 Eng. Rep. 145 (1854) that damages for breach of a contract are limited to those losses which would have been reasonably foreseeable by the parties as a probable result of a breach.

However, under the Perini concurrence endorsed in Tretina, arbitrators have no obligation to follow the principles of law which would govern an action in a court of law. Instead, arbitrators may conclude that the only way to provide complete relief for a breach of contract--the only way to actually put the injured party in as good a position as it would have been in if the contract had not breached, see Donovan v. Bachstadt, 91 N.J. 434, 444, 453 A.2d 160 (1982)--is to award any counsel fees which had to be incurred to prove the breach as well as lost profits that were beyond the parties' contemplation at the time of execution of the contract.

300 N.J. Super. at 19.

The Commerce Bank Court further quoted from the concurrence of Chief Justice Wilentz in Perini, later adopted by the Court in Tretina:

The very purpose of committing a dispute to arbitration is to get away from the judiciary, to get away from the structures and limitations of law, ...[I]f nothing is said in the agreement, the arbitrators may use any standards they want to reach a just and equitable result, unrestricted by any law or laws, required only to be honest and to attempt to the best of their ability, based on their knowledge and experience to achieve a just and equitable result.

129 N.J. at 542-43.

Collateral estoppel effect of arbitration awards.

The doctrine of collateral estoppel generally precludes a party that has had its "day in court" on a particular issue from relitigating that issue subsequently. The doctrine of collateral estoppel has been held to apply even though the prior proceeding is an arbitration. In order to successfully apply the doctrine of collateral estoppel to preclude subsequent litigation, it may be necessary to obtain specific findings of an arbitrator in an award regarding issues that may be the source of future litigation. A "net" award of an arbitrator in satisfaction of multiple claims may not be sufficient to preclude subsequent litigation.

In Rush, et als v. Kuhn, Smith & Harris, Inc., 335 N.J. Super. 73 (App. Div. 1984), an action was brought arising out of the construction of an office building for a medical partnership which would be occupied by the partners as separate tenants. Arbitration was ordered as to disputes involving the partnership and litigation of the partners' individual claims as tenants was stayed. Following an arbitration award, the Superior Court, Law Division, summarily dismissed the partners'/tenants' claims on grounds of collateral estoppel. The Appellate Division reversed, finding that collateral estoppel did not apply since the arbitrator made no findings regarding the issues raised by the tenants.

Collateral estoppel cannot be applied here, however, because the arbitrators made no findings respecting the issues to be retried. The award falls far short of compensating any party the amount claimed due. This could mean that the arbitrators found the partners/tenants responsible for some of the delay; but as we noted when the matter was last before us, one cannot tell from the award what percentage of the delay the arbitrators attributed to the partnership. The award could also mean that the arbitrators found the proof inadequate as to some claims. A party cannot be collaterally estopped from retrying an issue unless one knows the resolution of the issue in the prior proceeding. Ettin v. Ava Truck Leasing, Inc., 53 N.J. 463, 480, 251 A.2d 278 (1969).

The award of an arbitrator is generally expressed as a net figure without explanation or breakdown. In that respect it is similar to the general verdict of a jury, which may express the resolution of many issues without revealing how any was decided. If it is necessary to know the finding of a jury on a particular issue, the judge must ask for a special verdict. R. 4:39-1. As Judge Pressler has noted:

The use of the special verdict technique is particularly desirable where successive, related litigation may be anticipated since in these circumstances it is essential to be able to determine the precise issues decided in the first trial in order to avoid their retrial in later litigation by application of the doctrine of collateral estoppel. [Pressler, Current N.J. Court Rules, Comment R. 4:39-1 (1984).]

Id. at 77.

The New Jersey Arbitration Act

New Jersey gives force and effect to arbitration agreements by statute. The New Jersey Arbitration Act is set forth below.

2A:24-1. Arbitration provisions; validity and effect

A provision in a written contract to settle by arbitration a controversy that may arise therefrom or a refusal to perform the whole or a part thereof or a written agreement to submit, pursuant to section 2A:24-2 of this title, any existing controversy to arbitration, whether the controversy arise out of contract or otherwise, shall be valid, enforceable and irrevocable, except upon such grounds as exist at law or in equity for the revocation of a contract.

2A:24-2. Who may submit to arbitration; agreement for judgment upon award by specified court

Two or more persons by their agreement in writing may submit to arbitration a controversy existing between them at the time of the agreement, whether the controversy arises out of a contract or the refusal to perform the whole or a part thereof or out of any other matter. They may also agree in writing that a judgment of a court of record, chosen by them shall be rendered upon the award made pursuant to the submission.

2A:24-3. Nonperformance of agreement; action for order of arbitration

Where a party is aggrieved by the failure, neglect or refusal of another to perform under a written agreement providing for arbitration, the superior court may in a summary action direct that the arbitration proceed in the manner provided for in the agreement. The party alleged to be in default may demand a jury trial as to the issue that there has been no agreement in writing for an arbitration or that there has been no failure to comply therewith.

2A:24-4. Stay of action or proceeding subject to arbitration

In an action brought in any court upon an issue arising out of an agreement providing for the arbitration thereof, the court, upon being satisfied that the issue involved is referable to arbitration, shall stay the action, if the applicant for the stay is not in default in proceeding with the arbitration, until an arbitration has been had in accordance with the terms of the agreement.

2A:24-5. Naming arbitrators or umpire

If a method is provided in the agreement for naming or appointing an arbitrator or an umpire, it shall be followed; but if not so provided, or if one is provided and a party thereto shall fail to avail himself thereof, or for other reasons there shall be a lapse or failure in the naming of an arbitrator or an umpire or in filling a vacancy, the superior court may in the summary action provided for in N.J.S.2A:24-3 or in another action, designate and appoint an arbitrator or an umpire, as the case may require, who shall act thereunder with the same force and effect as if specifically named therein. The arbitration shall be by a single arbitrator unless otherwise provided.

2A:24-6. Hearing by arbitrators; witnesses; fees; subpoena

When more than 1 arbitrator is agreed upon, all the arbitrators shall sit at the hearing of the case, unless by written consent, all parties agree to a lesser number.

The arbitrator so sitting or an attorney of record in the arbitration proceeding may require the attendance of any person as a witness and, in a proper case, to bring with him any book or written instrument. The fees for the attendance shall be those allowed witnesses in a civil action in the Superior Court.

An arbitrator, or where more than one arbitrator is sitting, a majority of them, or an attorney of record in the arbitration proceeding, may issue a subpoena. The subpoena shall issue in the name of the arbitrator. The subpoena shall be signed by an arbitrator, or a majority of them, or an attorney of record, as the case may be. The subpoena shall be directed to the person therein named and served in the same manner as a subpoena to testify before the Superior Court. If any person so subpoenaed to testify shall refuse or neglect to obey such subpoena, the court, upon motion, may compel his attendance before the arbitrator or punish him for contempt in the manner provided for the attendance of witnesses or their punishment in the Superior Court.

2A:24-7. Application for confirmation, vacation or modification of award

The award must be in writing and acknowledged or proved in like manner as a deed for the conveyance of real estate and delivered to one of the parties or his attorney.

A party to the arbitration may, within 3 months after the award is delivered to him, unless the parties shall extend the time in writing, commence a summary action in the court aforesaid for the confirmation of the award or for its vacation, modification or correction. Such confirmation shall be granted unless the award is vacated, modified or corrected.

2A:24-8. Vacation of award; rehearing

The court shall vacate the award in any of the following cases:

a. Where the award was procured by corruption, fraud or undue means;

b. Where there was either evident partiality or corruption in the arbitrators, or any thereof;

c. Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause being shown therefor, or in refusing to hear evidence, pertinent and material to the controversy, or of any other misbehaviors prejudicial to the rights of any party;

d. Where the arbitrators exceeded or so imperfectly executed their powers that a mutual, final and definite award upon the subject matter submitted was not made.

When an award is vacated and the time within which the agreement required the award to be made has not expired, the court may, in its discretion, direct a rehearing by the arbitrators.

2A:24-9. Modification or correction of award; order

The court shall modify or correct the award in any of the following cases:

a. Where there was an evident miscalculation of figures or an evident mistake in the description of a person, thing or property referred to therein;

b. Where the arbitrators awarded upon a matter not submitted to them unless it affects the merit of the decision upon the matter submitted; and

c. Where the award is imperfect in a matter of form not affecting the merits of the controversy.

The court shall modify and correct the award, to effect the intent thereof and promote justice between the parties.

2A:24-10. Force and effect of judgment

The judgment confirming, modifying or correcting an award or a judgment in any action under this chapter shall have the same effect, in all respects, as, and is subject to all the provisions of law relating to, a judgment in any other action and may be enforced as if rendered in any other action in the court in which it is entered.

Fees of the American Arbitration Association.

Participation in an arbitration through an agreement to follow the current Construction Industry Arbitration Rules of the American Arbitration Association can involve significant expense. Aside from arbitrator compensation for a panel of one to three arbitrators at rates which vary widely depending upon compensation rates set by each arbitrator, the AAA schedule of fees in effect as of September, 2000 provides:

Fees

A nonrefundable initial filing fee is payable in full by a filing party when a claim, counterclaim or additional claim is filed. A case service fee will be incurred for all cases that proceed to their first hearing. This fee will be payable in advance at the time that the first hearing is scheduled. This fee will be refunded at the conclusion of the case if no hearings have occurred. However, if the Association is not notified at least 24 hours before the time of the scheduled hearing, the case service fee will remain due and will not be refunded. These fees will be billed in accordance with the following schedule:

Amount of Claim	Initial Filing Fee	Case Service Fee
Above $0 to $10,000	$500	N/A
Above $10,000 to $75,000	$750	N/A
Above $75,000 to $150,000	$1,250	$750
Above $150,000 to $300,000	$2,750	$1,000
Above $300,000 to $500,000	$4,250	$1,250
Above $500,000 to $1,000,000	$6,000	$2,000
Above $1,000,000 to $7,000,000	$8,500	$2,500
Above $7,000,000 to $10,000,000	$13,000	$3,000
Above $10,000,000	*	*
No Amount Stated	$3,250	$750

*Contact your local AAA office for fees for claims in excess of $10 million.

** This fee is applicable when no amount can be stated at the time of filing, or when a claim or counterclaim is not for a monetary amount. The fees are subject to increase or decrease when the claim or counterclaim is disclosed.

The minimum fees for any case having three or more arbitrators are $2,750 for the filing fee, plus a $1,000 case service fee.

Expedited Procedures are applied in any case where no disclosed claim or counterclaim exceeds $75,000, exclusive of interest and arbitration costs.