American Bar Association

Forum on the Construction Industry

IMPLEMENTING DISPUTE RESOLUTION PROCEDURES

IN MULTI-PARTY CONSTRUCTION DISPUTES

Robert W. Wachsmuth, Esq. R. Daniel Douglass, Esq.

Glast, Phillips & Murray, P.C. Stites & Harbison, PLLC

219 East Houston Street 303 Peachtree Street, N.E.

Suite 400 2800 SunTrust Plaza

San Antonio, TX 78205 Atlanta, GA 30308

May 18-19, 2006

Paradise Point Resort - San Diego, CA

© 2006 American Bar Association

IMPLEMENTING DISPUTE RESOLUTION PROCEDURES

IN MULTI-PARTY CONSTRUCTION DISPUTES

Alternative Dispute Resolution (ADR) procedures are widely used as an efficient and

effective means of dealing with inevitable disputes in the construction industry. ADR

procedures are typically creatures of contract, relying upon the parties’ agreement for their

authority, applicability and enforceability. Most standard industry contract forms (e.g., AIA,

AGC, DBIA, EJCDC) include some form of proposed ADR procedures. Implementation of

contractual ADR procedures has been supported and facilitated by federal and state laws such

as the Federal Arbitration Act (FAA) and various enactments of the Uniform Arbitration Act

(UAA) and Uniform Mediation Act (UMA). Use of arbitration procedures is found in federal

government contracting as well as on private projects.

Over the years, some typical enforcement problems and issues have developed, such as refusal

to mediate, joinder of non-signatory parties in arbitration, forum and location disputes, and the

like. Awareness of these potential pitfalls can inform the drafting of better contract language

to minimize enforcement problems and maximize the benefits of ADR. Awareness of the

available remedies in the courts and under applicable laws and industry rules can also enhance

contract drafting and avoidance of enforcement problems.

A. Dispute Resolution Procedures Available

On private projects, the ADR options are limited only by the parties’ willingness to agree.

The options include informal negotiation, mediation, arbitration, Dispute Review Board

(DRB), and hybrids of the foregoing, including standard litigation. The standard industry

contracts forms have developed over the years to include several of these ADR options, both

in the design-bid-build delivery method and in the design-build approach.

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In the federal government contracting arena, the Alternative Dispute Resolution Act

establishes procedures for use of ADR to resolve claims against the government, but only with

the mutual agreement of the parties.1 While the typical procedure on appeal of a contracting

officer’s decision is an evidentiary hearing before an appointed hearing officer, mediation is

available if both parties agree. But the Court of Federal Claims will not force mediation or

other ADR procedures on the parties. In practice, Department of Justice attorneys have

seldom agreed to use ADR, although this may be changing in recent times.2 ADR procedures

are also available on international projects if included in the contract between the parties.

Arbitration is the long-standing common ADR mechanism for dispute resolution in

international transactions, but interest in western style mediation is being studied and

encouraged in Europe and China.

B. How Typically Addressed in Standard Contracts

The standard industry contract forms typically provide for resolution of disputes by mediation

and arbitration and sometimes include other procedures, such as architect’s decision or step

negotiations between the parties. For example, the 1997 AIA A201 General Conditions

provide for an initial decision by the architect, followed by mediation in accordance with the

AAA Construction Industry Mediation Rules, followed by binding arbitration in accordance

with the AAA Construction Industry Arbitration Rules.

The A201 document allows for, but also places limits on, consolidation or joinder. It

provides:

4.6.4 Limitation on Consolidation or Joinder. No arbitration

arising out of or relating to the Contract shall include, by

consolidation or joinder or in any other manner, the Architect,

the Architect’s employees or consultants, except by written

consent containing specific reference to the Agreement and

signed by the Architect, Owner, Contractor and any other person

or entity sought to be joined. No arbitration shall include, by

consolidation or joinder or in any other manner, parties other

than the Owner, Contractor, a separate contractor as described in

Article 6 and other persons substantially involved in a common

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question of fact or law whose presence is required if complete

relief is to be accorded in arbitration. No person or entity other

than the Owner, Contractor or a separate contractor as described

in Article 6 shall be included as an original third party or

additional third party to an arbitration whose interest or

responsibility is insubstantial. Consent to arbitration involving

an additional person or entity shall not constitute consent to

arbitration of a Claim not described therein or with a person or

entity not named or described therein. The foregoing agreement

to arbitrate and other agreements to arbitrate with an additional

person or entity duly consented to by parties to the Agreement

shall be specifically enforceable under applicable law in any

court having jurisdiction thereof.

This clause prevents joinder of the project architect without its consent. However, it permits

consolidation with or joinder of non-signatory parties that are substantially involved in the

dispute and necessary for complete relief. It also provides that consolidation or joinder is

specifically enforceable in any court having jurisdiction, facilitating liquidation agreements

and joinder provisions in subcontracts and purchase orders.

The 1997 AIA B141 Owner-Architect Agreement also provides for resolution of disputes by

mediation followed by arbitration, and expressly provides that no arbitration under the

Agreement shall include by consolidation or joinder of any person not a party to the

Agreement except by written consent of the Owner, Architect and other persons sought to be

joined. Thus, the AIA documents for a design-bid-build project contemplate possible joinder

of necessary parties and consolidation with other arbitration proceedings, but propose to

preclude joinder of the project architect without its written consent. The AIA documents

reference the AAA Construction Industry Arbitration Rules, Rule 7 of which provides for

consolidation or joinder if the parties’ agreement or the law provides for consolidation or

joinder.

The AGC Document No. 200 Owner-Contractor Agreement provides for step negotiations

between the parties, followed by mediation, and thereafter resolution by the method selected

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from a “Dispute Resolution Menu.” The AGC document also provides: “All parties

necessary to resolve a claim shall be parties to the same dispute resolution proceeding.

Appropriate provisions shall be included in all other contracts relating to the Work to provide

for the consolidation of such dispute resolution procedures.” Thus, the AGC document places

importance on the ability to join all necessary parties and recognizes the necessity of including

ADR and joinder provisions in other contracts on the project.

The EJCDC documents also include dispute resolution provisions, which are found in EJCDC

C-800 SC-16 Dispute Resolution. It provides six options for disputes resolution, including

various combinations of mediation, arbitration, litigation, step negotiation, and use of a third-

party neutral.3 Unlike the AIA documents, the EJCDC C-800 provides for joinder of the

design professional if necessary to resolve the dispute. It also provides for arbitration fees and

expenses to be shared equally by the parties.

The design-build delivery method has a different set of standard form contracts, which also

recognize the benefits of ADR procedures and the joinder of multiple parties or consolidation

of multiple proceedings. The 2004 AIA A141 Owner/Design-Builder Agreement provides for

initial resolution of disputes by a neutral jointly selected by the parties in the agreement, or by

the Owner if no neutral is selected. Thereafter, the dispute is referred to mediation followed

by binding arbitration. The A141 document also provides for consolidation with another

arbitration proceeding or joinder of other parties under certain circumstances. Joinder and

consolidation are limited to common issues of law or fact and persons or entities having a

direct contract with the Owner or Design-Builder which requires arbitration and does not

prohibit consolidation or joinder. The AIA B143 Design-Builder/Architect Agreement

similarly provides for mediation followed by binding arbitration and provides for

consolidation or joinder under similar circumstances.

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The DBIA Document No. 535 Owner/Design-Builder Agreement provides for step

negotiations between the parties to resolve disputes, followed by mediation and binding

arbitration. Mediation is conducted pursuant to the AAA Construction Industry Mediation

Rules, and arbitration is in accordance with the AAA Construction Industry Arbitration Rules.

The DBIA document also provides that any arbitration may be joined or consolidated with

another arbitration involving a person or entity necessary to resolve the dispute or

substantially involved in or affected by the dispute. It further provides that appropriate

provisions will be included in contracts with other parties on the project to require such

joinder or consolidation. The DBIA Document No. 540 Design-Builder/Designer Agreement

provides for resolution of disputes involving the Owner pursuant to the provisions of the

Owner/Design-Builder Agreement, and further provides that the design-builder and designer

will cooperate in the prosecution or defense of owner disputes and will accept the result of

such dispute resolution. For disputes not involving the Owner, the agreement provides for

step negotiations between the parties, followed by mediation and binding arbitration. The

arbitration agreement similarly provides for joinder or consolidation with other persons or

entities necessary to resolve the dispute or substantially involved in or affected by the dispute.

C. Typical Enforcement Problems

1. Refusal to Mediate

Mediation is often a prerequisite, and in many contracts a condition precedent to arbitration or

litigation of disputes. Since mediation is facilitated settlement negotiation, its success in

resolving a dispute depends upon the parties reaching agreement. There can be other benefits

from the mediation process, such as inexpensive exchange of information and enhanced

communication of positions, but the ultimate measure of success is resolution of the dispute.

If one party obstructs the process by refusing to attend or refusing to negotiate in good faith,

what remedies does the other party have? Is an action to compel mediation available, and

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would you want to use it? Is “good faith” enforceable or lack of “good faith” sanctionable?

Can a party’s refusal to attend or to negotiate in good faith provide grounds for waiver of

mediation as a condition precedent to arbitration or litigation? Finally, is it possible to join

other parties that are necessary to complete relief or that enhance the prospects for settlement

in the mediation process?

There appears to be a divergence among federal courts on whether to compel or waive

mediation as a condition precedent to arbitration in multi-step ADR clauses. In cases where

the court finds that the condition precedent of mediation or good faith negotiation has been

met, the court has compelled arbitration.4 If the condition precedent has not been met, the

courts have taken different approaches. Several courts have ordered the parties to submit the

dispute to mediation as a prerequisite to arbitration.5 Other courts have found a waiver of the

mediation requirement and compelled arbitration.6 In the Dimark Marketing case, when the

parties were unable to agree on a location for mediation, the court waived the mediation

requirement and compelled arbitration.

Two federal appellate courts have taken a different and more drastic approach, ruling that by

failing to request mediation in a multi-step ADR clause, the arbitration provision was never

triggered and the parties must continue in litigation.7 The surprising result of these decisions

is effectively a waiver of the contractually agreed multi-step ADR clause. In both cases, the

court observed that the FAA policy favoring arbitration does not override the stated wishes of

the contracting parties, which in both contracts provided for mediation prior to arbitration.

The language in the HIM Portland case was more specific in stating that mediation was a

“condition precedent to arbitration or the institution of legal or equitable proceedings by either

party.” The court in the Kemiron Atlantic case did not require such explicit language to find

that mediation was a condition precedent that had not been satisfied.

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It is arguable that the federal courts should not be wrestling with this issue at all. Rather, the

court should defer to an arbitrator on such questions of “procedural arbitrability” as whether a

condition precedent to arbitration, such as mediation, has been satisfied or waived.8

The United States Supreme Court has recognized a distinction between procedural

arbitrability issues and substantive arbitrability issues and has suggested that the former are

the province of arbitrators while the latter are proper for decision by the courts.9 The Wiley

decision has been recognized as a guide on handling procedural versus substantive

arbitrability issues, and federal courts have often ruled on substantive arbitrability issues while

deferring procedural arbitrability issues to the arbitrator.10

The Howsam decision referred to the Revised Uniform Arbitration Act of 2000 (RUAA),

which updated the Uniform Arbitration Act adopted by most states and which has been

approved by the American Bar Association, endorsed by the American Arbitration

Association and already adopted by several states.11

Section 6 of the RUAA codifies the

general rule in federal and state courts on arbitrability issues, providing that the court decides

whether an agreement to arbitrate exists or a controversy is subject to the agreement to

arbitrate, whereas the arbitrator decides whether a condition precedent to arbitrability has been

met and whether the contract containing the arbitration agreement is enforceable. The CPR

Institute for Dispute Resolution arbitration rules similarly grants the arbitrator authority to

decide procedural arbitrability issues.

The foregoing indicates that the question of whether to compel or waive mediation as a

condition precedent to arbitration should be left to the arbitrator and not decided by the court.

This approach would be consistent with the scenario in which one party delays or obstructs

mediation and the other party files an arbitration demand and attempts to proceed with

ZZ997:99950:119424:1:ATLANTA 9

arbitration. Under these circumstances, the mechanism is in place to appoint an arbitrator to

resolve any challenge based on failure to mediate, i.e., compel or waive mediation. However,

if the parties are in court because one party has filed a lawsuit and neither party has timely

pursued enforcement of the ADR clause, there is a distinct possibility that the court could find

a waiver of the ADR provisions. Obviously, the way to avoid this result is timely exercise of

the ADR rights in the contract.

While federal courts tend to follow the U.S. Supreme Court on procedural vs. substantive

arbitrability issues, the various state courts often decide procedural arbitrability issues such as

whether a party has waived arbitration, in the context of a motion to compel arbitration.12

One’s odds of getting a state court to defer to an arbitrator may be enhanced by filing an

arbitration demand before seeking to compel arbitration, so that there is an arbitrator

appointed or about to be appointed to whom the court can defer.

Another potential issue is the authority of the courts to compel mediation. The Federal

Arbitration Act (FAA) provides that a contract clause requiring the parties to “settle by

arbitration a controversy arising out of such contract … shall be valid, irrevocable, and

enforceable, save upon such grounds as exist at law or in equity for the revocation of any

contract.” 9 U.S.C. § 2. When presented with an issue covered by an arbitration agreement,

the courts are required to stay the litigation until arbitration has occurred on application of

either party. 9 U.S.C. § 3. The FAA does not expressly address “mediation.” But couldn’t a

court enforce performance of a condition precedent to achieve the purposes of the FAA?

Several federal courts have found that enforcement of a mediation clause or multi-step ADR

clause is within the scope of the FAA. In Fisher v. GE Medical Systems,13

the court found

that federal policy favors arbitration in a broad sense and mediation falls within that

preference for non-judicial dispute resolution. The court cited other federal court decisions

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for the proposition that the policy in favor of finality of arbitration is but one part of a broader

goal of encouraging informal dispute resolution, which is not limited to arbitration.14

Therefore, the FAA was broad enough to authorize enforcement of a mediation agreement.

Other courts have reached a similar result.15

As a practical matter, how much success is a party likely to have negotiating a settlement with

an unwilling counterpart? It has been argued that ordering a reluctant party to mediate

violates the first premise of mediation as a voluntary and consensual process.16

In court-

ordered mediation cases, most courts have found that good faith requires only a party’s

attendance, not meaningful participation, and sanctions have been imposed when a party

failed to attend without good cause.17

The more practical approach may be to minimize delay

by proceeding with an arbitration demand and letting the arbitrator decide whether to compel

mediation or deem the requirement waived.

Joinder can be an important issue in mediation, just as it is in arbitration (as discussed below).

One commentator has observed that the likelihood of a successful settlement of a construction

defect dispute is directly related to the involvement of all subcontrators and design

professionals who performed the work or provided the professional services that gave rise to

the defect claim, as well as their insurance carriers.18

It is a fact of life that disputes are

generally easier to settle when there are more pockets of money at the table. Since mediation

is subject to the agreement of the parties, it is wise to ensure that a consent to joinder or

consolidation in a construction contract applies to mediation as well as arbitration.

2. Joinder and Consolidation in Arbitration

Every construction lawyer knows that a dispute on a large construction project can involve

multiple parties, and a complete resolution can require joining multiple parties in a single

proceeding. A good example is water intrusion claims on a highrise condominium project.

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Water intrusion can involve roofing, glass and glazing, EIFS and other exterior enclosures,

and virtually every trade performing work on the project. The causes can involve defective

design, defective workmanship, or defective materials or products. As a result, the owner,

architect, general contractor, trade contractors and suppliers are potentially necessary parties

to dispute resolution. What begins as an owner-contractor dispute can involve nearly every

participant in the construction project.

The failure to join all potentially responsible parties in one proceeding can expose various

parties to the risks of duplicative expense and inconsistent results. If the owner litigates or

arbitrates with the architect in one forum and with the contractor in another, he is exposed to

the risk of the architect successfully defending based on poor workmanship and the contractor

prevailing based on design defects. The owner can be left holding the bag on remedial costs

when he may be the only blameless party in the process. Similarly, the general contractor will

be looking to pass through defective workmanship claims to subcontractors that performed the

work and defective material claims to the respective material suppliers. The inability to join

all necessary subcontractors and suppliers exposes the contractor to the same risk of

inconsistent results as the project owner.

Joinder and consolidation are related issues, but joinder is more problematic than

consolidation. Consolidation with another arbitration proceeding obviously presupposes that

all parties have signed arbitration agreements. Thus, the only question is whether those

arbitration agreements preclude, or should be presumed to preclude, consolidation with other

arbitrations involving other parties. Generally, the standard is whether there are common

issues of law or fact and the parties are necessary for complete relief. This standard is

reflected in the consolidation language found in standard industry form contracts.

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Joinder of other parties to an existing arbitration may involve parties that have not signed an

arbitration agreement. Since arbitration is a creature of contract, the presumption is that a

party cannot be compelled to join an arbitration proceeding if it is not a signatory to an

arbitration agreement with one of the parties. This is an important distinction between

arbitration and litigation, where the rules of civil procedure typically authorize a court to

compel joinder and consolidation under certain circumstances.19

Thus, a general contractor cannot compel a subcontractor to join its arbitration with the owner

or with another subcontractor if the subcontract does not contain an arbitration agreement.

Likewise, an owner cannot compel an architect to join an arbitration with the general

contractor if the architect’s agreement precludes joinder. Obviously, the most effective way to

ensure that all necessary parties can be joined is to ensure that all agreements on a

construction project provide for arbitration and for joinder or consolidation. The enforcement

problems arise in seeking consolidation where the contracts do not provide for consolidation,

and in seeking joinder of non-signatory parties.

3. Consolidation of Arbitrations

While a number of federal court decisions have recognized the courts’ power to consolidate

separate arbitration proceedings, more recent decisions have prohibited consolidation absent

consent. An example is United Kingdom, Ministry of Defense v. Boeing Co.,20

in which the

federal court was prohibited from ordering consolidation of arbitration proceedings arising

from separate agreements absent the parties’ agreement to consolidation despite the

proceedings involving similar questions of fact and law. The Second Circuit Court of Appeals

held that the “FAA does not authorize consolidation of arbitration proceedings unless doing so

would be in accordance with the terms of the agreement.”

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State courts have taken differing approaches to the issue. Some state courts have precluded

consolidation in the absence of express statutory authority or where the arbitration agreement

is silent on consolidation.21

Other state courts have recognized judicial authority to order

consolidation of arbitration proceedings, although it may be limited by the contract terms.22

Some states have enacted statutes expressly granting the courts authority to consolidate

arbitrations, while other states have enacted statutes granting arbitrators the authority to

consolidate arbitrations and join related parties.23

The revised Uniform Arbitration Act (RUAA) has proposed to address this issue by allowing

in section (10)(a) for application to a court to consolidate separate arbitration proceedings.

Under this provision, a court has discretion to order consolidation of separate arbitrations if

the claims arise from the same transactions, a common issue of law or fact creates the

possibility of conflicting decisions, and the prejudice from failure to consolidate outweighs the

risk of undue delay or prejudice to objecting parties.

Thus, without contractual language addressing the issue, a party is unlikely to compel

consolidation of separate arbitration proceedings in the federal courts and in certain state

courts, while the ability to obtain court ordered consolidation is enhanced in certain states.

These varying results highlight the importance of including appropriate contract language to

preserve the option of compelling consolidation of related arbitration proceedings.

4. Joinder of Non-Signatory Parties

Generally, a non-signatory party cannot be compelled to join an arbitration proceeding and

does not have standing to compel arbitration with a signatory party. However, some situations

have been recognized by the courts as justifying joinder of a non-signatory party in arbitration.

Theories supporting joinder of a non-signatory party include (1) incorporation by reference (2)

assumption, (3) agency, (4) veil piercing/alter ego, and (5) estoppel.24

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The “incorporation by reference” argument is often seen in two contexts. First, a “flow down”

clause in a subcontract may incorporate by reference the arbitration clause in the owner-

contractor agreement. For example, in JS&H Constr. Co. v. Richmond County Hosp.

Authority,25

a subcontract that incorporated by reference the general conditions of the prime

construction contract between general contractor and hospital authority made the

subcontractor subject to the arbitration provisions of the prime contract. Thus, one contract

drafting approach is to include a multi-party ADR provision in the owner-contractor

agreement and incorporate it by reference through a “flow down” clause in the architect and

subcontractor agreements.

Second, a surety performance bond that incorporates by reference the secured contract or

subcontract may render the non-signatory surety subject to an arbitration agreement in the

referenced contract or subcontract. For example, in Boys Club of San Fernando Valley, Inc. v.

Fidelity & Deposit Co.,26

a contractor’s performance bond surety was required to arbitrate

with the project owner under the terms of an arbitration clause in the owner-contractor

agreement, which was incorporated by reference into the bond. The court held that the

incorporation of the contract into the bond expressed the intention of the parties, including the

surety who was not a signatory to the contract, to arbitrate disputes.

On occasion, both of the foregoing examples of “incorporation by reference” can be found in

the same case. For example, in Exchange Mut. Ins. Co. v. Haskell Co.,27

a surety on a

performance bond was bound to arbitrate a dispute with a subcontractor when the bond

incorporated the subcontract by reference and the subcontract likewise incorporated the

general contract by reference, which included the arbitration clause. The owner contract

contained the following arbitration agreement:

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All the claims, disputes and other matters in question arising out

of, or relating to this contract or the breach thereof, except for

claims which have been waived by the making or acceptance of

final payment as provided by subparagraphs 8.6.5 and 8.6.6 and

which cannot be settled by negotiation between the Contractor

and the Owner, shall be decided in accordance with the

Construction Industry Arbitration Rules of the American

Arbitration Association. The award rendered by the arbitration

shall be final, and judgment may be entered upon it in

accordance with applicable laws to any court having jurisdiction

thereof.

The subcontract contained the following incorporation clause:

Subcontractor hereby assumes the same obligations and

responsibilities with respect to his performance under this

Subcontract, that Contractor assumes towards Owner with

respect to his performance on the General Contract. If the

General Contract, which is hereby incorporated by reference,

fails or conflicts with any provision of this Subcontract, or any

modification hereof, this Subcontract shall govern.

The performance bond provided by the subcontractor and its surety included the following

incorporation clause:

WHEREAS, the principal has entered into a written Subcontract

with The Haskell Company, dated 10/8/79 to perform as

Subcontractor, certain portions of the work in connection with

the said Prime Contract, consisting of … as stated in

Subcontract No. 4234-06 … which Subcontract is hereby

referred to and made a part hereof.

The court found that the performance bond incorporated by reference the subcontract, the

subcontract incorporated by reference the general contract and hence the duty to arbitration.

In the surety bond situation, the “incorporation by reference” argument is not always

available. In a dispute between a general contractor and subcontractor, the GC can likely

compel joinder of the sub’s surety because the sub’s bond will usually reference the

subcontract. However, the subcontractor may not be able to compel joinder of the GC’s

surety because the GC’s bond will reference the owner-contractor agreement, not the

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subcontract. Perhaps joinder could be achieved if the owner-contractor agreement contains an

arbitration clause that is incorporated by reference in the subcontract.

Turning the tables slightly, a non-signatory surety may have standing to compel arbitration on

the same theory. In Travelers Cas. & Surety Co. of America, Inc. v Long Bay Mgmt. Co.,28

a

general contractor’s performance bond surety had the right to compel arbitration of a claim

under the construction contract against the project owner, since the contract and its arbitration

clause were incorporated into the bond. The opposite result is also possible. In Hartford

Accident & Indem. Co. v. Scarlett Harbor Associates, Ltd. Partnership,29

the court found that

a surety could not compel arbitration of the obligee owner’s claim on the performance bond

based on an arbitration clause in the referenced owner-contractor agreement.

The “assumption” theory for joinder of a non-signatory party is relevant where one party has

been assigned or has assumed a contract containing an obligation to arbitrate disputes.

Generally, the non-signatory party must manifest an intention to be bound by the agreement

containing the arbitration clause.

The “veil piercing/alter ego” theory may be used to join a person or entity related to a

signatory entity in the arbitration. For example, if one company controls another as its alter

ego, or there are grounds for piercing the corporate veil to get to a principal or general partner,

the related non-signatory party may be joined in an arbitration with the signatory entity.

The “estoppel” theory for joinder of a non-signatory party can arise from the facts and the

parties’ conduct. In Dunn Constr. Co. v. Sugar Beach Condominium Assoc., Inc.,30

a

developer sued its contractor and surety for defective work and the dispute was referred to

arbitration pursuant to the language of the AIA form contract. The developer’s lender

foreclosed on part of the property and loaned funds to the condominium association to make

ZZ997:99950:119424:1:ATLANTA 17

repairs. The lender and association then intervened in the developer’s action against the

contractor and surety, claiming to be third party beneficiaries of the construction contract.

The contractor and surety demanded arbitration of the claims by the lender and association

and petitioned the federal court to compel arbitration under the FAA. The court found that the

lender and association were estopped from asserting that they were not bound to arbitrate

because they had characterized themselves as third party beneficiaries of the contract and

because the lender had occupied an integral position with respect to the construction contract

and was a named obligee on the surety bond.

In Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc.,31

a non-signatory party was permitted to

compel arbitration with a signatory party because the signatory party relied on the terms of the

agreement containing the arbitration clause in asserting its position. In McBro Planning &

Development Co. v. Triangle Electronic Constr. Co.,32

a non-signatory party was bound to

arbitrate claims that were so intertwined as to be “inherently inseparable” from arbitrated

claims the non-signatory had opted to pursue.

In In re Weekley Homes, L.P.,33

the daughter of the signatory owner of a home construction

contract was compelled to participate as a party to the arbitration required under her father’s

contract. The court found that the daughter’s negotiations with the builder for changes and

additions to and warranty work under the contract constituted her receipt of benefits under the

contract which estopped her from avoiding the arbitration provisions of the contract. The

court recognized what it termed the “federal law of ‘direct benefits estoppel,’” citing In re

Kellogg Brown & Root, Inc.34

The claimant daughter had pleaded tort injury from asthma

caused by dust from Weekley’s repairs of the home, thus not suing “based on the contract” or

seeking a direct benefit from the contract. Nevertheless, the Texas Supreme Court found

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ample evidence of her receipt of direct benefits under the contract sufficient to estop her from

avoiding the arbitration provision.

By use of liquidating or award/judgment sharing agreements, parties which lack privity can

effectively be joined as participants in any ADR process required by the governing contract.

The general contractor agrees to prosecute claims against the Owner, the Architect or other

separate contractors on behalf of his subcontractors and suppliers in consideration of their

agreement to look only to their respective shares of the final award or judgment for recovery

of their claims, waiving judgment against the general contractor.

Such agreements are usually entered after disputes and claims arise but may be contemplated

or required in subcontracts and purchase orders. They do, however, present their own unique

issues of enforceability, conflicts of interest, cost sharing and liability for counterclaims.

In Interstate Contracting Corp. v. City of Dallas,35

the Texas Supreme Court expressly

approves “pass-through claims”, recognizes them as valid in spite of Texas law insistence on

privity of contract, and sets out a thorough discussion of their history and recognition in other

jurisdictions. The opinion cites United States v. Blair36

as well as Severin v. United States,37

and other familiar decisions for the policy rationale for allowing pass-through claims pursuant

to a liquidation or consolidation-of-claims agreement included in the subcontract or by

separate agreement. The opinion also reviews the published opinions from nineteen states that

have addressed this issue, concluding that eighteen states “treat pass-through claims favorably,

and only Connecticut rejects them.”38

The language of the subcontract and pass-through agreement in the Interstate Contracting

case can be instructive for future contract drafting purposes. The subcontract provided:

ZZ997:99950:119424:1:ATLANTA 19

In the event SUBCONTRACTOR has a claim for which the

Owner may be responsible, the CONTRACTOR, in its sole

discretion, may initiate with the Owner, at the

SUBCONTRACTOR’S expense and which shall include

attorneys fees, any dispute or claim procedures provided for in

the Contract documents for the use and benefit of

SUBCONTRACTOR: otherwise SUBCONTRACTOR shall

have full responsibility for the preparation of its claims and shall

bear all expenses thereof, including attorneys fees.

CONTRACTOR shall be liable to SUBCONTRACTOR only to

the extent of the amount, if any, actually awarded as a result of

the disputes process: SUBCONTRACTOR shall be entitled

only to the amount, if any, actually awarded as a result of the

disputes process: and such amount when received by

CONTRACTOR from the Owner shall satisfy and discharge

CONTRACTOR from any and all liability to

SUBCONTRACTOR for or on account of the acts or omissions

of the Owner or its Architect or Engineer.

The parties also entered a pass-through agreement, which included the following terms:

1. MSI [the subcontractor] may pursue the Claim against the

city [the owner] in Interstate’s name. Interstate [the general

contractor] shall cooperate fully with MSI including, but not

limited to, passing on the Claim to the City and executing such

documents that may be required to further the Claim; and MSI

shall cooperate fully with Interstate. MSI shall have the

responsibility for the preparation of any claim, the presentation

and prosecution of any such claim, and the conduct of any

litigation.

3. MSI shall diligently pursue the Claim. The right to abandon,

settle, compromise or dismiss the Claim shall be shared by MSI

and Interstate. Interstate and MSI shall each not settle the Claim

without the others prior written approval.

4. All costs, fees and other expenses (including expert and

attorney fees) incurred by MSI in connection with the

preparation, prosecution and litigation of the Claim shall be paid

by MSI. MSI shall have no responsibility for any attorney fees

or expenses that Interstate may elect to incur.

6. From any amount paid in settlement of the Claim, Interstate

and MSI shall be paid first for their respective markup

(including profit and overhead).

. . .

ZZ997:99950:119424:1:ATLANTA 20

The remainder of the settlement fund shall be prorated and paid

between Interstate and MSI in the same percentage that each

party’s portion of the Claim (exclusive of the markup) is to the

total Claim (exclusive of markup) submitted to the City.

A theory of agency or similar relationship can sometimes provide grounds for arbitration with

a non-signatory party. In Wasserstein v. Kovatch,39

a homeowners’ lawsuit against principals

of a general contractor was consolidated with claims by other parties on the same project and

referred to arbitration. The homeowners’ claim against the principals of the general contractor

related to actions under the contract with the general contractor, which called for arbitration of

disputes. The court found, among other grounds, that the individual defendants were entitled

to arbitration as agents of the general contractor, even though they were not signatories to the

arbitration agreement.

The foregoing theories focus on compelling arbitration with all necessary parties, including

non-signatory parties to the arbitration agreement. In a creative twist, one possible solution

for joinder of all parties involves the court declining to enforce an arbitration agreement when

it would result in the inability to include all necessary parties in one forum. The Rules of

Civil Procedure could allow joinder or consolidation in the court system, while non-signatory

parties might not be joined in an arbitration proceeding. This approach is discussed below.

5. Waiver vs. Partial Arbitration

If you have all necessary parties in one lawsuit, but some have not signed arbitration

agreements and the foregoing joinder arguments do not apply, what can you do? Can you get

the court to waive arbitration and proceed in litigation with all parties? Do you want some

parties to go off and arbitrate while your client sits back and watches?

It is arguable that compelling arbitration by less than all parties (or of fewer than all disputes)

actually frustrates speedy and economical dispute resolution that is the prime objective of

ZZ997:99950:119424:1:ATLANTA 21

arbitration.40

On such a theory, some courts have declined to stay judicial proceedings and

compel arbitration where the proceedings were so intermingled that enforcing arbitration

between some parties would only increase the cost, length and complexity of dispute

resolution.41

Other decisions, however, interpret state arbitration statutes as requiring enforcement of an

arbitration agreement even if the result may be counterproductive.42

The weight of authority

under the FAA mandates enforcement of an arbitration agreement regardless of whether some

parties cannot be ordered to join the arbitration.43

In Moses H. Cone Memorial Hospital v. Mercury Construction Corp.,44

the U.S. Supreme

Court stated that the FAA “requires piecemeal resolution when necessary to give effect to an

arbitration agreement”, and enforcement of an arbitration agreement is required

“notwithstanding the presence of other persons who are parties to the underlying dispute but

not to the arbitration agreement.”45

Thus, the option of declining to enforce an arbitration

agreement would presumably be available only by the addition of express contract language

giving the parties or the court such authority.

6. Forum/Locale Battles

A forum selection clause, specifying the forum or location for any arbitration, can be

important in multi-party dispute resolution. If none is included, it is one more open issue for

dispute among the parties. If it is included, it can still lead to battles if one or more parties are

seriously disadvantaged by the forum selected. In addition, the forum selection clause offers a

potential advantage over federal or state civil procedure rules in litigation. While it may not

be possible to get all necessary parties in one venue under judicial rules, a contractual

agreement to one forum can overcome the problem.

ZZ997:99950:119424:1:ATLANTA 22

Several issues arise in considering what sort of forum selection clause to include in an ADR

provision. Is it enforceable and when can it be challenged? What is the result if no forum

selection clause is included?

Federal courts generally enforce contractual forum selection clauses. The U.S. Supreme

Court’s decision in The Bremen v. Zapata Off-Shore Co.,46

reversed a trend in federal courts

of hostility toward contractual forum selection clauses. The court declared that such clauses

are “prima facie valid and should be enforced unless enforcement is shown by the resisting

party to be “unreasonable” under the circumstances.” The court defined “unreasonable” as so

gravely difficult and inconvenient that the resisting party will be deprived of its day in court.

Following the Bremen decision, federal courts have generally and routinely enforced

contractual forum selection clauses. This general rule also applies to forum selection clauses

in arbitration provisions.47

Thus, the FAA generally mandates enforcement of arbitration

provisions, and Bremen and its progeny generally mandate enforcement of forum selection

clauses, including those contained in arbitration provisions.

A number of states have enacted statutes that place limitations on forum selection clauses.

North Carolina, for example, has provided by statute that a contract provision specifying a

forum other than North Carolina for resolution of disputes arising out of a North Carolina

project is void as against public policy. One would expect the state courts of North Carolina

(or other states having similar statutes) to refuse to enforce a forum selection clause if it

violates such a statute. However, the same is not true in the federal courts.

Federal courts generally follow the federal law of Bremen and its progeny and enforce forum

selection clauses as written despite contrary state law. In addition, many courts have held that

the FAA preempts state law restrictions on forum selection clauses in arbitration agreements.

ZZ997:99950:119424:1:ATLANTA 23

For example, in Doctor’s Assocs., Inc. v. Hamilton,48

the court held that state law restrictions

on forum selection clauses in an arbitration provision are preempted by the FAA. Other

courts have concluded that if state law imposes an absolute requirement of in-state arbitration

notwithstanding the parties’ agreement otherwise, the applicability of the state law would be

in serious doubt as a result of the preemptive effect of the FAA.49

Thus, if an action to compel

arbitration is brought in federal court rather than state court, or if the dispute involves

interstate commerce such that the FAA applies, then a forum selection clause is likely

enforceable as written despite state law to the contrary. In addition, the odds of enforcement

can be enhanced by including language such as: “Any disputes concerning the enforceability

or scope of the arbitration clause shall be resolved pursuant to the Federal Arbitration Act, 9

U.S.C. § 1 et seq., and the parties acknowledge that the FAA preempts any state law

restrictions on the enforcement of the arbitration clause in this agreement according to its

terms, including any restrictions on the site of the arbitration.”

Some forum selection clauses are drafted for the convenience of one party (usually the one

with most bargaining power at the time of contract) but bearing little or no relation to the

project site or location of witnesses, and perhaps creating serious hardship for the other party

or parties. When you represent one of these parties, it is good to know that there may be

exceptions to enforcement of such a forum selection clause and that the clause may be

severable so as not to invalidate the entire ADR provision. Under the Bremen line of cases,

there are exceptions to the presumed enforceability of a forum selection clause on grounds

such as unequal bargaining power, fraud or effective denial of access to a forum. The party

objecting to the forum selection clause has the burden of showing a “compelling and

countervailing reason” on one of these grounds to overcome the strong policy in favor of

enforcement.

ZZ997:99950:119424:1:ATLANTA 24

One example of refusal to enforce an unworkable forum selection clause in the international

arbitration context is the case of National Iranian Oil Co. v. Ashland Oil, Inc.50

In that case,

the relevant contract specified arbitration in Teheran, Iran, as well as arbitrator selection and

applicable law in accordance with Iranian guidelines. The dispute arose after the Iranian

Islamic Revolution, and the American party to the contract refused to arbitrate in Iran because

of the danger to Americans in that forum. The court refused to compel arbitration in the

chosen forum (Iran) or in another forum (United States), and instead allowed the case to go

forward in court, thereby negating the entire arbitration provision.

The foregoing result is arguably incorrect and undesirable. Courts have the option to enforce

the ADR provision as written, refuse to enforce the ADR provision at all, or invalidate and

sever the offending portion while enforcing the remaining clause. While a forum selection

clause is particularly important in international contracts, it is also important that an invalid

forum selection clause not defeat the entire ADR provision. An arbitration agreement is

severable from the contract that contains it.51

Other courts have severed and refused to

enforce an offending forum selection clause.52

Here is another opportunity to include contract

language that enhances the likelihood of the desired result, such as: “In the event that any

provision of this arbitration agreement is unenforceable, that provision is severable from the

remainder of the arbitration agreement, which shall remain in full force and effect.”

If an arbitration agreement does not include a forum selection clause, or includes an unfair or

unworkable forum selection clause, the proper forum for arbitration can be a subject of

dispute. This is only more likely in a case with multiple parties. Since this is a question of

procedural arbitrability, rather than substantive arbitrability, the question would normally be

decided by an arbitrator rather than a court. In guiding arbitrator determinations, the

ZZ997:99950:119424:1:ATLANTA 25

American Arbitration Association typically requests information from the parties on the

following nine factors:

1) location of parties

2) location of witnesses and documents

3) location of site or place or materials

4) consideration of relative costs to the parties

5) place of performance of contract

6) laws applicable to the contract

7) place of previous court actions

8) necessity of an on-site inspection of the project

9) any other reasonable arguments that might affect the locale

determination.

These factors are obviously aimed at a fair and practical determination based on circumstances

of the particular case. The determination is obviously made more difficult when an arbitration

involves numerous parties in differing geographic locations. This highlights the importance of

including appropriate contract language in project agreements, not only to ensure the joinder

of all necessary parties in one proceeding, but also to ensure that all necessary parties are

amenable to one venue.

The choice of where to file an action to compel arbitration can affect the forum of the

arbitration as well as the enforceability of the arbitration agreement.53

The FAA54

provides

that a party can enforce an arbitration agreement by action in a federal district court that has

an independent basis for jurisdiction, but also provides that the hearing and proceedings under

the arbitration agreement shall be within the district in which the petition is filed. Thus, where

the arbitration agreement does not specify a forum for the proceedings, the forum may be

determined by where an action to compel arbitration is filed. Where the arbitration agreement

in the contract includes a forum selection clause, the result of an action to compel under the

FAA can vary depending upon the court.

ZZ997:99950:119424:1:ATLANTA 26

The majority view is represented by the decision of the 10th Circuit Court of Appeals in Ansari

v. Qwest Communications Corp.55

The majority view is also followed by the Third, Sixth and

Seventh Circuits. Under this view, a district court may compel arbitration only within its

district and only if the arbitration agreement selects a forum within or encompassing its

district. Under this interpretation of the FAA, filing an action in a district court outside of the

forum selected in the arbitration agreement may defeat enforcement of a forum selection

clause or perhaps avoid arbitration entirely.

A minority view is represented by the Fifth Circuit decision in Dupuy-Busching Gen. Agency,

Inc. v. Ambassador Ins. Co.56

By this approach, a district court may compel arbitration in the

forum selected by the arbitration agreement, even if it is not within the court’s district. This

approach eliminates the “race to the courthouse” created by the majority view, but is

obviously inconsistent with the language of Section 4 of the FAA. A third view is represented

by the Ninth Circuit decision in Textile Unlimited, Inc. v. A. BMH & Co., Inc.57

Under the

Ninth Circuit approach, a district court may compel arbitration in its district and ignore the

forum selected by the parties in the arbitration agreement.

The inconsistent results among the federal courts once again highlights the importance of

careful contract drafting in order to avoid enforcement problems.

7. Unilateral Enforceability

An enforceability issue that has arisen over the last several years is the use of “unilateral” or

“discretionary” arbitration provisions. These are contract clauses that give one party the right

to choose whether to arbitrate or litigate disputes while purportedly leaving the other party no

option to choose or compel arbitration. Such provisions are found in owner-contractor

agreements and in general contractors’ form subcontracts. Are these clauses enforceable and

what effect do they have on multi-party disputes?

ZZ997:99950:119424:1:ATLANTA 27

When faced with such contract language, a court could conceivably enforce it as written, read

it as mutually enforceable by the parties, or declare it unenforceable. Both the Federal

Arbitration Act and Uniform Arbitration Act provide that a valid agreement to arbitrate is

enforceable “save upon such grounds as exist at law or in equity for the revocation of any

contract.” While some courts have refused to enforce “unilateral” or “discretionary”

arbitration provisions, most courts have apparently enforced the language as written.58

One argument against the enforceability of such provisions is that they are one-sided and

unreasonably favorable to the drafter to the point of being unconscionable.59

A unilateral

arbitration option has also been invalidated based on lack of mutuality and lack of

consideration.60

On the other hand, a subcontract provision that gave the general contractor

“at its sole option” the right to require the subcontractor to arbitrate disputes has been found

enforceable and not unconscionable.61

The impact of such clauses on multi-party disputes is that some parties can potentially compel

arbitration, and related joinder or consolidation, while other parties cannot. Such a regime can

start with the owner-contractor agreement and be incorporated by reference through lower tier

project agreements. The scenario leaves a subcontractor, for example, with little control or

predictability, and the decisions regarding arbitration or litigation can only flow downward. A

general contractor on the other hand, may see advantages in being able to control the

prospects of consolidation or joinder by controlling the choice of dispute resolution forum.

8. Dispute Review Boards

The Dispute Review Board (DRB) has been a useful tool for resolving disputes on some

construction projects. A typical example involves a three-member board appointed by the

owner and contractor to hear disputes arising during the project and issue non-binding

decisions that may become binding if not contested by either party. The American Arbitration

ZZ997:99950:119424:1:ATLANTA 28

Association posts a sample DRB agreement on its website, which contemplates a three-

member board conducting hearings and issuing a written report and recommendation on

disputes arising during a project. However, this dispute resolution tool is not without

enforcement problems.

In Los Angeles County Metropolitan Transp. Auth. v. Shea-Kiewit-Kenny,62

the California

courts dealt with a dispute between the owner and contractor over the owner’s removal of its

appointed representative on a DRB. The project involved construction of a tunnel segment of

the Los Angeles subway system. In accordance with the contract documents, the owner and

contractor each appointed one representative to the DRB and those appointees selected a third

member. The contract further provided that the DRB would consider disputes placed before

them by either party and provide written recommendations for settlement of the disputes.

Either party could reject the DRB’s recommendations by providing a timely notice of intent to

litigate the issues. All records and written recommendations of the DRB would be admissible

in subsequent litigation.

A dispute arose when the owner gave the contractor a termination notice based on the

discovery of a large sinkhole on Hollywood Boulevard. The contractor requested a DRB

hearing on the purported termination, and the owner claimed that the termination extinguished

the existence of the DRB. The DRB determined that it had authority to consider the dispute

and scheduled a hearing. The owner refused to attend and a hearing was held in the owner’s

absence, resulting in a decision that the termination was improper. The issue then went to

litigation.

The owner thereafter terminated for cause the DRB member that it had appointed. The

contractor objected and the owner filed a declaratory judgment action on the issue of whether

its removal for cause of its DRB appointee was proper. The trial court agreed with the owner

ZZ997:99950:119424:1:ATLANTA 29

and the contractor appealed. The appeal focused on what constitutes “cause” justifying

removal of a DRB member under the contract terms. The contractor argued that it must be the

same as the “cause” necessary to remove a judge. The court disagreed, finding that the DRB

was a creature of contract, not a constitutional or statutory entity. The court found that

“cause” meant a fair and honest reason in the exercise of good faith, and observed that

removal simply resulted in replacement with a new member, not destruction of the DRB.

Another consideration was whether the DRB appointee’s conduct would reasonably cause the

owner to lose confidence in its appointee, since confidence in the DRB members was essential

for the process to work. Thus, the court found that the owner had cause for removal of its

appointee based on the contractual prohibition against ex-parte communications, expression of

opinions during hearings and prejudging issues.

This case demonstrates potential enforcement issues with a DRB. A dispute as drastic as

termination may be beyond the scope of a contractual DRB to resolve. The irony is that the

parties wound up litigating over the entity they established to avoid litigation.

D. Contract Language to Avoid Enforcement Problems

There are numerous revisions and substitutions for typical dispute resolution clauses that can

address and perhaps avoid some of the typical enforcement problems discussed above. The

following revisions or substitutions to dispute resolution clauses are possible ways to address

problems such as refusal to mediate, consolidation of arbitration proceedings, joinder of non-

signatory parties, forum for mediation or arbitration, pre-hearing discovery, and similar issues.

1. Refusal to Mediate

The following alternate mediation clause can be used in Section 4.5 of the AIA A201

document to address timing, mediator section, location and delay:

Unless delay in initiating or prosecuting a Claim in litigation

would irrevocably prejudice the Owner or Contractor, any claim

ZZ997:99950:119424:1:ATLANTA 30

that is not resolved by direct discussions between the parties

shall be submitted to Mediation under the Construction Industry

Mediation Rules of the American Arbitration Association or

such other rules as the parties may promptly agree to employ. If

the Owner and Contractor cannot agree on the selection of a

mediator within ten (10) days of the request for Mediation,

either party may immediately request the appointment of a

mediator in accordance with the governing mediation rules.

Mediation shall occur at any location to which the parties and

mediator agree or, in the absence of agreement, at the location

of the Project.

The parties agree to conduct and conclude Mediation

proceedings under this paragraph within sixty (60) days from

the designation of the mediator. In the event that Mediation

proceedings do not resolve the claim within such period, either

party may initiate other means of dispute resolution with respect

to the claim.63

This clause helps to minimize disputes over mediation as a condition precedent, delay by an

obstructing party, and risk of waiver of the entire ADR process, by using time limits. If there

is no agreement on a mediator within 10 days, one is appointed. If the dispute is not resolved

by mediation in 60 days from appointment of a mediator, either party can proceed to the next

stage. A specification of forum or locale should probably be added to this clause.

Time limits can also be used in the “meet and confer” stage of dispute resolution. The

following clause may be used for this purpose:

Field Presentation’s Meeting: Within fifteen (15) days after a

dispute occurs, the Contractor’s senior project management

personnel shall meet with the Owner’s project representative in

a good faith attempt to resolve the dispute.

Management Representatives’ Meeting: If Contractor’s and

Owner’s project representatives fail to meet, or if they are

unable to resolve the dispute, a senior executive for Contractor

and for Owner, neither of which may have day-to-day Project

management responsibilities, shall meet, within thirty (30) days

after the commencement of the dispute, in an attempt to resolve

the dispute and any other identified disputes or any unresolved

issues that may lead to a dispute.

ZZ997:99950:119424:1:ATLANTA 31

If the senior executives of Contractor and Owner are unable to

resolve a dispute or if a senior management conference is not

held within the time provided herein, either party may make

written demand on the other party for mediation by an

independent mediator.64

2. Joinder and Consolidation in Arbitration

The following clause may be used in an owner-contractor agreement on design-bid-build or

design-build projects to provide for the right to join other parties in an arbitration or other

dispute resolution process:

At either party’s option, third parties may be joined in any of the

dispute resolution processes listed above, by consolidation,

joinder or otherwise, who are subject to a valid alternative

dispute resolution agreement with the party seeking joinder of

such third-party.65

An advantage of this clause is its applicability to all dispute resolution processes used in the

contract: mediation, arbitration or litigation. The reach of this clause could be extended to

subcontracts and sub-consultant agreements by use of the following “flow-down” clause:

Subcontractor agrees to be bound to the Contractor by all the

terms of the Agreement between the Contractor and Owner and

the Contract Documents thereto (except for the payment

provisions of the Owner-Contractor Agreement which are

specifically excluded from the scope of this Subcontract), and

assumes toward the Contractor and the Owner all the obligations

and responsibilities that the Contractor, by those instruments,

assumes toward the Owner.

Typical “flow-down” clauses are also found in the AIA A401 document (section 2.1) and the

AGC 650 document (section 3.1). The AIA A201 document (section 5.3.1) provides that the

contractor will include such a provision in its subcontracts.

Use of a “pass-through” clause in subcontracts is another method of joining necessary parties

in one dispute resolution process. The following clause may be used in subcontracts as a

ZZ997:99950:119424:1:ATLANTA 32

“pass-through” agreement requiring the contractor to pursue claims promptly on behalf of the

subcontractor against the owner:

Contractor shall, within ten (10) working days after receipt of

action from Owner on a claim containing Subcontractor’s Claim

give notice to Subcontractor. If Subcontractor does not agree

with Owner’s action, Subcontractor may direct Contractor to

pursue its Claim against Owner, in accordance with the Contract

Documents, and Contractor shall take said action if

Subcontractor agrees to be responsible for its pro rata share of

the costs associated with pursuing the Claim against Owner. If

Contractor complies with this provision, it shall not be

independently liable to Subcontractor for Subcontractor’s

claim.66

The following clause may be used for allocation of costs between contractor and subcontractor

in the joint presentation of claims:

When Contractor pursues a claim against the Owner or its

agents that incorporates any claim on behalf of Subcontractor,

each party shall pay the fees of any mediator or arbitrator and

the cost of the dispute resolution proceedings in proportion to

the amount of the party’s respective claim. If Contractor and

Subcontractor participate in a legal proceeding to resolve issues

between them that do not involve the owner, each party shall

share equally in paying the bills of mediators or arbitrators and

of any service administering the dispute process. As part of a

final award, the arbitrator may require the party it deems

unsuccessful to reimburse the costs and fees charged by

mediators and/or arbitrators. Each party will, however, remain

responsible for its owner attorneys’ fees and costs, if any, and

no award for a party’s costs and attorneys’ fees shall be made

unless provided for in the Contract Documents.67

The following alternate clauses may be used in Section 4.6 of the AIA A201 document to

address consolidation and joinder issues:

Consolidation. To the extent not prohibited by the Owner’s or

Contractor’s agreements with third parties, disputes or Claims

with third parties involving common questions of fact or law

shall be addressed in the same ADR proceeding.

ZZ997:99950:119424:1:ATLANTA 33

Joinder. The American Arbitration Association may join to any

arbitration under this Agreement an entity not a party to this

Agreement or other arbitrations involving this Project who has

consented to such joinder, if such joinder is necessary to a

complete resolution of any common issues of law or fact. The

award rendered by the arbitrators will be final and not subject to

appeal, and judgment may be entered upon it in any court

having jurisdiction thereof.68

The following alternate clause can be employed in Section 7.2 of the AIA B151 document

(Owner-Architect Agreement) to facilitate joinder:

The Architect waives all objections to joinder of the Architect as

a party to any mediation, arbitration or litigation related to this

Project in which the Owner is joined or is otherwise positioned

as a party and in which the Architect’s conduct or performance

of professional services is in any way relevant to the subject of a

dispute. The Architect also agrees to prepare or modify all

documents used or prepared by the Architect, including but not

limited to agreements between the Architect and his

Consultants, Agreements between the Owner and other parties,

and any General and Supplemental Conditions for Construction

for this Project, to reflect this waiver.69

The following alternate clauses could be used in Article 6 of the AIA A401 document

(Subcontract) to facilitate consolidation or joinder:

Any claim arising out of or related to this Subcontract or the

breach thereof, except claims as otherwise provided in

Subparagraph 4.1.5 and except those waived in this

Subcontract, shall be settled according to the dispute resolution

procedures in the Prime Contract.

For a dispute that involves the Subcontractor’s work, in whole

or in part, the Subcontractor shall be bound by the outcome of

the dispute resolution procedure.

The Contractor shall pay the Subcontractor the amount of the

proportionate share of any recovery due the Subcontractor on

the basis of the ratio of the Subcontractor’s claims to other

claims that are asserted, less the expenses and attorneys fees of

the procedures, provided the Subcontractor’s claims and other

claims are substantially similar and reasonably justified as to

merit and actual costs incurred as determined by the Contractor.

The Subcontractor shall pay the Contractor its proportionate

share of a recovery by the Owner against the Contractor

ZZ997:99950:119424:1:ATLANTA 34

involving the Subcontractor’s work or materials and pay the

Contractor its proportionate share of the expenses and attorneys

fees incurred in defending such Owner claim against the

Contractor.

All claims, disputes and other matters in question between the

Subcontractor and the Contractor arising out of or related to the

Subcontract or the breach thereof, except as specifically

governed by the foregoing provisions, and except for claims

that have been waived by the making and acceptance of final

payment, may be mediated by the parties in accordance with the

Construction Industry Mediation Rules of the American

Arbitration Association then in effect or decided by arbitration

in accordance with the Construction Industry Arbitration Rules

of the American Arbitration Association then in effect at the

sole option of the Contractor. If a request for mediation or

demand for arbitration is filed by the Subcontractor, the

Contractor will advise the Subcontractor within thirty (30) days

after the receipt of such a request for mediation or a demand for

arbitration if the Contractor exercises the option to mediate or

arbitrate or rejects mediation or arbitration or both; such

election, once made, shall be binding. The filing of a request

for mediation by the Contractor shall be deemed an election to

mediate and shall constitute the exercise of the option of the

Contractor to proceed with mediation. The filing of a demand

for arbitration by the Contractor shall be deemed an election to

arbitrate and shall constitute the exercise of the option of the

Contractor to proceed with arbitration. The Contractor may

join or consolidate mediation or arbitration with the Owner,

Architect, any other Subcontractor, surety, insurer or any other

party having an interest in the proceedings. The Subcontractor

hereby consents to such joinder or consolidation, which may be

ordered at the sole discretion or election of the Contractor. This

agreement to mediate or arbitrate shall be specifically

enforceable under applicable law in any court having

jurisdiction thereof. Any award rendered by arbitration shall be

final, and judgment may be entered upon it in accordance with

the applicable law in any court having jurisdiction thereof.70

The following alternate clause is similarly suitable for use in the AIA A401 Subcontract, but

is more from the subcontractor’s perspective:

The Contractor shall give the Subcontractor prompt written

notice of any demand received or made by the Contractor for

arbitration if the dispute involves or relates to the Work,

materials, equipment, rights or responsibilities of the

Subcontractor. The Contractor shall consent to inclusion of the

Subcontractor in the arbitration proceeding, whether by joinder,

consolidation or otherwise, if the Subcontractor requests in

ZZ997:99950:119424:1:ATLANTA 35

writing to be included within ten (10) days after receipt of the

Contractor’s notice.71

3. Forum/Locale Battles

An enforceable forum selection clause can help avoid venue disputes in multiparty dispute

resolution. The enforceability of a forum selection clause is generally enhanced by specifying

the location of the project. Parties are generally subject to jurisdiction, state law restrictions

are mollified, and an action to compel arbitration can likely be brought in that judicial district.

The following clauses may be used to reduce the likelihood of problems with enforceability

based on an objectionable or flawed venue provision:

Any disputes concerning the enforceability or scope of the

arbitration clause shall be resolved pursuant to the Federal

Arbitration Act, 9 U.S.C. § 1 et seq. (FAA), and the

[contractor/subcontractor] acknowledges that, notwithstanding

any contrary language in this Agreement, the FAA preempts any

state law restrictions on the enforcement of the arbitration clause

in this Agreement according to its terms, including any

restrictions on the site of the arbitration.

In the event that any provision of this arbitration agreement is

unenforceable, that provision is severable from the remainder of

this arbitration clause, and the balance of the arbitration

agreement shall remain in full force and effect. In addition, any

ruling invalidating any other portion of the Agreement shall not

affect the validity of this arbitration clause.72

4. Litigation, Discovery

Some practitioners avoid arbitration under certain circumstances. For example, the prospect

of expensive litigation can be seen as enhancing the success of negotiation or mediation. An

owner may prefer the court system for the prospect of summary judgment on contract terms,

such as waiver due to untimely notice. A contractor may have the same preference regarding

enforcement of subcontract terms. Opponents of arbitration may cite such “drawbacks” as

ZZ997:99950:119424:1:ATLANTA 36

failure of arbitrators to be sufficiently bound by facts or law, limited grounds for appellate

review, problems with joinder of necessary parties, ineffective subpoena power and limited

discovery.73

In such circumstances, the following clause can be used to provide for resolution of disputes

by litigation and to delete any reference to ADR:

Notwithstanding any other provision in the Contract

Documents, the parties agree that all disputes arising out of or

related to the Project shall be resolved through litigation. The

parties further agree that the sole and exclusive forum for such

litigation shall be [insert venue.] All references in the Contract

Documents to dispute resolution procedures other than litigation

are hereby deleted.74

Some objections to arbitration can be addressed by simply including additional language in

the ADR clause. For example, larger projects involving disputes of greater complexity and

dollar value may merit more extensive discovery, but also benefit from the expertise of

arbitrators familiar with the industry. The following clause may be used to provide for the

type and extent of discovery in arbitration:

Each party shall produce all documents relevant to the dispute

not less than thirty (30) days after the demand for arbitration has

been filed. The documents provided to the other party shall

include reports of any experts who may testify, in person or by

affidavit, at the arbitration proceedings. An expert’s report shall

set forth all opinions of the expert and the factual basis for the

opinions. Any document not provided to the other party in

compliance with this provision may not later be introduced in

the arbitration proceedings and any expert whose report is not

given to the other party, as provided herein, shall not be allowed

to testify in the arbitration proceedings.

Each party shall be entitled to depose no more than ___ (___)

fact witnesses for no longer than ___ (___) hours each. Each

party shall be entitled to depose any and all retained expert

opinion witnesses for no longer than ___ (___) hours each. All

discovery disputes shall be decided by the arbitrator(s). The

arbitrator(s) may modify these discovery limitations for good

cause shown.75

ZZ997:99950:119424:1:ATLANTA 37

The following alternate clause may be used in the AIA A201 document to address the issue of

pre-hearing discovery:

The parties shall be entitled to discover all documents and

information reasonably necessary for a full understanding of

any legitimate issue raised in the arbitration. Parties may use

all methods of discovery available under the Federal Rules of

Civil Procedure and shall be governed thereby. Prior to the

deposition of any expert witness, the party proposing to call

such a witness shall provide a full and complete report by the

expert, together with the expert’s calculations and other data by

which the expert reached any opinions concerning the subject

matter of the arbitration. The report shall be provided no more

than ten (10) days prior to the date set forth in the expert

witnesses’ deposition.76

5. Enforceability

The following alternate provision may be used in the AIA A201 document to address

enforceability of the arbitration clause:

This consent to arbitrate and any other agreement or consent to

arbitrate entered into in accordance herewith as provided in

Paragraph 4.6 will be specifically enforceable under the

prevailing arbitration law of any court having jurisdiction.77

1 Adrian Bastianelli, Litigating with the Federal Government, ABA Forum 2000 Annual Meeting (May

200); 5 U.S.C. §§ 571 et seq. 2 Id.

3 Daniel S. Brennan, et al. The Construction Contracts Book, Chap. 8 “Dispute Resolution”, p. 75

(American Bar Ass’n 2004). 4 Daye Nonferrous Metals Co. v. Trafigura Beheer, 1997 U.S. Dist. LEXIS 9661 (S.D. N.Y. 1997).

5 DeGroff v. Masco Tech Forming Technologies Fort Wayne, Inc., 179 F. Supp. 2d 896 (N.D. IN.

2001); Semco, LLC v. Ellicott Machine Corp, Int’l., 1999 WL 493278 (E.D. LA. 1999); Ponce

Roofing, Inc. v Roumel Corp., 190 F. Supp. 2d 264 (D. Puerto Rico 2002); Jenks v. Workman, 2000

WL 962821 (S.D. IN 2000). 6 Blue Cross & Blue Shield of Texas v. Dimark Marketing, Inc., 1997 WL 405169 (N.D. TX 1997);

Cumberland & York Distributors v. Coors Brewing Co., 2002 WL 193323 (D. ME, 2002); Welborn

Clinic v. Medquist, Inc., 301 F.3d 634 (7th

Cir. 2002). 7 HIM Portland, LLC v. DeVito Bldrs., 317 F.3d 41 (1

st Cir. 2003); Kemiron Atlantic v. Aguakem Int’l.,

Inc., 290 F.3d 1287 (11th

Cir. 2002). 8 See, Note & Comment: Should mediation trigger arbitration in multi-step alternative dispute

resolution clauses?, 15 Am. Rev. of Int’l. Arb. 162 (2004). 9 Howsam v. Dean Witter Reynolds, 537 U.S. 79 (2002); John Wiley & Sons, Inc. v David Livingston,

376 U.S. 543 (1964). 10

Thomas J. Stipanowich, Of Procedural Arbitrability: The Effect of Noncompliance With Contract

Claim Procedures, 40 S.C.L. Rev. 847, 860 (1989); AT&T Technologies, Inc. v. Communications

ZZ997:99950:119424:1:ATLANTA 38

Workers of America, 475 U.S. 643 (1986); Moses Cone Memorial Hosp. v. Mercury Constr. Corp.,

460 U.S. 1, 24-25 (1983); Stroh Container Co. v Delphi Indus., Inc., 783 F.2d 743 (8th

Cir. 1986). 11

The RUAA has been adopted by the following states as of August 31, 2005: Alaska, Colorado,

Hawaii, Nevada, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Utah and Washington.

Legislation has been introduced or proposed for adoption of the RUAA in Arizona, Maryland,

Vermont, Connecticut, Indiana, Iowa, Massachusetts, West Virginia, and District of Columbia. For

other considerations in drafting arbitration clauses, including joinder, consolidation and enforcement

pursuant to the RUAA, see John C. Fleming, “A Few Things to Know about the Revised Uniform

Arbitration Act,” Commercial & Business Litigation, Vol. 7, No. 2 (Winter 2006). 12

See e.g., Federated Dept. Stores, Inc. v. Pavarini Constr. Co., 425 So.2d 1212 (Fla. 4th

DCA 1983;

Wise v. Tidal Constr Co., Inc., 261 Ga. App. 670, 583 S.E.2d 466 (2003). 13

276 F. Supp. 2d 891 (M.D. Tenn. 2003) 14

Id. at 893, citing Bakers Union Factory, #326 v. ITT Continental Banking Co., Inc., 749 F.2d 350,

353 (6th

Cir. 1984). 15

C.B. Richard Ellis, Inc. v. American Environmental Waste Mgmt, 1998 U.S. Dist. LEXIS 20064,

1998 WL 903495 (E.D. N.Y. 1998). 16

Symposium Article: Mediating in the Shadow of the Courts: A Survey of the Emerging Case Law,

54 Ark. L. Rev. 171 (2001); Dept. of Transp. v. City of Atlanta, 380 S.E.2d 265, 268 (Ga. 1989). 17

E.g., Avril v Civilmar, 605 S.2d 988 (Fla. DCA 1992); Texas Parks & Wild Life Dept. v. Davis, 988

S.W.2d 370 (Tex. App. 1999); but see, Texas D.O.T. v. Pirtle, 977 S.W.2d 657 (Tex. App. 1998). 18

John Bickerman, Don’t Get Caught Shorthanded: Include All Players in Construction Defect

Mediation, 13 Constr. 6 (Summer 2004). 19

See F.R.C.P. 18, 19, 20. 20

998 F.2d 68 (2nd

Cir. 1993). 21

Andrew Ness and David Peden, Arbitration Developments – Defects & Solutions, ABA Forum 2002

Annual Meeting (April 2002); Consolidated Pac. Eng’g, Inc. v. Greater Anchorage, 563 P.2d 252

(Alaska 1977); Louisiana Stadium & Exposition Dist. v. Huber, Hunt & Nichols, Inc., 349 So.2d 491

(La. Ct. App. 1977); Bay County Bldg. Auth. v. Spence Bros., 140 Mich. App. 182, 362 N.W.2d 739

(1984); Pueblo of Lagunna v. Cillessen & Son, Inc., 101 N.M. 341, 682 P.2d 197 (1984); Hjelle v.

Sornsin Constr. Co., 173 N.W.2d 431 (N.D. 1970); Ashland City Sch. Dist. Bd. of Educ. v. Ashland

City Teachers Ass’n, 1997 Ohio App. LEXIS 2337 (Ohio Ct. App. 1997); Balfour, Guthrie & Co. v.

Commercial Metals Co., 93 Wash. 2d 199, 607 P.2d 856 (1980); Bateman Constr, Inc. v. Haitsuka

Bros., Ltd., 77 Haw. 481 889 P.2d 58 (1995). 22

Litton Bionetics, Inc. v. Glen Constr. Co., 292 Md. 34, 437 A.2d 208 (1981); Grover-Dimond Assoc.

v. American Arb. Ass’n, 297 Minn. 324, 211 N.W.2d 787 (1973); Exber, Inc. v. Sletten Constr. Co., 92

Nev. 721, 558 P.2d 517 (1976); William Blanchard Co. v. Beach Concrete Co., 150 N.J. Super. 277,

375 A.2d 675(App. Div. 1977); County of Sullivan v. Nezelek, Inc., 42 N.Y.2d 123, 366 N.E.2d 72,

397 N.Y.S.2d 371 (1977); School Dist of Philadelphia v. Livingston-Rosenwinkel, P.C., 690 A.2d 1321

(Pa. Commw. Ct. 1977); Children’s Hosp. of Phila. v. American Arb Ass’n 231 Pa. Super. 230, 331

A.2d 848 (1974). 23

Cal. Civ. Proc. Code §§ 1281.3; Mass. Ann. Laws. ch. 251, § 2A; O.C.G.A. § 9-9-6; S.C. Code Ann.

§ 15-48-60; N.J. Stat. § 2A: 23B-10. 24

Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125 (2nd

Cir. 2003). 25

473 F.2d 212 (5th

Cir. 1973). 26

6 Cal. App. 4th

1266, 8 Cal. Rptr. 2d 587 (2d Dist. 1992). 27

742 F.2d 274 (6th

Cir. 1984). 28

58 Mass. App. 786, 792 N.E.2d 1013 (2003). 29

346 Md. 122, 695 A.2d 153 (1997). 30

760 F.Supp. 1479 (S.D. Ala. 1991). 31

10 F.3d 753 (11th

Cir. 1993), cert. den. 513 U.S. 869 (1994). 32

741 F.2d 342 (11th

Cir. 1984). 33

176 S.W.3d 740 (Tex. 2005). 34

166 S.W.3d 732, 741. 35

135 S.W.3d 605 (Tex. 2004).

ZZ997:99950:119424:1:ATLANTA 39

36

321 U.S. 730, 737-38 (1944). 37

99 Ct. Cl. 435, 444 (1943). 38

Interstate Contracting, at 613-614. 39

261 N.J. Super. 277, 618 A.2d 886 (App. Div. 1993). 40

Thomas J. Stipanowich, Arbitration and the Multiparty Dispute: The Search for Workable

Solutions, 72 Iowa L. Rev. 473, 483-488 (March 1987). 41

See e.g., Ford Motor Co. Ltd. v. Gorthon, 397 F.Supp. 1332 (D. Md. 1975); J.F. Inc. v. Vicik, 99 Ill.

App. 3d 815, 426 N.E. 2d 257, 260 (1981); County of Jefferson v. Barton-Douglas Contractors, Inc.

282 N.W.2d 155, 158-59 (Iowa 1979); Prestressed Concrete, Inc. v. Adolfson & Peterson, Inc. 308

Minn. 20, 24, 240 N.W.2d 551, 553 (1976); Rosenthal v. Berman, 14 N.J. Super. 348, 352, 82 A.2d

455, 457 (App. Div. 1951); GAF Corp v. Werner, 106 A.D.2d 41, 46, 484 N.Y.S.2d 12, 16(1985) 42

Bowes v. International Pharmaken Laboratories, Inc., 111 Mich. App. 410, 314 N.W.2d 642 (1981);

Charles J. Frank, Inc. v. Associated Jewish Charities of Baltimore, 294 Md. 433, 450 A.2d 1304

(1982); Galt v. Libby-Owens-Ford Glass Co., 376 F.2d 711 (7th

Cir. 1967); Travel Consultants, Inc. v.

Travel Mgmt Corp., 367 F.2d 334 (D.C. Dir. 1966); Atlas Plastering, Inc. v. Superior Court, 72 Cal.

App. 3d 63, 140 Ca. Rptr. 59 (1977); Town of Danvers v. Wexler Constr. Co., 422 N.E.2d 782 (Mass.

App. Ct. 1981); Manchester Township Bd of Educ. v. Thomas P. Carney, Inc., 199 N.J. Super. 266,

589 A.2d 682 (App. Div. 1985); Stillwater Leased Housing Assocs. v. Kraus-Anderson Constr. Co.,

319 N.W.2d 424 (Minn. 1982). 43

Stipanowich, Arbitration and the Multiparty Dispute, 72 Iowa L. Rev. 473, 487 (March 1987). See,

e.g., McBro Planning & Dev. Co. v. Triangle Elec. Constr. Co., 741 F.2d 342, 349 (11th

Cir. 1984);

Hughes Masonry Co. v. Greater Clark County School Bldg. Corp., 659 F.2d 836, 838-39 (7th

Cir.

1981); IC. Itoh & Co. v. Jordan Int’l Co., 552 1228, 1231 (7th

Cir. 1977); Acevedo Maldonado v. PPG

Indus, 514 F.2d 614, 616 (1st Cir. 1975); Hamilton Life Ins. Co. v. Republic Nat’l Life Ins. Co., 408

F.2d 606, 609 (2d Cir. 1969); Hilti, Inc. v. Oldach 392, F.2d 368, 370-71 (1st Cir. 1968); Wilko v.

Swan, 201 F.2d 439, 445 (2d Cir.) rev’d on other grounds 346 U.S. 427 (1953); Martin K. Eby Constr.

Co. v City of Arvada, 599 F. Supp. 449, 450 (D. Colo. 1981); Schulman Inv. Co. v. Olin Corp. 458 F.

Supp. 186, 188 (S.D.N.Y 1978); Lawson Fabrics, Inc. v. Akzona, Inc., 355 F. Supp 1146, 1148

(S.D.N.Y. 1973). 44

460 U.S. 1 (1983). 45

460 U.S. at 20. 46

407 U.S. 1 (1972). 47

Mitsubishi Motors v. Solar Chrysler-Plymouth¸ 473 U.S. 614 (1985); Carnival Cruise Lines, Inc. v.

Shute, 499 U.S. 585 (1991). 48

150 F.3d 157 (2nd

Cir. 1998). 49

Management Recruiters Int’l., Inc. v. Bloor, 129 F.3d 851 (6th Cir. 1997); M.C. Constr. Corp. v.

Gray Co., 17 F. Supp. 2d 541 (W.D. VA 1998). 50

817 F.2d 326 (5th

Cir. 1987) cert. den. 108 S.Ct. 329 (1987). 51

Prima Paint Corp. v. Flood & Conklin, 388 U.S. 395 (1967). 52

E.g., Yoder v. Heinold Commodities, Inc., 630 F. Supp. 756 (E.D. Va. 1986). 53

Steven Welhouse and Paule Lurie, “Ansari: Problems with Forum Selection Arbitration Clauses”,

UNDER CONSTRUCTION, ABA Forum Newsletter (August 2005). 54

9 U.S.C. § 4. 55

2005 WL 1625225 (10th

Cir. 2005). 56

524 F.2d 1275 (5th

Cir. 1975). 57

240 F.3d 781 (9th

Cir. 2001). 58

Adam Nahmias, The Enforceability of Contract Clauses Giving One Party the Unilateral Right to

Choose between Arbitration and Litigation, 21 Constr. Lawyer 36 (Summer 2001); Barker v Gulf USA,

Inc., 154 F.3d 788 (8th

Cir. 1998); Doctors Assocs., Inc. v. Distajo, 66 F.3d 438 (2nd

Cir. 1995). 59

Iwen v. U.S. West District, 977 P.2d 989 (Mont. 1999). 60

Stevens/Leinweber/Sullens, Inc. v. Holm Dev. & Mgmt., Inc., 795 P.2d 1308 (Ariz. Ct. App. 1990). 61

Willis Flooring, Inc. v. Howard S. Lease Constr. Co., 656 P.2d 1184 (Ak. 1983). 62

59 Cal. App. 4th

676, 69 Cal. Rptr. 2d 431 (1997). 63

Glower W. Jones, Alternate Clauses to Standard Construction Contracts, p. 403 (2d Ed. 1988).

ZZ997:99950:119424:1:ATLANTA 40

64

Brennan, The Construction Contracts Book, Chap. 8 “Dispute Resolution”, p. 80 (American Bar

Ass’n 2004). 65

Brennan, et al., The Construction Contracts Book. Chap. 8 “Dispute Resolution”, p. 81 (American

Bar Ass’n 2004). 66

Brennan, et al., The Construction Contracts Book, Chap. 8 “Dispute Resolution”, p. 79-80

(American Bar Ass’n 2004). 67

Brennan, et al., The Construction Contracts Book, Chap. 8 “Dispute Resolution”, p. 80-81

(American Bar Ass’n 2004). 68

Jones, Alternate Clauses to Standard Construction Contracts, pp 288, 405 (2d Ed. 1988) 69

Id. at 92. 70

Id. at 636-638. 71

Id. at 770. 72

Kevin Kennedy “Drafting an Enforceable Franchise Agreement Arbitration Clause”, 22 Franchise

L.J. 122 (Fall 2002). 73

Brennan, et al., The Construction Contracts Book, Chap. 8 “Dispute Resolution”, p. 67 (American

Bar Ass’n 2004). 74

Brennan, et al., The Construction Contracts Book, Chap. 8 “Dispute Resolution”, p. 82 (American

Bar Ass’n 2004). 75

Id. at 81. 76

Jones, Alternate Clauses to Standard Construction Contracts, p. 289 (2d Ed. 1988). 77

Id. at 287.