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Litigation Update: Arbitration issues

Werner11headshot LAW
Werner Sabo, FAIA, CSI
Arbitration is an important topic in construction. Standard-form contracts used in the construction industry, such as the American Institute of Architects (AIA) documents, specifically reference the possible use of arbitration, although the parties may have to check a box on a form to make this the final dispute resolution process. Every year, several reported construction cases revolve around arbitration issues. This article examines a few recent cases discussing situations where one party claimed it was not required to arbitrate.

Under what circumstances can a party who did not sign the agreement containing the arbitration clause be compelled to arbitrate? In WBCM LLC v. BCC Properties LLC (2016 WL 5122310 [Ct.Spec.App.MD Sept. 21, 2016]), the owner contracted with a design-builder, WBCM-CS, to design and build an office and maintenance facility. The contract was a design-build agreement, AIA A131 CMc-2003, Standard Form of Agreement Between Owner and Construction Manager Where the Construction Manager is also the Constructor and Where the Basis of Payment is the Cost Plus a Fee without a Guarantee Maximum Price, which incorporated A201-1997, General Conditions of the Contract for Construction, and identified the architect as WBCM.

Apparently, the owner did not sign a separate agreement with the architect. The architectural firm and design-builder are separate legal entities, although closely related. After a dispute arose, the owner filed two demands for arbitration—one against each of these entities. The architectural firm filed a court petition alleging:

  • it was not a party to the agreement with the owner;
  • the owner was not a third-party beneficiary of the contract between the architect and design-builder; and
  • the architect did not consent to arbitrate.

The issue for the court was whether the architect was equitably estopped to refuse to arbitrate the dispute if it directly benefitted from the contract to which the owner was a party. The court found in the affirmative, but the appellate court reversed, finding in favor of the architect. Here, the architect was neither a signatory to the contract nor the party seeking relief under the contract. Equitable estoppel would apply if the non-signatory were attempting to enforce provisions of the contract. That was not the case where the contract expressly excluded the architect from any arbitration.

In Schneider Electric Building Critical Systems Inc. v. Western Surety Company (2016 WL 6996290 [Ct. App. MD, Nov. 30, 2016]), the issue was whether the surety that issued a performance bond on behalf of a subcontractor was required to arbitrate. The contract between the general and sub required the latter to provide a performance bond, which it did. Later, the sub refused to perform some work, and the general filed a demand for arbitration against the sub and another against the surety.

The surety wanted to litigate the matter and not arbitrate. It argued it did not sign any agreement to arbitrate. However, the bond incorporated the subcontract, which, in turn, incorporated the general contract containing an arbitration clause. Although there are several older cases that would require the surety to arbitrate, the court in this case held the mere incorporation by reference of a contract containing an arbitration clause did not obligate the issuer of that bond to arbitrate.

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