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New AIA documents and Arbitration

Much is being written about the 2007 AIA Documents, which were released in early November. One of the much-discussed differences in these documents is the fact that arbitration is no longer the default dispute resolution mechanism, being replaced by a "check-box" system whereby three options are provided: arbitration, litigation and "other." If none of the boxes is checked, then litigation is the default mechanism, following mandatory mediation.

It was with great interest that I opened the new documents using the AIA's Electronic Documents software system. I immediately printed out several of the new documents, including various owner-architect agreements and an owner-contractor agreement. At this point, I had not filled in anything. I was, therefore, astonished to find that the "arbitration" box had been checked on all of the documents where that option appeared. Thinking that I had made some type of mistake, I again started a brand new document and made sure not to check anything.  Once again, the arbitration choice was checked.

I mentioned this to several other people, one of whom apparently has a friend that worked on the electronic version of the documents, and I was informed (this was third or fourth-hand) that the reason this had occurred was that one of the boxes had to be initially checked in order to make the program work, and that the AIA did not favor arbitration. (note that I did not actually speak to this person directly, so I can't vouch for what was actually said). After thinking about this for about half a second, I realized that they could just as easily have selected the "litigation" check box as the one that was initially selected by the software, particularly as that choice is supposed to be the default.

The reason I bring this up is not to blame the AIA for anything. After all, arbitration was the preferred method in the AIA documents for decades. And, the paper documents do not have anything pre-checked. However, most users today are using the electronic documents and may not be aware that they actually need to check the litigation box if that is what they intend. If they just read the articles that claim that litigation is the automatic "default," they may not even look at this provision when drafting the documents if they actually want to have litigation as the real default. They may be surprised years later to receive a demand for arbitration. If they are attorneys, they may be open to a claim for legal malpractice if their client insisted on not using arbitration and they relied on the "default" litigation story.

Perhaps the real lesson is to always read every word of every contract.

Optional Arbitration clause

In Higley v. N/S Corporation, 2006 WL 985753 (6th Cir., April 17, 2006), the contract contained this arbitration clause:  “Should [N/S] and [Higley] be unable to resolve said dispute(s) through mediation, any and all dispute(s), at the sole discretion of [Higley], shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association." Higley filed suit and N/S sought to compel arbitration. The trial court denied the motion to compel and the Sixth Circuit affirmed, finding that a contract that gives one party the option to pick either arbitration or litigation will be upheld.

Termination of contract bars arbitration

Thanks to the Construction Owners and Builders Law Blog for this case. In Aberdeen Golf & Country Club v. Bilss Construction, the owner terminated the contractor prior to completion of a $2 million project. The contractor filed suit and the owner demanded arbitration pursuant to the parties' AIA contract. The  court held that termination of the contract terminated the arbitration provision, or, alternatively, that there had been a waiver.

The arbitration provision is interpreted and enforced as a part of a contract and does not stand on its own. If the contract is repudiated, the repudiating party cannot avail itself of the very contract it has repudiated. This certainly makes sense, but appears to be at odds with the majority of the courts that want to enforce arbitration at any cost.

California: No contractual jury waiver

The California Supreme Court, on August 4, 2005, in Grafton Partners v. Pricewaterhousecoopers, held that a waiver of a right to a jury trial contained in a contract was not enforceable. The California Constitution states:

Trial by jury is an inviolate right and shall be secured to all, but in a civil cause three-fourths of the jury may render a verdict. A jury may be waived in a criminal cause by the consent of both parties expressed in open court by the defendant and the defendant’s counsel. In a civil cause a jury may be waived by the consent of the parties expressed as prescribed by statute.

The applicable statute lists 6 grounds for waiving a jury trial, none of them including a pre-dispute contractual provision. An attempted analogy to agreements to arbitrate failed because arbitration is permitted by statute, and because an agreement to arbitrate means that the parties are not submitting their controversey to a court of law in the first instance. The court held that, "unless the legislature prescrives a jury waiver method, we cannot enforce it."

The court also reviewed the laws of other jurisdictions, noting that New York enforces predispute jury waivers and that the applicable California statutes were modeled on New York law, but declined to follow New York.

The concurring opinion noted that only one other supreme court -- Georgia -- would not allow predispute waivers of a right to a jury.

These types of waivers are usually seen in contracts where there is a disparity in bargaining positions. Often, these are take-it-or-leave-it propositions. It will be interesting if courts in other states continue to side with the big corporations or help the little guy by adopting this California approach.

No Arbitration for Aesthetic Effect

A recent South Dakota case, Flandreau Public School District v. GA Johnson, 2005 WL 1663791 (July 13, 2005) held that, because of certain provisions found in AIA Document A201, the General Conditions, the contractor could not enforce the mediation and arbitration provisions of the contract. A dispute arose over the appearance of the interior walls of the building and the school sued the general. When the general moved for ADR, the court found that, because the dispute concerned aesthetics, the mediation and arbitration provisions did not apply, based on the following provision:

4.5.1 Any Claim arising out of or related to the Contract, except Claims relating to aesthetic effect ... shall be subject to mediation as a condition precedent to arbitration or the institution of legal or equitable proceedings by either party.

The court held the dispute primarily revolved around issues of aesthetics, thereby triggering the exception. The case apparently will be decided by the trial court instead of an arbitrator. However, nowhere in the decision is another provision of A201 set forth:

4.2.13 The Architect’s decision on matters relating to aesthetic effect will be final if consistent with the intent expressed in the Contract Documents.

This provision would seem to render the entire case moot if the architect made a decision on the claim. It was unclear as to whether the architect in this case actually rendered a decision on the aesthetic issues. It is likely other courts would not follow this case since arbitration is overwhelmingly favored and the exception would do away with arbitration of potentially significant issues. The AIA provision concerning aesthetic effect is not directed at major issues—rather, it is intended for smaller, aesthetic issues that involve little or no money. Of course, A201 does not make this clear. One option for architects is to simply eliminate this exception from the AIA document, thereby taking themselves out of these controversies.

Supreme Court Revisits Prima Paint

On June 20, 2005, the United States Supreme Court agreed to hear the Florida case of Buckeye Check Cashing Inc., v. Cardegna (04-1264).  The Florida Supreme Court's decision in that case will be reviewed in which that court determined that the court, not the arbitrator, must initially determine the validity of an arbitration clause in a contract alleged to be illegal. This is an opportunity to have this issue cleared up, since courts have treated this issue in different ways. If the underlying contract itself is invalid or illegal, then why should an arbitration clause in that contract be upheld?

Arbitrator's Change of Award Upheld

The Colorado Supreme Court upheld an arbitrator's changed award as a clarification in Sooper Credit Union v. Sholar Group Architects (June 13, 2005). The arbitrator held for the petitioner, but the award was internally inconsistent. When the award was issued, the petitioner asked the court to order the arbitrator to correct the award, and the respondent asked for confirmation. The court sent the matter back to the arbitrator who corrected the award. The initial error was not apparent from the face of the award. Initially, the arbitrator had awarded the Respondent some $200,000. The corrected award was for $223,000 in favor of the Petitioner, a swing of over $400,000.  The trial court confirmed the award. Respondent appealed, arguing that the arbitrator exceeded his authority by modifying the initial award and redetermining the merits. The appellate court reversed. The Colorado Supreme Court reversed and reinstated the amended award. An ambiguity need not be apparent on the face of the award, and it is up to the arbitrator to determine if an ambiguity exists. This was not a redetermination of the merits.

Arbitration: Email Satisfies Writing Requirement

According to the National Arbitration Forum Blog:

A federal appeals court has ruled for the first time that sending an e-mail satisfies the writing requirement of the Federal Arbitration Act for the purpose of forming a binding and legally enforceable agreement to arbitrate, according to counsel on the case.

In a case that sets new parameters for electronic contracts, the U.S. Court of Appeals for the First Circuit said the Electronic Signatures in Global and National Commerce Act -- known as the "E-Sign Act" -- establishes that electronic writing can form a legally binding contract and meets the FAA's condition that arbitration agreements be put on paper.

The E-Sign Act "prohibits any interpretation of the FAA's 'written provision' requirement that would preclude giving legal effect to an agreement solely on the basis that it was in electronic form," the First Circuit said in its May 23 opinion in Roderick Campbell v. General Dynamics Government Systems Corporation (No. 04-1828).

Texas Supreme Court orders Arbitration under the FAA

The Texas Supreme Court in a recent opinion in In re Nexion Health held that the FAA trumped the Texas Arbitration Act. In this case, the fact that Medicare payments were made invoked Interstate Commerce, thus triggering the FAA. After the trial court denied a motion to compel under the TAA, the FAA was raised, but the trial court denied the motion to reconsider. The Texas Supreme Court reversed, ordering arbitration, finding no waiver.

Florida Adopts new Rules re: representing clients in ADR Proceedings

The Florida Supreme Court has issued new rules that address, among other things, out-of-state attorneys participating in Florida arbitrations and mediations. Download these rules here. These rules require such attorneys to provide notice to the Florida Bar and pay a fee. There are other limitations that attorneys must be aware of before undertaking the representation of any client in a Florida ADR matter.