91ÊÓƵ

Litigation is an unfortunate byproduct of the construction industry. With so many players contributing design services, construction services, materials and equipment in a confined space under a tight budget and timeline, it is no surprise that disputes develop.

And it should be no surprise that the contracts between these players often contain differing dispute resolution clauses that can prevent all parties from entering one forum to resolve their differences. Too often we see some portion of related claims being resolved in court while the balance is resolved in one or more arbitrations. This leads to extensive and overlapping hearings, increased attorney fees, and sometimes inconsistent results from multiple decision makers operating in isolation.

Disciplined use of consolidated dispute resolution clauses will minimize or prevent these problems.

1. Standard consolidation clauses

Many standard form contracts (such as AIA and AGC forms) already provide an option for consolidated arbitration. They state that both parties to the contract agree that all project participants involved in the dispute may be consolidated into a single arbitration if the other parties’ (e.g. subcontractors and suppliers) arbitration clauses allow for consolidation under similar procedural rules and arbitrator selection procedures.

This option was not always available in standard forms. Earlier versions of the standard forms did not specify consolidation, and the arbitration service organizations and courts would refuse to consolidate disputes absent mutual agreement of all parties. Some involved parties refused to participate in consolidated proceedings, hoping that sitting on the sidelines would marginalize their involvement in settlement talks and minimize their share of the blame in the final adjudicated result. This approach produces mixed results for the parties that refuse consolidation.

2. Standard consolidation clauses often fail

While today’s standard consolidation clauses are a good start, they fail to solve the entire problem. The prime contractors and architects do not consistently include flow-down clauses that require all their subcontractors to abide by the same consolidation agreement. Moreover, even if the prime parties do include proper flow-down language, the subcontractors often fail to include this language in their sub-sub contracts and purchase orders.

A typical water intrusion case illustrates the problem. The owner usually has the same consolidated arbitration clause with its prime contractor and architect. If the prime parties are sophisticated, they have good flow-down language with their subcontractors. But when a subcontractor purchases envelope products such as windows, doors, siding, paper or caulk, it often uses purchase order forms that get very little attention, and consolidated dispute resolution is ignored. If a product failure is a substantial contributing factor in a dispute, there is limited ability to join the product manufacturer in a consolidated proceeding, and the manufacturer usually elects to sit on the sidelines.

3. Maximizing consolidation

Several steps can be taken to avoid the pain of unconsolidated disputes. First, ensure that all prime contracts between the owner and the contractor, the architect and any other party hired directly by the owner (such as civil, environmental and geotechnical engineers) contain the same consolidation clause. Second, in the prime contracts, require that the prime vendor include flow- down language which ensures its subs and even sub-subs, suppliers and manufacturers are bound by the same or very similar consolidated arbitration provisions.

Third, at least for major subcontractors and suppliers, the owner and prime vendor should require an advance copy of the final contract before it is signed to ensure that consolidation (along with other key issues) is appropriately addressed. Fourth, consider using a prime consolidation clause that gives the owner the power to elect litigation in court (either by a judge-only trial or a jury trial), in the event one or more parties significantly involved in the dispute are not contractually bound to consolidated arbitration.

The advantages of arbitration may be outweighed by the need to get all parties into one forum, even if that forum is the courtroom. Giving the owner discretion to select its forum when faced with consolidation problems could be challenged by opposing parties, but because the goal is advancing consolidation, courts should be inclined to enforce the clause.

4. Consolidated trials

When the parties are considering a court proceeding, they should not assume that all parties are subject to the consolidated jurisdiction of a single court. Care must be taken to ensure that proper forum selection clauses and governing law clauses are employed in conjunction with consolidated dispute resolution clauses.

Unlike other clauses that require heavy negotiation, most parties agree that consolidated dispute resolution is a good idea. Achieving consolidation merely requires careful drafting and enough rigor to ensure that downstream parties are governed by the same contract language.

Eric Grasberger is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9439 or [email protected].