Rule Change New Arbitration Rules for Construction Disputes

Rule Change

Spring is here, and with it comes a lot of renovation—especially of homes, weekend homes and co-ops. With all that work comes inevitable disputes between homeowners and their architects, interior designers and contractors. For many years, arbitration has been the main method chosen by interior designers and architects to resolve their disputes with clients.

Arbitration clauses are in standard American Institute of Architects (AIA) contracts, which are widely used on construction projects. Arbitration is generally regarded as being a much faster and more cost-effective way to resolve a dispute than going to court—so much so that some insurance carriers even reduce premiums for policyholders who routinely have arbitration clauses in their contracts.

In addition, panels of arbitrators have always been comprised of people who know the industry, so the terminology is familiar to them. Design professionals can comfortably use industry terms and know that the person hearing the case understands the language. However, a recent case in the State of New York has changed things dramatically for design professionals working on residential projects.

In a recent case, homeowners hired an architect and a contractor to design and build, respectively, a custom home that would accommodate their daughter’s severe disabilities. The architect was also supposed to supervise the contractor’s work. The contract between the homeowners and the architect contained a mandatory arbitration provision in the event of a dispute. The homeowners were dissatisfied with the contractor’s work and sued the architect in court for breach of his duty to supervise the contractor. The architect sought to invoke the arbitration clause and have the dispute arbitrated instead of litigated in court.

The court found that a section of the General Business Law prohibiting mandatory arbitration clauses in contracts for sale of consumer goods actually applied to this case—precluding the architect from requiring arbitration in the dispute with his former clients. The court found that the definition of “consumer goods” in the statute was far broader than most definitions of that term. The definition of “consumer goods” included “services purchased or paid for by a consumer, the intended use or benefit of which is intended for the personal, family or household purposes of such consumer.” The Court also found that there was no distinction between professional and non-professional services.

The architect argued that the contract called for the provision of professional services in connection with the construction of a house—not the purchase of consumer goods. However, the court found that the home fell within the parameters of the statute’s definition of “consumer goods.” The court looked at the purpose of the statute, which was to prevent sales contracts from including clauses pre-committing consumers to arbitrate disputes rather than using Small Claims Court, and refusing to pay for goods or other legal remedies available to them.

Even though this law has been around for 20 years, this is the first case that has analyzed its provisions. The court went on to point out that a residential property owner may be at a disadvantage where the forum chosen for arbitration specializes in the resolution of disputes between members of the construction industry.

The process of arbitration has always had its critics, more so in recent years. Many feel that it has become too expensive. Some feel that the decisions too often split things down the middle. Others feel that the process now takes too long. Owners often do not like arbitration because there is limited discovery. They feel that it is harder to find out about your adversaries’ case before the hearing.

Nevertheless, this decision has significant ramifications. It certainly applies to interior design services and contractors doing home improvements. There is also the possibility that this decision may be used to extend its applicability into the commercial area.

Once a dispute arises, the parties may still mutually agree to arbitrate—but the odds of that happening are small. In my many years of practice, that has only happened once. The courts have increasingly tried to use alternative dispute resolution techniques within the court system. Thus, it is increasingly common to see mediation used in the court system as a way of trying to resolve disputes faster. A case may start out as a “regular” lawsuit, and the parties may agree to mediate. This is an important decision, and one that requires advice from knowledgeable legal counsel.

C. Jaye Berger is an attorney in New York City specializing in construction law and litigation.

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