A contract with pre-dispute arbitration provisions provides the parties with a process to resolve their disputes before disputes arise. Such pre-dispute arbitration provisions exist in the standard American Institute of Architect’s A201 General Conditions of the Contract for Construction. If your contract contains such provisions, when a dispute arises you are bound to follow the process outlined in your contract. Such provisions were the subject of conflict recently in Summit Construction Company v. American Arbitration Association, 2010-Ohio-874.

In Summit, an owner and a contractor entered into a contract to construct a hotel. The contract contained the standard AIA A201 General Conditions (1997 version). The following A201 pre-dispute arbitration provisions were at issue in Summit.

“Claims […], shall be referred initially to the Architect for decision. An initial decision by the Architect shall be required as a condition precedent to mediation, arbitration or litigation of all Claims between the Contractor and the Owner arising prior to the date final payment is due, unless 30 days have passed after the Claim has been referred to the Architect with no decision having been rendered by the Architect.” §4.4.1.

Any Claim “shall, after initial decision by the Architect or 30 days after submission of the Claim to the Architect, be subject to mediation as a condition precedent to arbitration [...].” § 4.5.1.

“Prior to arbitration, the parties shall endeavor to resolve disputes by mediation […].” §4.6.1.

The contractor completed the project and the owner made final payment. All appeared well until the owner noticed defects in the hotel. Blaming the contractor for the defects, the owner contacted the American Arbitration Association (AAA) and filed a demand for arbitration with mediation as a precursor.

The standard A201 general conditions required the parties to use the AAA Construction Industry Arbitration Rules when resolving disputes. Rule 4 of the AAA Construction Industry Arbitration Rules provides the process for initiating arbitration when the parties have provided for arbitration in their contract, as the parties did in this contract.

Rule 4 - The Parties Shall Endeavor to Resolve Disputes by Mediation

The contract provided that, “the parties shall endeavor to resolve the dispute by mediation.” The AAA contacted the owner and contractor to coordinate the mediation. The contractor objected to the use of mediation and arbitration. The contractor claimed that the contract required the owner to submit the claim to the architect for an initial decision. The owner, however, insisted that involvement of the architect applied only to claims occurring prior to final payment—the contract did not require a decision by the architect where a claim arose after final payment.

The AAA case manager reviewed the parties’ positions and concluded that the owner met the filing requirements for arbitration, and since the parties did not agree on mediation, the parties would proceed directly to arbitration.

Selection of the Arbitrator

Rule 14 of the AAA Construction Industry Arbitration Rules provides the process for selection of an arbitrator where the parties have not appointed an arbitrator. The AAA provides a list of arbitrators and the parties are encouraged to agree on an arbitrator. Where the parties do not agree on an arbitrator, each party must submit the list to the AAA and number the arbitrators in order of preference and indicate which arbitrators the party objects to using. The AAA will use the information from each party’s list and appoint an arbitrator. The AAA considers a party’s failure to provide a response with their preferences to be the party’s consent to use any of the arbitrators on the list.

In Summit, the AAA case manager provided a list of possible arbitrators to both the owner and the contractor. The owner participated in the selection process; however, the contractor refused to participate. The AAA selected an arbitrator based on the owner’s preferences and considered the contractor’s failure to provide its preferences as consent to any arbitrator on the list.

The AAA scheduled a preliminary hearing conference call. The arbitrator, case manager, and owner all participated in the conference call. The contractor did not participate. The case manager attempted to follow up with the contractor. In response, the contractor told the case manager that if the “harassing calls” continued, the contractor would contact the authorities.

The AAA scheduled a second preliminary hearing. Again, the contractor did not participate. The contractor continued to take the position that the claim must be submitted to the architect for an initial determination. The owner contacted the architect and obtained a written statement from the architect that it would not render a determination because the claim arose after the contract ended.

Eventually, the contractor agreed to mediation. The AAA postponed the arbitration to allow the parties time to mediate. Meanwhile, the contractor objected to the selected arbitrator. The AAA reviewed each party’s position and determined that the arbitrator was acceptable. The parties did not resolve the dispute in the mediation, and the contractor continued to object to the selected arbitrator.

The contractor attempted to use judicial means to remove the selected arbitrator. The contractor requested the court to remove the selected arbitrator and to appoint a new arbitrator because the owner should have submitted the claim to the architect for a decision prior to initiating arbitration. The trial court conducted a hearing and held that the issue of whether the owner was required to submit the claim to the architect prior to initiating the arbitration process was an issue for the arbitrator to decide.

The Jurisdiction of the Court to Hear Issues Involving the Selection of the Arbitrator

The contactor appealed the trial court’s decision. In its appeal, the contractor argued that submission of the claim to the architect was a condition precedent to arbitration. However, before addressing the contractor’s argument, the court first analyzed whether it had jurisdiction to hear the matter.

The Ohio Constitution limits the jurisdiction of the court of appeals to judgments or final orders of lower courts. R.C. § 2505.02 defines a final appealable order as an order “that affects a substantial right in an action that in effect determines the action and prevents a judgment [...].” The court of appeals determined that the trial court’s denial of the contractor’s request was not a final appealable order because it did not prevent a judgment; to the contrary, the trial court’s denial of the contractor’s request allowed the matter to proceed to a judgment.

The appropriate time to object to the appointment of an arbitrator would be after the arbitrator makes its award. Under R.C. § 2711.13, “[a]fter an award in an arbitration proceeding is made, any party to the arbitration may file a motion in the court of common pleas for an order vacating, modifying, or correcting the award…” The contractor, therefore, could then challenge the appointment of the arbitrator in the common pleas court.

The common pleas court can, pursuant to R.C. § 2711.10, vacate a judgment based on impropriety on the part of the arbitrator. R.C. § 2711.10 provides four instances where the common pleas court must vacate the award of an arbitrator:

  1. The award was procured by corruption, fraud, or undue means.
  2. Evident partiality or corruption on the part of the arbitrators, or any of them.
  3. The arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.
  4. The arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.  

Furthermore, R.C. § 2711.15 allows the contractor to appeal a decision of the common pleas court not to vacate an arbitration award. R.C. § 2711.15 states that “[a]n appeal may be taken from an order confirming, modifying, correcting, or vacating an award made in an arbitration proceeding or from judgment entered upon an award.”

The Court of Appeals in Summit outlined the procedure a disappointed contractor must follow to object to the selection of an arbitrator—and that process, in the eyes of the court, required the contractor to complete the arbitration first and then challenge the award on statutory grounds. In that way it could then proceed with an appeal, as the trial court’s decision would be a final appealable order.

Taking the time to understand the AAA’s rules and your rights is essential to crafting contract language that provides you with the dispute resolution process you desire. Moreover, understanding the rules and statutes that apply to arbitration proceedings and enforcement of awards will save the parties considerable time and expense when they dispute the process or the outcome.