Arbitrate Your Construction Dispute

Many times I’ve recommended inserting an arbitration clause in your construction contracts. Why? It’s conventional wisdom:

• Vendors usually win in arbitration.
• Arbitration typically costs far less than a court case.
• Courts won’t touch a dispute if the contract requires arbitration.
• Most arbitration awards are final, not subject to court review.

Of course, there are exceptions. One happened last month, in New Jersey. Here are the details.

Frank Garvey agreed to have Oliver Building Contractors remodel his Strathmere, New Jersey home. The contract price was $389,796. Six months into the job, work was thirty percent complete. But Garvey had paid almost the full contract price. A month later, Oliver sent an invoice for an extra $176,377, claiming higher costs:

• Floor joists ran in the opposite direction shown on the plans.
• Garvey’s planner delayed the job by not having plans ready for the building department.
• Winter weather delayed work even more.
• The cost of construction materials increased while work was halted.

Garvey didn’t agree but paid the $176,377 into his attorney’s trust account. Then he asked Oliver for a meeting on site. Oliver agreed to a walk-through but didn’t show up at the scheduled time.

With no payment, Oliver stopped work. Garvey and Oliver were at an impasse. Their contract called for arbitration of disputes. Oliver filed a demand for arbitration alleging breach of contract. Garvey counterclaimed, alleging violations of New Jersey’s Consumer Fraud Act (CFA) and Home Improvement Practice Regulations (HIPR)"

The Arbitration

After a six-day hearing, the arbitrator found no actual fraud by either Garvey or Oliver. But the arbitrator awarded Oliver $48,396, reasoning that Garvey’s failure to hire a contract administrator created a culture and environment ripe for CFA and HIPR violations. The arbitrator blamed Garvey’s for the confusion. Garvey had to pay.

Now, that’s interesting. New Jersey HIPR was enacted to protect owners. Here, the arbitrator used HIPR to reward the contractor!

Garvey had a few complaints about the arbitrator:

• Interrupted Garvey’s witnesses;
• Criticized Garvey for not hiring a professional to review the contract;
• Questioned whether CFA and HIPR applied;
• Prevented Garvey from fully testifying about defects in Oliver’s work;
• Fell asleep during Garvey’s presentation;
• Ignored the CFA and HIPR;
• Coached Oliver’s attorney;
• Suggested Garvey’s architect was "not trustworthy" and
• Complimented Oliver’s representative for being a hard worker.

Garvey filed suit to vacate the arbitration award. As noted earlier, courts seldom do that. Bias of the arbitrator isn’t enough to vacate an arbitration award. But misapplying the law is a fatal flaw. The court vacated the arbitrator’s decision. In the court’s opinion, nothing required Garvey to hire a professional to manage his project. The CFA and HIPR "place the burden of eliminating informal and confusing communications between a homeowner and a . . . home improvement contractor squarely on the contractor." Oliver, not Garvey, had to be sure the scope of work was clear and change orders were signed. The arbitrator imagined a requirement that simply doesn't exist under the law. The arbitrator's interpretation "turn[ed] the purpose and intent of the [CFA and HIPR] on its head."

Oliver appealed. The appellate court affirmed the trial court’s decision and made a recommendation. Get a different arbitrator when the case goes back to arbitration. Good advice.

Take Aways for Garvey v. Oliver

1. As the contractor, it’s your job to prevent misunderstandings. A good contract resolves disputes before they start. The best contract drafting tool I know is Construction Contract Writer.
2. If you want to require arbitration, it has to be in your contract: who does the arbitration and what rules apply? There are many choices. Some good and some bad. Construction Contract Writer lays out the options.