The Critical Path: Tools for Resolving Construction Disputes : California Construction Lawyer & Attorney for Dispute Resolution in Los Angeles, San Diego & the S.F. Bay Area

Alternative dispute resolution procedures such as arbitration, mediation, and references to referees are often found in commercial contracts. A recurring issue in the ADR world is the enforceabilty of an arbitration provision when one side claims it is  unconscionable. A companion issue in California is the enforceabilty of provisions that require parties to submit their disputes to a court-appointed referee pursuant to Code of Civil Procedure 638 in the event the arbitration provision is found to be unenforceable.

In cases involving large groups such as tenants or members of home owner associations, a threshold issue is often whether some members of a group can be compelled to submit to the appointment of a referee when other members of the group do not have predispute reference provisions in their contracts for one reason or another. This was the situation in an opinion published last week by the California Supreme Court in a case called Tarrant Bell Property v. The Superior Court of California. 

Here's What Happened

 A couple of years ago, 120 lessees and residents of a mobile home park sued the owners of the park for failing to maintain the common areas and facilities and for otherwise subjecting the residents to substandard living conditions. The standard lease agreement provided that any landlord-tenant disputes would be resolved through arbitration but if the arbitration clause was deemed unenforceable the parties would submit their dispute to a court-appointed referee. However, the arbitration and reference provisions were found in only 100 of the 120 leases at issue.

In response to the lawsuit, the park owners filed a motion to compel arbitration, or, in the alternative, for an appointment of a referee. The tenants opposed the motion, arguing the arbitration and reference provisions were unenforceable and that, because some of the leases did not include the arbitration and  reference provisions, the motion should be denied to avoid the risk of conflicting rulings on common issues of law and fact.

The trial court denied the park owners' motion to compel arbitration on the grounds the arbitration agreement was unenforceable. The court also declined to enforce the predispute reference provision because of the possibility that the tenants could face inconsistent results even though they were experiencing the same problems at the mobile home park. In other words, the tenants with leases containing the reference provision would have there disputes reviewed by a referee in one proceeding while the other tenants who were not bound by the predispute provision would have their disputes resolved in court by a judge. This presents a question of fairness as the judge might not rule the same way as the referee on common questions of law and fact. Same problem; potentially different results. Unfair.

The park owners petitioned the Court of Appeal for a writ of mandate seeking to vacate the trial court's order denying their motion to appoint a referee. The Court of Appeal denied the writ, finding the trial court had the discretion to refuse to enforce the reference provision because of the possibility of conflicting rulings and other issues related to the efficient resolution of disputes.

The park owners appealed to the California Supreme Court. The Court affirmed the decisions of the lower courts, holding the legislative history of Code of Civil Procedure 638 establishes an intent to give trial courts the discretion to deny a request for the appointment of a referee when the potential for inconsistent findings is present. The Court also noted its disapproval of two appellate decisions to the contrary.

 Lessons Learned

 Some ADR provisions in commercial contracts are written with a belts and suspenders approach. Such contracts have arbitration as the first option for dispute resolution. If a court later finds that the arbitration provision is unenforceable, an alternative provision requires that the dispute be submitted to a court-appointed referee. 

Despite the careful drafting of such ADR provisions, disputes, like a baggy pair of pants, can fall to the ground when the most obvious details-like buckling and fastening-are not  considered. In California, you had better be sure the ADR provisions you spent so much time, effort and money preparing are actually found in the signed contracts of your opposition, especially when you are dealing with large groups of people such as tenants and home owner associations.

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Pre-nuptial agreements (or “What Happens When Our Marriage Fails?” agreements) seem awfully cold-hearted. We read about them when the Tiger Woods and Paul McCartneys of the world have marital melt-downs. Most people can’t imagine building a marriage on the foundation of such a document. I quess it goes something like this:“You are my soul mate, my one and only, now sign this…” While many would be reluctant to ask their betrothed to contemplate divorce before the "I dos" are even spoken, construction professionals should not be shy about making contractual arrangements for the disputes that will likely arise during the course of construction. 

Construction professionals often fall in love with an exciting project or can’t wait to be associated with a certain owner or design team, and they enter into contractual relationships without giving much thought to what happens if the project fails. Or they are so enamored with the prospect of a lucrative venture that they do not want to consider what happens if someone breaches the contract. Instead most people rely on boilerplate contractual language that may or may not be suitable for the proposed project, and hope for the best. There is a better way.

Dispute resolution provisions in contracts (or “What Happens When Claims Arise?” provisions) are the product of this cold-hearted reality: the plans and specifications, means and methods of construction and management of a project are rarely perfect. Since everyone knows this why do disputing parties spend so much time and money trying to prove in a court of law that they are right and the other guy is wrong? Why not draft dispute resolution procedures that empower parties to resolve disputes in the most balanced, cost-effective way possible? During my 25 years as a construction lawyer, I was always amazed when sophisticated parties would bemoan the cost and time drain of litigation but never changed their contracts to limit the impact of litigation on their businesses.

There is much that can be done during the contracting phase that can prepare the parties to resolve their disputes in a more cost effective manner. For example, many construction contracts include provisions that require parties to submit to mediation before a lawsuit is even filed. Other contracts require that the parties mediate their dispute as a first step and if that fails, proceed to arbitration. Since arbitration can be as expensive as a trial in civil court, some contracts include limitations on the arbitration process.

An arbitration provision that limited discovery was the subject of a recent California Court of Appeals decision (PDF) in a case where a corporate employer fired one of its in-house attorneys, and he sued for wrongful termination. The corporate employer then filed a motion to compel arbitration in accordance with the terms of the employment contract. The lawyer opposed arbitration on the grounds that the arbitration provision was unenforceable due to the discovery limitations imposed by the contract. The trial court found that the provision concerning witness depositions was flawed, declined to sever the provision, and denied the employer’s motion to compel arbitration.

The Court of Appeal reversed the trial court, stating:

We disagree with the trial court for two reasons. First, arbitration is meant to be a streamlined procedure. Limitations on discovery, including the number of depositions, is one of the ways streamlining is achieved. In Armendariz [a California Supreme Court case], the court stated that the parties are entitled to discovery sufficient to vindicate their claims. The court also acknowledged that discovery limitations are an integral and permissible part of the arbitration process. "'Adequate'" discovery does not mean "unfettered" discovery. Armendariz specifically recognized that parties may agree to something less than the full panoply of discovery permitted under the California Arbitration Act, Code of Civil Procedure section 1283.05. (Armendariz, supra, at pp. 105-106; see also Martinez v. Master Protection Corporation (2004) 118 Cal.App.4th 107, 118-119 [agreement permitting one deposition and a document request did not as a matter of law fail to afford adequate discovery]; Mercuro, supra, at p. 183 [provision permitting an arbitrator to authorize additional depositions for "good cause" was not unconscionable].)

The discovery provision reviewed by the Court of Appeal is an example of careful pre-dispute lawyering:

Each party shall have the right to take the deposition of one individual and any expert witness designated by the other party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below in paragraph 4 [[e]ach party shall have the right to subpoena witnesses and documents for the arbitration'] shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of need.

I am not suggesting that this provision is ideal in the context of a construction contract, but it does illustrate the benefit of careful draftsmanship to control the dispute resolution process and provide an efficient, cost effective way to manage claims. In addition to discovery issues, and depending on the laws of your state, arbitration provisions could be drafted to cover rules of evidence, the scope of the arbitrator’s authority, trial court review and appellate rights, the definition of prevailing party and the circumstances by which attorney fees and costs are awarded, all of which could be drafted in a way that incentivizes the parties to settle disputes prior to the arbitration proceedings.

The bottom line is this: construction professionals deal with risk every day. Those who manage it best generally do the best. Carefully drafted dispute resolution provisions are an important part of preparing for the risks associated with construction projects. Therefore, you should draft them with the same degree of care that you give to every other aspect of a project, for the success and profitability of a project can not be measured until all disputes are resolved.

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