Court Permits Arbitration to Proceed Against Both Owner and Owner’s Disclosed Agent
By THOMAS H. WELBY, P.E., ESQ. and GREGORY J. SPAUN, ESQ.
On a construction project, the term “general contractor” is often thrown around rather loosely to refer to the one contractor at the top of the contractor pyramid; the contractor working most closely with the owner. However, those familiar with the industry know that construction managers often sit on top of that pyramid.
The chief difference is that construction managers typically work closely with the owner from the design stage, where general contractors are brought in after the project is more or less fully designed. While there are other differences, it is generally acknowledged that CMs have their own obligations to the owner above and beyond the build obligation.
On a related note, there are generally two types of CM arrangements, the “CM at Risk” and the “CM as Agent.” The CM at Risk resembles a typical owner/GC arrangement in that the CM hires the subcontractors, or “trade contractors,” directly, and assumes payment (and other contractual) responsibilities to those subcontractors. A CM as Agent, on the other hand, enters into contracts with subcontractors as agent for the owner, and it is the owner, and not the CM, who has the payment and other contractual obligations towards the subcontractors.
However, as an appellate court found in Matter of Sciame Construction, LLC v Accurate Specialty Metal Fabricators, Inc., the fact that a CM entered into a contract as a disclosed agent for an owner may not prevent that CM from itself being brought into an arbitration proceeding relating to the project.
In September of 2014, Sciame entered into a construction management agreement with the owner of a construction project within Hudson Yards in Manhattan for the construction of a culture center. In April of 2017, Sciame, as disclosed agent for that owner, entered into a subcontract with Accurate Specialty whereby Accurate Specialty was to perform the ornamental steel work on the project for $2,709,298, which was subsequently increased to $4,455,458. This contract provided for dispute resolution by arbitration.
Disputes arose regarding the quality and timeliness of Accurate Specialty’s work. Sciame, as agent for the owner, ultimately commenced an arbitration proceeding against Accurate Specialty to recover damages on behalf of the owner. Accurate Specialty filed an answer in the arbitration denying those allegations, and also filed a claim in the arbitration proceeding directly against Sciame itself, alleging that Sciame undertook obligations to Accurate Specialty to maintain and facilitate the progress of the project and its schedule, and that Sciame’s stacking of trades, dilution of supervision, chaotic work site, failure to timely approve change orders, and interference with Accurate Specialty’s remediation efforts proximately caused it to incur damages in the performance of its work.
Sciame commenced a proceeding to permanently stay Accurate Specialty’s arbitration claim, arguing that as there was no contract between Sciame and Accurate Specialty, Sciame could not be compelled to submit to arbitration. Accurate Specialty noted that although its subcontract was ostensibly between it and the owner, Sciame undertook numerous obligations directly to Accurate Specialty, and Accurate Specialty could assert claims against Sciame for its breach of these obligations.
The motion court denied Sciame’s application to stay Accurate Specialty’s arbitration, holding that even if Sciame was not in privity with Accurate Specialty due to its having entered into the subcontract as an agent of the owner, Sciame received direct benefits from the contract. Citing well settled case law holding that where a party benefits from a contract, which contains an arbitration agreement, it may be held to that arbitration agreement itself, the motion court held that Sciame was estopped to deny that it was bound by the arbitration agreement. Accordingly, the court held that Sciame was compelled to utilize arbitration as the method of dispute resolution.
Sciame appealed, but fared no better before the appellate court. Although noting that generally an agent who signs a contract on behalf of a known principal does not bind itself individually, the appellate court held that the language of the contract documents evinced Sciame’s intent that all disputes arising out of Accurate Specialty’s subcontract, including those involving Sciame itself, would be resolved through arbitration. In that regard, the appellate court affirmed the motion court’s direction that Sciame proceed to arbitrate Accurate Specialty’s claims.
Although arbitration is generally faster (you can easily have a decision in under a year from commencement), better (you can have a knowledgeable construction professional as your decision maker), and cheaper way (discovery, the expensive part of a lawsuit, is curtailed in an arbitration proceeding) to resolve disputes, it is technically a denial of one’s right to a trial by jury, as enshrined in the Sixth Amendment to the U.S. Constitution. Accordingly, before a party will be compelled to arbitrate, a court must find that the party either explicitly, or implicitly, consented to forego its constitutional right to a trial by jury, and affirmatively opted for the arbitration proceeding. Explicit consent is easy to determine; either a party signed an agreement to arbitrate, or it did not. Implicit consent, on the other hand, will ultimately require a court to determine what the parties’ intent was at the time the contract was signed. Contractors and others who are parties to construction contracts would be well advised to consult with experienced construction counsel to determine what provisions can be put into contracts to clarify parties’ desires as to arbitration (and other subjects) so that courts do not ultimately err in setting forth what the parties may, or may not, have intended.
About the author: Thomas H. Welby, an attorney and licensed professional engineer, is General Counsel to the Construction Industry Council of Westchester and the Hudson Valley, and is the Founder of, and Senior Counsel to the law firm of Welby, Brady & Greenblatt, LLP, with offices located throughout the Tri-State/Greater Metropolitan Region. Gregory J. Spaun, General Counsel to the Queens and Bronx Building Association, and an attorney and a partner with the firm, co-authors this series with Mr. Welby.