ANCILLARY ARBITRATION ISSUES IN CONSTRUCTION DISPUTES Lionel M. Schooler1 ...

28 Pages·2008·0.23 MB·English

ANCILLARY ARBITRATION ISSUES IN CONSTRUCTION DISPUTES
Lionel M. Schooler1
INTRODUCTION
The use of arbitration as a means of alternative dispute resolution is well-known in the
construction industry. What is less well-understood is the breadth and impact of the arbitration
process, particularly who can be compelled to participate in an arbitration proceedingand the impact
ofsuch an award on subsequent disputes.This Article explores the interstices of this process through
the mechanics of an elaborate hypothetical (but all too realistic) scenario about the construction of
the Spindletop Office Building.
THE BUILDING OF THE SPINDLETOP OFFICE BUILDING:
INCEPTION OF THE PROJECT
In January of 2000, Oliver Owner, a well-known Texas oilman, decided to build a new office
complex in Houston, Texas,named “Spindletop.”He contracted withAlex Architect to design plans
and specifications for Spindletop. The contract for architectural services between Oliver and Alex
contained,among other things, an arbitration clause invoking the Federal Arbitration Act, and also
provided that any other arbitration proceeding instituted by Owner could not require consolidation of
Owner’s claims against Alex without Alex’s written consent. The contract also called for fifty
percentofAlex’s payment to be withheld for one year, at which time the Project was scheduled to be
substantially complete. After working day and night for three weeks, Alex completed the designs
and specifications and took them to Oliver Owner for review.Mr. Owner was so excited about the
plans for his new building that he barely glanced at them before inviting bids for the construction of
Spindletop from twenty localgeneral contractors with whom he had worked on other projects.

1Lionel M. Schooler is a partner in the law firm of Jackson Walker L.L.P. and a member of the panel of arbitrators of the
American Arbitration Association.
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One such general contractor was Greg Cummings, Incorporated(“GCI”).Greg Cummings
was very excited to have the opportunity to bid on Spindletop.In preparinghis general contractor’s
bid, Mr. Cummings obtained bids from numerous subcontractors including Ernie’s Electrical and
Hank’s Heating, Ventilating & Air Conditioning (“HVAC”). Ernie’s Electrical provided Greg
Cummings with a bid for the electrical scope of work. To do so, Ernie’s Electrical solicited
numerous bids for supplies, including one from Cam the Conduit Supplier.Ernie’s Electricalrelied
upon Cam’s bid when submitting the electrical bid.Hank’s HVACalso solicited numerous bids for
supplies. He received one from Derek the Duct Supplier for the HVAC supplies, upon which he
relied when submitting his HVAC bid.
Atthe bid opening in March, GCI was determined to be the low bidder on the Project with an
acceptable bid, and Oliver Owner therefore signed a contract with GCI to construct Spindletop per
Alex Architect’s plans and specifications.The contract between Oliver Owner and GCI contained a
broad arbitration clause that stated “any and all controversies or claims arising out of and/or relating
to the contract shall be resolved through binding arbitration pursuant to the Federal Arbitration Act.”
After GCI signed the contract withOliver Owner, Greg Cummings contacted hissurety,Safe
Bonding, to obtain Payment and Performance Bonds to comply with the requirements of the
contract.Once he obtained the necessary bonds, Greg Cummings then signed contracts withthe low
bidders upon whose numbers he had relied when formulating and submitting his bid. These low
bidders included Ernie’s Electrical and Hank’s HVAC.
GCI’s contract with Ernie’s Electrical contained an arbitration clause utilizing the same
language as the contract between GCI and Oliver Owner. Hank’s HVAC also contained the same
clause, but because Hankrefused to agree to anycontract with an arbitration clause, it was deleted
from the contract that Hank’s HVAC and GCI signed.
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After receiving the signed contract with GCI, Ernie’s Electrical solicited an invoice from
Cam the Conduit Supplier for the electrical supplies needed to perform the electrical scope of work.
Cam’s invoice contained an arbitration provision. Upon hearing his companywas the low bidder,
Hank immediately contracted with Derek the Duct Supplier for the duct and other HVAC supplies
needed to complete that scope of work.This contract did not have anarbitration clause.
THE BUILDING OF THE SPINDLETOP OFFICE BUILDING:
EVENTS AT THE JOB SITE
The construction of the Project commenced.Within four months, the foundation and shell of
the building were complete.However, a few weeks later, the weather turned cold and wet.While the
shell of the building was intact, the windows and doors were not installed and rain water managed to
infiltrate the building. Knowing that the completion date was quickly approaching, GCI’s job
superintendent and job foreman ordered work to continue despite the presence of standing water
throughout the building.
Outside in the mud, Ernie’s Electrical crew diligently tried to locate the electrical main
shown on the plans to tie into it and supply the building with electricity. After numerous failed
attempts, Ernie’s contacted the local utility company for assistance in locating the electrical main
and was informed that the actual location was more than three hundred yards away from the
designated location. Ernie’s Electrical promptly notified GCI ofthe discrepancy and submitted a
change order for the additional material and labor itestimated would be required to trench the extra
three hundred yards to install the underground electrical connections.
In consultation with Alex the Architect, GCI rejected the change order, stating that the
contract with Ernie’s Electricalcalled for Ernie’s Electrical to locate and make connections to the
electrical main as needed.GCI thusinsisted that the additional three hundred yards oftrenching was
part ofErnie’s Electrical’s scope of work and refused to agree to payanyadditionalmoney for this
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work. The parties spent several days in fruitless discussions, and ultimately, when the stalemate
could not be resolved, Ernie’s Electrical’s crew walked off the Project site.
Hank’s HVAC continued working diligently inside the building installing the HVAC
components of the project.After installing the duct, thermostats, compressors, air handlers, and other
necessary accessories, Hank’s HVACcontacted GCI to inform it that electrical power was needed to
provide energyto the HVAC units.
After Ernie’s Electrical walked off the job, GCI was not able to locate a replacement
electrical subcontractor. GCI therefore called Ernie back and told Ernie it would sign Ernie’s
Electrical’s proposed change order if Ernie would return to the Project immediately and install the
underground electrical supply required to provide power to the building. By the time Ernie’s
Electrical returned to the job site, nearly six weeks had elapsed. Ernie’s Electrical proceeded to
install the underground electrical connections but the six-week delay in completing this task
prevented the use of the HVAC equipment at the job site for eight weeks.
In this two month interim, the interior subcontractors had continued to work at the instruction
of GCI’s project superintendent. The drywall, insulation, and ceiling tiles were installed and the
millwork neared completion. When the HVAC system was finally turned on, however, GCI
discovered that the delay had caused mold to develop on the drywall, insulation, and ceiling tiles.
Responding to this development, GCI retained the services of a mold consulting firm to
conduct tests in the building.Its report identified the HVAC system as being entirely inadequate to
provide positive pressure in the buildingand attributedthe presence of mold to a negative pressure
condition existing inside the building which drew outside water into the building, causing the mold.
GCI notified Hank’s HVAC of the test results and suspended payment of any progress
payment application submitted by or pending from Hank’s HVAC. In response, Hank’s HVAC
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issued a notice of default to GCI and a claim of lien for unpaid work, but this notice was not sent
within the twenty-one days required by the terms and conditions of the contract between GCI and
Hank’s HVAC. When Oliver Owner learned of this, he insisted that GCI replace all the interior
finishes and complete the project according to the original schedule.
Relying upon the mold report, GCI insisted Oliver Owner sign a time and materials change
order before agreeing to proceed with mold remediation. Oliver Owner rejected this request and
suspended payments to GCI. He also notified Alex the Architect of a potential breach by Alex
regarding this disputeand invoked the penalty clause of the contractbetween Owner and Architect to
suspend the deadline for paying the balance of Architect’s fee.
Oliver Owner then contacted Safe Bonding, insisting that it complete the project under its
Performance Bond.Safe Bonding replied that the terms of the bond were not satisfied and refused to
complete the project.
THE BUILDING OF THE SPINDLETOP OFFICE BUILDING:
THE DISPUTES
A. Lawsuits Are Filed
Wearyofthe mounting problemsand threats of lien,which created concerns over potential
defaults with his financing, Oliver Owner filed suit against GCI and Safe Bonding for breach of
contract and violations of the Texas Deceptive Trade Practices Act (“DTPA”).2Oliver Owner also
sued Alex Architect, Hank’s HVAC, and Ernie’s Electrical for negligence for designing and
installing inadequate HVAC equipment.
After learning of the suit, GCI immediatelyfiled a counterclaim against Oliver Owner for
breach of contract and asserted a lien claim against the Project. GCI also stopped paying its
subcontractors because itwas not being paid by Oliver Owner.As a result, the subcontractors were

2TEX.BUS.&COM.CODE§§ 17.45 et seq.
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unable to pay their suppliers. GCI also filed suit against Alex Architect for negligent design in
providing plans and specifications with an inadequate HVAC design. Alex Architect filed suit
against Oliver Owner for breach of contract for not paying the outstanding balance of fiftypercent of
his fee.
After not receiving payment, Ernie’s Electrical filed suit against GCI for quantummeruit for
failure to payfor the change order work to install the underground electrical from its new location.
On being notified of the lawsuit by Ernie’s Electrical, GCI filed a counterclaim for breach of
contract for Ernie’s abandonment of the job.Camthe Conduit Supplier, who had not been paid by
Ernie’s Electrical, filed a lien against Spindletop and filed a suitagainst Ernie’s Electrical for breach
ofcontract.Hank’s HVAC stoppedpaying Derek the Duct Supplier because Hank’s HVAC was not
paid by GCI.Hank’s HVACalso filed a lawsuit against GCI for breach of contract as well as a lien
against Spindletop.Derek filed a lien against Spindletop and filed a breach of contract claim against
Hank’s HVAC.
B. The Pending Claims
As the result of the filing of all of these lawsuits, the following claims were outstanding when
the dust settled.
No. Plaintiff Defendant Claim Basis
Failure to Perform;
General Contractor Breach of contract;
1. Owner Failure to honor the
and Bonding Co. DTPA
bond
Installing inadequate
2. Owner Architect Negligence
HVAC
HVAC Installing inadequate
3. Owner Negligence
Subcontractor HVAC
Electrical Installing inadequate
4. Owner Negligence
Subcontractor HVAC
Failing to payprogress
General Counterclaim for
5. Owner payments and failing to
Contractor breach of contract
approve change order
6. General Architect Negligent Design Inadequate HVAC
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No. Plaintiff Defendant Claim Basis
Contractor design
Failing to pay50% of
7. Architect Owner Breach of contract
fee
Electrical General contractor Failing to payfor
8. QuantumMeruit
Subcontractor and Owner change order work
General Electrical Counterclaim for
9. Abandoning the job
Contractor Subcontractor breach of contract
Electrical Failure to payfor
10. Conduit Supplier Breach of contract
Subcontractor supplies
Owner/General Failure to payfor
11. Conduit Supplier Lien claim
Contractor supplies
HVAC General Contractor Breach of contract Failure to payfor work
12.
Subcontractor and Owner and lien claim performed
Owner/General Failure to payfor
13. Duct Supplier Lien claim
Contractor supplies
HVAC Failure to payfor
14. Duct Supplier Breach of contract
Subcontractor supplies
C. The Fora for Resolving the Disputes
All of the lawsuits were consolidated into one proceeding in Harris County, Texas, state
district court, the county where the Project was being constructed. As the court was assessing the
multitude of claims, it noticed that several of the agreements attached to the pleadings contained
arbitration claims and several of the responsive pleadings asserted pleas in abatement to require
submissionofclaims to arbitrate.Thus, to assess the impact of arbitration as an alternative means of
resolving disputes in the Spindletop litigation, the court realized that its first procedural step would
be to determine whose claims were arbitrable, how they would proceed to arbitrate, and which
parties could be compelled to arbitrate.
ARBITRATION #1(DISPUTES AMONG THE OWNER,THE GENERAL CONTRACTOR,THE
ELECTRICAL SUBCONTRACTOR AND ITS SUPPLIER)
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In light of the numerous claims against it, GCImoved the court to compel arbitration as to
all the parties and all claims pursuant to the arbitration clause contained in the contracts it had with
Oliver Owner and Ernie’s Electrical.
The court noted that the claims in issue involved transactions in commerce as that termis
used in the Federal Arbitration Act (“FAA”)3 and that the contract containing arbitration clauses
also referred to adjudication of these clauses under the FAA. The court granted GCI’s motion to
compel in part, citing In re Oakwood Mobile Homes, Inc.,4 holding that where there is a valid
agreement to arbitrate and the subject dispute falls within the scope of that agreement, then
signatories to that agreement are compelled to arbitrate.Therefore, Oliver Owner was directed by
the court to arbitrate his breach of contract and DTPA claims against GCIbased upon the common
nucleus of operative facts giving rise to these claims and the operative agreement to arbitrate in the
contract between Oliver Owner and GCI.5
Ernie’s Electrical resisted compulsion to arbitrate its claims against GCI. Ernie’s
acknowledged that it was a signatoryto a contract containing an arbitration agreement but argued
that its claim was not subject to arbitration as being beyond the scope of the arbitration clause
because it was suing in quantum meruit, not breach of that contract. The court overruled this
objection and held that Ernie’sElectrical’s change order claim was subject to arbitration on the basis
of Dustrol, Inc. v. Champagne-Webber, Inc.,6which upholds the arbitration of change order claims
based upon a broadly wordedarbitration agreement in the original contract.The court found that,
regardless of the nature of the relief claimed by Ernie’s Electrical, the relationship it had with GCI

39 U.S.C. § 2(2000).
4987 S.W.2d 571 (Tex. 1999)(orig. proceeding).
5Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266, 271 (Tex. 1992).
6Dustrol, Inc. v. Champagne-Webber, Inc., No. CIV.A.3:01-CV-0650-G, 2001 WL 1326477 (N.D. Tex. Oct. 16, 2001).
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arose from an agreement containing an arbitration clause by which Ernie’s Electrical was bound.
The court also held that all of Ernie’s Electrical’s counterclaims against GCI would be arbitrated in
the same proceeding, except for the issue of enforcement of Ernie’s Electrical’s claim of lien.
In response to the court’s holding, Ernie’s Electrical sought to compel Oliver Owner to
arbitrate its negligence claimagainst Ernie’s Electrical.Relying upon Associated Glass, Ltd. v. Eye
Ten Oaks Investments, Ltd.,7 the court granted Ernie’s Electrical’s motion to compel. Therefore,
Oliver Owner, a non-signatory to such a contract, was directed to arbitrate his negligence claim
against Ernie’s Electrical in the same arbitration proceeding as the one adjudicating the disputes
between GCI and Ernie’s Electrical.
Ernie’s Electricalalso requested the court compel Cam the Conduit Supplier to arbitrate its
claim against Ernie for breach of contract on the basis of the arbitration clause in the invoice issued
by Cam’s to Ernie’s Electrical, including Cam’s lien claims. Cam objected to arbitrating his lien
claims, contending that such claimswere not subject to any contract and were statutorily based.On
the basis of the holding in Dalton Contractors, Inc. v. Bryan AutumnWoods, Ltd.,8the court granted
Ernie’s Electrical’s motion and required Cam’s lien claims to be arbitratedin the same proceeding.9
ARBITRATION #2(DISPUTES AMONG THE OWNER,THE GENERAL CONTRACTOR,AND THE
HVACSUBCONTRACTOR)

7Associated Glass, Ltd. v. Eye Ten Oaks Invs., Ltd., 147 S.W.3d 507 (Tex.App.—San Antonio 2004, no pet.)(building
owner's claims against glass installation subcontractor and masonry subcontractor for negligence, fraud, fraudulent
concealment, and negligent misrepresentation, relating to water incursions and moisture accumulationarose out of or
were related to subcontractors' contractual duties under their subcontractswith general contractor, and thus, owner was
bound by arbitration provision of subcontract, though owner was not a party to subcontracts).
8Dalton Contractors, Inc. v. Bryan AutumnWoods, Ltd., 60 S.W.3d 351 (Tex.App.—Houston [1st Dist.] 2001, no pet.).
9SeeCVN Group, Inc. v. Delgado, 95 S.W.3d 234 (Tex. 2002) (scope of agreement to arbitrate can control arbitrability
of mechanics’ lien claims).
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GCI sought to have claims asserted by Hanks’ HVAC against it dismissedon the basis that
Hanks’ HVAC had failed to timely submit claims within the terms oftheir applicable agreement.
Alternatively, GCI sought to compel to arbitration the claims asserted by Hank’s HVAC. Hank’s
HVAC resisted being compelled to arbitrate on the basis that it did not have any written agreement
to arbitrate with GCI, nor one that was enforceable by GCI.
The court first considered the question of arbitrability of Hank’s HVAC’s claim under
quantum meruit, which required it to examine the jurisprudence of compelling non-signatories to
arbitrate, including the recent, far-reaching decision of the Texas Supreme Court in In Re Kellogg
Brown &Root.10
THE IMPACT OF IN RE KELLOGG BROWN &ROOT
The court analyzed the historyofthe jurisprudence of compelling non-signatories to arbitrate.
The court noted that several earlier cases had evaluated this issue,11withthe majorityholding that in
certain instances, non-signatories could be compelled to arbitrate.
The court then focused upon recent decisions by the Texas Supreme Court.In the first, In Re
FirstMerit Bank,12the court noted that the supreme court upheld arbitrability against non-signatories
who were attempting to invoke the benefits of a contract thatcontained an arbitration agreement.In
the second, In Re Halliburton,13the court noted that the supreme court upheld arbitrabilityagainst
non-signatories in an employment context, where the non-signatories by their conduct (e.g.,

10No. 03-1129, 2005 WL 1187775 (Tex. May 20, 2005).
11CompareNationwide of Bryan v. Dyer, 969 S.W.2d 518 (Tex.App.—Austin 1998, no pet.)(upholding arbitrabilityas
to non-signatories); In Re Rangel, 45 S.W.3d 783 (Tex.App.—Waco 2001, no pet.)(same); In Re James Keith Rose, 82
S.W.3d 523 (Tex.App.—Corpus Christi 2002, no pet.) (same);withIn Re Conseco Fin., 19 S.W.3d 562 (Tex.App.—
Waco 2000, no pet.)(preventing arbitrability as to non-signatories); Southwest Tex.Pathologyv. Roosth, 27 S.W.3d 204
(Tex.App.—San Antonio 2000, no pet.)(same); Fleetwood Enters.v. Gaskamp, 280 F.3d 1069 (5thCir. 2002)(same).
1252 S.W.3d 749 (Tex. 2001).
1380 S.W.3d 566 (Tex. 2002).
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