No one enters into a construction contract expecting problems or disputes. However, because they often arise in construction projects, a growing number of contracts include an arbitration clause. An arbitrator’s decision is meant to be final between the parties involved in the dispute. But is arbitration binding on other related parties? In a court case, the Connecticut Supreme Court ruled that once a property owner arbitrated a dispute with the general contractor, they were not allowed to sue the GC’s subs.
Arbitration clauses
Nearly every well-drafted construction contract between an owner and a GC will include some sort of alternative dispute resolution clause requiring arbitration or mediation before a lawsuit can be filed. These clauses are less prevalent in subcontracts. Arbitration, unlike mediation, is meant to be binding on all parties involved. Once the arbitrator issues a decision, both parties are generally prohibited from suing over the issue again, or appeal the decision (barring some egregious misapplication of law).
But what happens when an arbitrator’s decision affects a third party – who wasn’t involved in the proceedings?
That’s the exact issue the Connecticut Supreme Court recently dealt with.
Can Owner sue subcontractors after arbitration with GC?
The case in question is Girolametti v. Michael Horton Associates, Inc.
Project Snapshot:
- Owners: John & Cindy Girolametti (Girolametti)
- General contractor: Rizzo Corporation (Rizzo)
- Subcontractor: Michael Horton Associates, Inc. (Horton)
- Note: there were 5 total subcontractors involved in the case
Girolametti hired Rizzo as the general contractor for the construction and expansion of a party depot store. They used an AIA contract for the project, the AIA-101 Standard Form of Agreement Between Owner and Contractor.
In turn, Rizzo hired Horton (and 4 other subcontractors) for the project. They completed the entire project a little over a year later. Upon completion of the project, several disputes arose between Rizzo and the Girolamettis.
Arbitration proceedings
Rizzo claimed the owners owed them additional compensation for extra work. For their part, Girolametti contended that Rizzo owed them money for late completion of the project and multiple construction defects.
To resolve their disagreement, Rizzo and Girolametti went to arbitration, according to the terms of their contract. Two days before arbitration was scheduled to finish, Girolametti withdrew from the proceedings. The arbitrator ultimately found in favor of Rizzo, ordering Girolametti to pay Rizzo over $500,000.
Owner ignores arbitration & files a lawsuit
Girolametti, with complete disregard for the arbitration, filed a lawsuit against Rizzo and all five subcontractors. The trial court dismissed Rizzo from the suit, due to the fact that the arbitrator’s decision was binding against the parties.
However, the court didn’t dismiss the subs named in the lawsuit. The court reasoned that (a) the subs weren’t in privity with Rizzo and (b) they weren’t parties to the arbitration proceedings.
An Appellate Court reversed the trial court’s decision. The court stated that if Girolametti had claims against the subs, they should have raised the issue in arbitration. They barred Girolametti from suing the subcontractors by the doctrine of res judicata, also known as claim preclusion. It basically means that the issue was already decided.
CT Supreme Court: Arbitration is be binding on all parties
The Supreme Court upheld the Appellate Court decision, mainly based on the theory of res judicata. This is a legal doctrine that basically means the issue had already been adjudicated by the courts, and cannot be brought up again by the same parties or those in privity with them. So to decide whether res judicata should apply, the Court needed to determine whether the subs and Rizzo were “in privity.” The court adopted a “default presumption of privity.”
Without diving too deep into the analysis by the court, most of the decision was based on this. Allowing the claims to continue in court could potentially lead to inconsistent rulings and defeat the purpose and finality of arbitration. Furthermore, many standard construction contracts impose responsibility on the GC for any subcontractor work.
All claims should be brought up in arbitration
The biggest takeaway here is how strongly the courts, and the construction industry as a whole, favor arbitration. So much so that, in this case, the Associated General Contractors of CT filed a brief in support of the subs. If a dispute is resolved in arbitration, the determination will be binding and final – even if a party didn’t participate in the proceedings.
Arbitration is meant to be a quick, cheaper alternative to a court proceeding. It prevents flooding the courts with lawsuit after lawsuit. Arbitration allows for the resolution of any and all disputes on a construction project to be dealt with in one fell swoop. In fact, Supreme Court said that “it is as much to the benefit of owners as it is to subcontractors to be able to expeditiously resolve all disputes arising from a construction project in a single forum.”
And Connecticut isn’t alone; a handful of other states have adopted a presumption of privity between GC’s and subs for the purposes of res judicata.