Construction Arbitration Award May Not Always Bar Participants' Future Lawsuits
Today’s blog post focuses on an opinion from the Sixth Circuit Court of Appeals dealing with arbitration and the ability to have a “second bite at the apple” after an arbitration award. There has been a lot of discussion of this case recently on construction forums and I thought Idaho Land Law blog readers would be interested. While this case comes to us from Michigan, it does raise some questions for construction contractors in Idaho.
The case, W.J. O’Neil Co. v. Shepley, Bulfinch, Richardson, et al., has your usual players, an owner, construction manager, subcontractor, design professionals, and of course a large claim for design errors and mismanagement of the project. Typical construction case… what is not typical is the Sixth Circuit’s holding.
After losing millions of dollars because of delays and coordination failures in building a hospital, W.J. O’Neil Company sued its construction manager, Barton Malow Company, in Michigan state court. The two ended up in arbitration. Shepley, Bulfinch, Richardson & Abbott, Inc., the project’s architect, and Smith Seckman Reid, Inc., the project’s MEP design professional, (additional defendants in this case), were added to the arbitration on indemnity claims.
In the arbitration, O’Neil did not formally assert claims against Shelpley or Reid despite the fact that O’Neil’s claims against Barton Mallow arose from Shelpley and Reid’s alleged defective and inadequate design of the hospital. O’Neil won the arbitration against Barton Malow. Barton Malow lost on its indemnity claims against Shelpley and also against Reid. And no party sought judicial confirmation or review of the arbitration award.
After winning its arbitration claims, O’Neil then sued the design professionals, Shelpley and Reid, in federal court. The federal district court dismissed O’Neil’s claims, finding them barred by Michigan’s doctrine of res judicata. The Sixth Circuit found the district court’s conclusion in error and held an arbitration award cannot bar a claim that the arbitrator lacked authority to decide.
The Sixth Circuit went on to state that an arbitrator lacks authority to decide a claim that the parties did not agree to arbitrate. In this case, the Court found that O’Neil did not agree to arbitrate its claims against the design professionals and only agreed to arbitrate its claims against the construction manager, Barton Mallow. The Court reversed the district court’s orders, vacated the judgment, and remand for further proceedings.
The Court focused on the arbitration flow-through provisions of the contract between O’Neil and Barton Mallow. The defendants argued that O’Neil agreed to arbitrate its claims against the defendants in its contract with Barton Mallow. The defendants also pointed to the contract between Barton Mallow and the owner, which required arbitration of all claims between the owner and any member of the construction team. The Court found that O’Neil was not required to arbitrate its claims against the defendants simply because it “had an arbitration agreement with one company, that company had arbitration agreements with the defendants, and disputes among the parties arose from the same circumstances.” The Court called the legal reasoning behind this… “the contagion theory of arbitration” and stated it “has no basis in law or the relevant contracts.”
So what are some practice tips for those wanting to arbitrate all disputes on construction projects? First, a thorough review of all arbitration flow-through provisions in your construction contract is essential to making the argument that everyone consented to arbitration. Second, have the award confirmed by the court immediately after it is issued by the arbitrator. These two steps may prevent a party from having a “second bite at the apple” after completing arbitration.