Third Circuit Holds AIA 201’s Arbitration Clause Applies Only to Disputes During Construction

We are pleased to welcome a guest author for today’s post.  Douglas Dodson is a 2016 graduate of the University of Miami’s J.D./M.B.A. program, and he is pursuing a career in business consulting.

Georgia Construction Arbitration
AIA A201 Arbitration Clause

By Douglas Dodson, J.D., M.B.A.

The prime contract on the majority of construction projects includes a general conditions document, which are then typically adopted by subsequent subcontractors. One of the most common general conditions documents in the United States is the American Institute for Architects’ Document A201, used for building construction projects. The terms of A201, the general conditions for the construction project, are agreed to by all parties working on the construction project, and provide a guideline for the authority of the different parties. A201 creates a structure and process for establishing responsibilities for the project, as well as a way of enforcing the agreement among parties. A201 provides for arbitration within its terms to resolve any dispute between parties which are bound to A201’s terms.

A major advantage of A201 is its familiarity among participants in construction projects, which allows parties to have an understood baseline agreement which can then be modified or supplemented as necessary to accommodate a given construction project. Like most standardized agreements, A201 is designed with modification in mind. As a standard form, it cannot satisfy the expectations of every party in all of the projects on which the form is used, and different parties may interpret the same terms in conflicting ways. One such conflict of the application of A201’s terms has recently been clarified by the Third Circuit in Blackman & Co., Inc. v. GE Business Financial Services, Inc. and Riverwinds Urban Renewal, LLC.

The Third Circuit concluded that the A201 document’s arbitration clause does not extend to post construction disputes. A201, titled as General Conditions of the Contract for Construction, provides for arbitration to be used to decide any dispute or claim “arising out of or related to the contract.” However, the Third Circuit held that the scope of this binding arbitration is limited to disputes that arise during construction.

This decision came from a demand for arbitration against Blackman & Co., Inc. (“Blackman”), who had been contracted to manage the construction of a four-story apartment building in West Deptford, New Jersey.  The claim against Blackman, which alleged breaches of contract and implied warranty, arose out of post-construction defects in the apartment building. In response, Blackman sought judgment from the Third Circuit that the dispute in question was not controlled by the AIA’s A201 document, or any other agreement which would require arbitration of the dispute.

While the Third Circuit courts will enforce arbitration clauses within contracts, such clauses must have a clear connection to the dispute in question, and such a dispute should arise out of the contract where the arbitration clause is found. On its face, AIA A201’s title, General Conditions of the Contract for Construction, would suggest that A201 would not control in the claim against Blackman. The claim in question here was brought six years after construction was completed, and A201 is intended to cover conflicts during construction, not post-construction actions. It was argued that A201’s arbitration clause could be extended to “any claim” relating to the construction, including post-construction disputes, but the structure of the arbitration process under A201 indicates that its intention is solely to cover construction conflicts.

The arbitration clause in A201 makes the architect for the project a key player in resolving any dispute. The project architect is given the role of arbiter for such disputes, as is common practice in many construction contracts. The Court reasoned that this appointment of the architect as arbiter would only make sense if the claim leading to arbitration was one made during construction, as the project architect would not be an appropriate arbiter for post-construction disagreements. The arbitration clause in A201 must be applied in its entirety in order to uphold the intention of the contract. The arbitration clause cannot be enforced without also appointing the project architect as the arbiter for the dispute.

Additionally, A201 contains a provision which requires the project architect to make a decision on any dispute between the contracting parties before either party can seek the mediation, arbitration or litigation of any claim which arises “prior to the date final payment is due.” This is another indicator that A201 is not intended to control in post-construction claims. The architect, acting as arbiter, is given authority to decide to change the contract price or timeframe in concluding a dispute, which would only be applicable to claims made before the completion of construction and payment. In light of all of the above factors, the court determined that A201 relates only to those occurrences or disputes found during construction, and does not cover issues which are only discovered once construction has been completed.

AIA A201 is intended to insure that construction projects are completed in a timely manner, and provides a standardized guide to achieve that goal. To enable A201 to successfully manage construction projects, the arbitration clause was added to allow for an expedited dispute resolution process for any disagreements which may occur between the parties during the construction process. The architect, as a pivotal player in the construction process, was given authority through A201 to resolve disputes between the parties by arbitration. Once construction had been completed, A201 has achieved its purpose, and its terms are no longer binding on any future dispute.

This decision limits the potential scope of A201’s control. If parties to a construction contract are interested in establishing a requirement for arbitration in their general conditions which would extend beyond the construction period for the project, the arbitration clause of A201 will need to be modified. Such modifications should include the removal of the architect as an arbiter in disputes which arise after construction has been completed. However, given that A201 has been interpreted in its entirety to control only those events which occur during the construction process, it is possible that any amendment to the arbitration clause which attempts to extend the scope of A201 beyond the construction phase may be struck down as well. A more appropriate location for such an arbitration requirement may be within the prime document itself, rather than among the general conditions.

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