Rule Change New Arbitration Rules for Construction Disputes

Spring is here, and with it comes a lot of renovation—especially of homes, weekend homes and co-ops. With all that work comes inevitable disputes between homeowners and their architects, interior designers and contractors. For many years, arbitration has been the main method chosen by interior designers and architects to resolve their disputes with clients.

Arbitration clauses are in standard American Institute of Architects (AIA) contracts, which are widely used on construction projects. Arbitration is generally regarded as being a much faster and more cost-effective way to resolve a dispute than going to court—so much so that some insurance carriers even reduce premiums for policyholders who routinely have arbitration clauses in their contracts.

In addition, panels of arbitrators have always been comprised of people who know the industry, so the terminology is familiar to them. Design professionals can comfortably use industry terms and know that the person hearing the case understands the language. However, a recent case in the State of New York has changed things dramatically for design professionals working on residential projects.

In a recent case, homeowners hired an architect and a contractor to design and build, respectively, a custom home that would accommodate their daughter’s severe disabilities. The architect was also supposed to supervise the contractor’s work. The contract between the homeowners and the architect contained a mandatory arbitration provision in the event of a dispute. The homeowners were dissatisfied with the contractor’s work and sued the architect in court for breach of his duty to supervise the contractor. The architect sought to invoke the arbitration clause and have the dispute arbitrated instead of litigated in court.

The court found that a section of the General Business Law prohibiting mandatory arbitration clauses in contracts for sale of consumer goods actually applied to this case—precluding the architect from requiring arbitration in the dispute with his former clients. The court found that the definition of “consumer goods” in the statute was far broader than most definitions of that term. The definition of “consumer goods” included “services purchased or paid for by a consumer, the intended use or benefit of which is intended for the personal, family or household purposes of such consumer.” The Court also found that there was no distinction between professional and non-professional services.

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