Thoughts on construction law from Christopher G. Hill, Virginia construction lawyer, LEED AP, mediator, and member of the Virginia Legal Elite in Construction Law

The New Jersey Construction Triangle – Compelling Arbitration Without a Contract Provision Between Subcontractor and Owner/Developer

bsusserFor this week’s Guest Post Friday here at Musings, we welcome Bennet Susser. Bennet is a founding member and shareholder of the New Jersey law firm, Jardim, Meisner & Susser, P.C. He has over 25 years’ experience in representing clients in all types of complex (and not so complex) litigation, including those involving construction actions. His Construction Law Practice Group has deep experience in the representation of property owners, developers, homeowners, design professionals, materials manufacturers, contractors and subcontractors in connection with construction of high-rise and other residential developments, condominium conversions of older rental properties, commercial property, mixed-use projects, and governmental buildings. Issues handled include: construction defects and deficiencies related to residential and commercial construction, including roofing defects, water intrusion, and structural life safety; construction delays; liens; hurricane recovery and rebuilding; insurance coverage disputes, including negotiation and resolution of insurance claims related to rebuilding; mold and mildew claims; and construction contracts and related documents, including loan documentation.

Not too infrequently, an owner or developer of commercial or residential property engages a general contractor with reference to a construction project. The parties enter into a written agreement that often provides for a mandatory arbitration provision to resolve all disputes. In order for the general contractor to carry out its duties, it, in turn, engages subcontractors, also by written contract which contains a mandatory arbitration clause. There is no direct contract between the owner/developer and the subcontractor.

Something then goes south. Either the subcontractor is not paid, or the owner or developer has issues with the work performed by the subcontractor. One of the parties sues the other in New Jersey Superior Court or the District of New Jersey, and sues the general contractor for good measure. The contractor claims entitlement to its day in arbitration – not in court – and therefore moves to dismiss the civil action based on the mandatory arbitration provision it has with the plaintiff. The plaintiff counters that this may be all well and good, but then it cannot bring suit against the other party, because no such arbitration provision exists between the plaintiff and the non-general contractor party – indeed no contract exists between the subcontractor and owner/developer at all. The plaintiff argues that it would be more judicially efficient to have all the parties appear before one venue, and that venue should be a civil court notwithstanding its agreement to arbitrate with the contractor. The plaintiff’s argument is wrong on multiple grounds.

New Jersey Favors Arbitration and Courts Enforces Mandatory Arbitration Clauses

Both New Jersey’s legislature and its Supreme Court have recognized and embraced the general enforceability and irrevocability of mandatory arbitration provisions contained in commercial agreements. The New Jersey Arbitration Act of 2003, N.J.S.A. 2A:23B-1, et seq. governs the enforceability of the arbitration provisions, and reflects the New Jersey legislature’s strong public policy interest to “advance arbitration as a desirable alternative to litigation[.]” (Assembly Judiciary Committee Statement, Senate Bill No. 514 (2003), reprinted at N.J.S.A. 2A:23B-1)). Specifically, N.J.S.A. § 2A:24-1 provides:

A provision in a written contract to settle by arbitration a controversy that may arise therefrom or a refusal to perform the whole or a part thereof or a written agreement to submit, pursuant to section 2A:24-2 of this title, any existing controversy to arbitration, whether the controversy arises out of contract or otherwise, shall be valid, enforceable and irrevocable, except upon such grounds as exist at law or in equity for the revocation of a contract. (emphasis added).

Our New Jersey Supreme Court similarly recognizes arbitration as a favored alternative to judicial proceedings; it offers parties to a contract a final, speedy, and less expensive means at conflict resolution with a minimization of judicial interference. See, e.g., Barcon Associates, Inc. v. Tri-County Asphalt Corp., 86 N.J. 179, 187 (1981); Hojnowski v. Vans Skate Park, 187 N.J. 323, 342 (2006); Martindale v. Construction TriangleSandvik, Inc., 173 N.J. 76, 84-85 (2002); Garfinkel v. Morristown Obstetrics & Gynecology Assocs., 168 N.J. 124, 131 (2001); Marchak v. Claridge Commons, Inc., 134 N.J. 275, 281 (1993); see generally Littman v. Morgan Stanley Dean Witter, 337 N.J. Super. 134, 148-49 (App. Div. 2001) (“State’s policy in favor of arbitration is well settled”). . Indeed, arbitration is such a favored means of dispute resolution that Courts will adopt a liberal construction of contracts in favor of arbitration. See, e.g., Caruso v. Ravenswood Developers. Inc., 337 N.J. Super. 499, 503 (App. Div. 2001) (noting that the State has strong public policy favoring arbitration and requiring a liberal construction of contracts in favor of arbitration).

New Jersey’s policy favoring arbitration and precludes judicial interference with an arbitrator’s award “except in extremely limited circumstances.” Malik v. Ruttenberg, 398 N.J. Super. 489, 495 (App. Div. 2008); see Tretina Printing, Inc. v. Fitzpatrick & Assocs., Inc., 135 N.J. 349, 358 (1994) (adopting the Chief Justice’s concurring opinion in Perini Corp. v. Greater Bay Hotel & Casino, Inc., 129 N.J. 479, 548 (1992) (defining the Supreme Court’s newly adopted standard of review as “[b]asically, arbitration awards may be vacated only for fraud, corruption, or similar wrongdoing on the part of the arbitrators.”).

Moreover, New Jersey courts are not free to rewrite a general contractor’s contracts and ignore the mandatory arbitration provision that these parties agreed upon. A court’s role is to enforce a contract as it is written and not, “under the guise of interpretation write a new contract for the parties.” Gray v. Joseph J. Brunetti Constr. Co., 266 F.2d 809, 818 n.13 (3d Cir.), cert. denied, 361 U.S. 826 (1959) (3 Williston on Contracts, § 620, p.1788 (1936)). As one New Jersey appellate court observed:

where the terms of a contract are clear and unambiguous there is no room for interpretation or construction and the courts must enforce those terms as written. The court has no right to rewrite the contract merely because one might conclude that it might well have been functionally desirable to draft it differently. Nor may the courts remake a better contract for the parties than they themselves have seen fit to enter into, or alter it for the benefit of one party and to the detriment of the other.

Karl’s Sales & Serv., Inc. v. Gimbel Bros., Inc., 249 N.J. Super. 487, 493 (App. Div.) (citations and quotations omitted), certif. denied, 127 N.J. 548 (1991).

Accordingly, Courts will generally do what they have to do ensure that a party obtains a right that it has contractually bargained for.

All Parties Need Not be in the Same Forum

Enforcement of a mandatory arbitration provision should be abandoned simply because another named defendant does not have a contractual relationship with the plaintiff. In Kalman Floor Co. v. Jos. L. Muscarelle, Inc., 196 N.J. Super. 16 (App. Div. 1984), plaintiff Kalman, a flooring installation subcontractor, entered into an agreement with defendant, Muscarelle, a general contractor who was constructing a building for third-party defendant owner, Wakefern. Kalman and Muscarelle had a contract containing a mandatory arbitration provision, enforceable at Muscarelle’s discretion. 196 N.J. Super. at 19-20. On the other hand, Muscarelle and Wakefern had a mandatory arbitration provision in their contract. The Court was not offended by the fact that there might be two separate proceedings, notwithstanding that the actions arise out of identical subcontract work:

We conclude that there is no inherent unfairness in enforcing a contractual clause which gives Muscarelle alone the right to compel AAA arbitration, especially where the dispute between Muscarelle and Wakefern is subject to AAA arbitration, and both disputes arise out of the identical flooring work. Kalman retains its remedy to sue for legal damages if it desires to do so and Muscarelle does not demand arbitration. We see no reason why justice should require perfect symmetry of remedy and there is no suggestion made that commercial arbitration is not a desirable alternative to judicial dispute resolution.

196 N.J. Super. at 29 (emphasis added).

The lesson of Kalman is clear – a Court will not use judicial economy as a pretext to overwrite the contracts agreed upon by the various parties. But the story doesn’t end here. A non-contracting party may yet be able to bring a party before an arbitration tribunal along with the general contractor.

New Jersey Courts Connect the Arbitration Triangle When a General Contractor has Mandatory Arbitration Clauses with the Subcontractor and the Owner/Developer

New Jersey courts have repeatedly found no issue in proceeding with an arbitration when three parties are involved, and two of the parties do not have a contractual relationship, but the third party has mandatory arbitration provisions with each of the other parties. This is particularly prevalent in construction disputes between an owner, a general contractor, and a subcontractor. See, e.g., Structural Steel Fabricators, Inc. v. LaConti Masonry & Concrete, Inc., 2012 WL 1345129, (App. Div. Apr. 19, 2012); Bruno v. Mack MaGrann Associates, 388 N.J. Super. 539 (App. Div. 2006); Wasserstein v. Kovatch, 261 N.J. Super. 277 (App. Div.), certif. denied, 133 N.J. 440 (1993).

“Nonsignatories of a contract … may compel arbitration or be subject to arbitration if the nonparty is an agent of a party or a third party beneficiary to the contract.” Mutual Benefit Life Insurance Co. v. Zimmerman, 783 F. Supp. 853, 865-66 (D.N.J. 1992), aff’d, 970 F.2d 899 (3d Cir. 1992); Garfinkel v. Morristown Obstetrics & Gynecology Assoc., 333 N.J. Super. 291, 308 (App. Div. 2000), rev’d on other grounds, 168 N.J. 124 (2001); Jansen v. Salomon Smith Barney, 342 N.J. Super. 254, 261 (App. Div.), certif. denied, 170 N.J. 205 (2001). Under the construction scenario, the owner/developer is a third party beneficiary of the general contractor’s contract with the subcontractor. Similarly, the subcontractor is an agent of the general contractor as its activities related to the work called for by the owner/developer. Accordingly, the mandatory arbitration provision contained in a general contractor’s contract with the owner/developer or the subcontractor forms a basis for a non-contracting party to proceed with an arbitration against the other two parties.

Based on the foregoing law, we were able to obtain a dismissal on behalf of a general contractor of a New Jersey Superior Court action brought by a subcontractor against our client and an owner, with whom the subcontractor had not direct contract. The parties will be proceeding within the proper forum – and the triangle is complete.

As always, Bennet and I welcome your comments below. Please subscribe to keep up with this and other Guest Post Fridays at Construction Law Musings.

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2 Responses to The New Jersey Construction Triangle – Compelling Arbitration Without a Contract Provision Between Subcontractor and Owner/Developer

  1. So would you suggest that owners insist on additional clause that the contractor must also make sure that the subcontractors and everyone else in your pyramid has signed an agreement for arbitration in this situation or the clause is null and void? How would you suggest the builder respond when this inevitably responds? What about a penalty provision for the owner’s forcing multiplicity of the dispute resolution?

  2. You raise good questions. In New Jersey and New York, I’ve seen owner/developer contracts that contain a mandatory arbitration clause that requires any disputes or claims arising from/relating to work on the project performed by any party, and/or the agreement with the general contractor, or arising from or relating to any subcontract or sub-subcontract, shall be resolved through arbitration. I have not seen, nor researched in NJ/NY (let alone elsewhere) the validity of an additional provision that states something to the effect that should a general contractor fail to ensure that mandatory arbitration clauses are included in agreements with subcontractors/sub-subcontractors, and that such parties do not otherwise consent to such forums, that the general contractor would be required to pay for attorneys’ fees and costs of the owner, but that may be an option. The Kalman decision permitted one-sided discretionary authority for one party to enforce a mandatory arbitration provision, and the New Jersey court found that valid in our jurisdiction. As you state, a less onerous provision could state that should not all parties ultimately appear in the same forum, that the arbitration clause would be null and void. If I changed hats and represented the GC under such circumstances, I might counter-propose a provision to the effect that: “it is the parties’ intent to try all disputes before one forum, and that forum is ideally to be an arbitration, but should one party not be bound to a mandatory arbitration provision, then should there be valid jurisdiction for the claims and defenses of all parties to be heard, the parties consent to trying all other claims before that one forum.” Again, I have not researched this issue in any jurisdiction, so there may be precedent that holds otherwise or contains a unique twist and requires that specific language be used, but at first blush, these may be viable alternatives.

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