Arbitration and Contract Termination

» Articles » Construction Articles » Article

August 29, 2013

The American Institute of Architects standard contract documents are commonly used in the construction industry today. The AIA General Conditions of the Contract for Construction (A201-1997) include a dispute resolution clause that requires all claims to be submitted to mediation and arbitration after initial decision by the architect. However, anyone that uses the AIA documents should be aware that termination of the contract itself may create a question of the continued applicability of the contract’s dispute resolution clause.  In 2007, the First District Court of Appeal of Florida issued its decision in Auchter Company v. Zagloul, 949 So. 2d 1189 (Fla. 1st DCA 2007) which provides guidance on the ability of a party to enforce the AIA arbitration provision after termination.

Factual Background
In the Auchter Company case, Zagloul and Auchter Company entered into a contract for construction of a house. The contract documents consisted of the “Standard Form of Agreement Between Owner and Contractor” (AIA Document A111-1997) and “General Conditions of the Contract for Construction” (AIA Document A201-1997). Two months after Auchter obtained a certificate of occupancy on the house, Zagloul notified Auchter that the contract was terminated because of what he alleged as “substantial breaches of the contract” and subsequently filed suit on its claims.

In response to this suit, Auchter filed a motion to dismiss and/or compel mediation and/or arbitration and to stay the action. That motion was based on Articles 4.5.1 and 4.6.1 of the AIA General Conditions which required the parties to submit any “claims arising out of or related to the [c]ontract” to mediation and, if mediation failed, to binding arbitration. Zagloul opposed the motion on the ground that the contract between the parties had been terminated and, as a matter of law, the mediation and arbitration provisions contained in the AIA General Conditions did not survive that termination. Zagloul relied principally on the decision in Aberdeen Golf & Country Club v. Bliss Construction, Inc., 932 So. 2d 235 (Fla. 4th DCA 2005), which Zagloul asserted was binding on the trial court because it was the only Florida appellate decision construing the AIA dispute resolution clause. In response Auchter stated that that Aberdeen decision was not binding because the actual holding of that case was that the owner had waived its right to enforce the dispute resolution clause when it terminated the contract. Auchter argued that it had done nothing to waive its right to enforce the arbitration clause in this case. The trial court agreed with Zagloul and denied Auchter’s motion.

Decision on Appeal
On appeal, the court first noted that the only issue to be decided was whether the dispute resolution clause contained in the AIA documents was valid. The court then went through a careful analysis of the Aberdeen decision. In Aberdeen the parties entered into a standard AIA contract, substantively similar to the Auchter contract.  The owner in Aberdeen also attempted to terminate the contract before final completion. However, in Aberdeen the contractor filed suit and it was the owner who filed a motion to stay and compel arbitration. The contractor argued that the owner waived its right to enforce the arbitration clause when it terminated the contract. In Aberdeen, the trial court and the appellate court agreed holding that the owner’s actions had constituted a waiver of its right to compel arbitration.

Continue reading below

FREE Construction Training from Lorman

Lorman has over 37 years of professional training experience.
Join us for a special white paper and level up your Construction knowledge!

Best Practices for Measuring and Documenting Construction Delays

Learn More

The court in Auchter noted that the facts of Aberdeen were readily distinguishable from those of this case. Specifically, in Aberdeen, it was the owner, who terminated the contract, who was seeking the benefit of the dispute resolution clause. Although the owner also terminated the contract in this case, it was the contractor who sought arbitration. Therefore, the court noted that the equities were far different than in Aberdeen.

The court also examined the language in Aberdeen where that court concluded that the AIA dispute resolution provisions were not intended to survive termination of the contract by either party. The Auchter court did not agree with the dicta in Aberdeen regarding the intent of the standard AIA contract. The court added the arbitration provision in the AIA contract does not require any type of savings clause to survive termination. In fact, in the court’s view, it is well established that the duty to arbitrate does not end when a contract is terminated, so long as the disputed claims arise under the contract. In this case, posttermination disputes were not expressly excluded from the scope of the AIA dispute resolution clause.

The court also relied upon the definition of the term “claims” in the AIA contract in reaching its decision. The AIA definition of claims includes other disputes and matters in question between the “Owner and Contractor arising out of our relating to the contract.” [emphasis added]. The court stated that this language was intended to be all-inclusive and did not attempt to limit “claims” to disputes arising before termination of the contract. The Florida Supreme Court previously interpreted this language to encompass virtually all disputes between the contracting parties, including related tort claims in Seifert v. U.S. Home Corp., 750 So. 2d 633, 637 (Fla. 1999). Based upon the factual distinctions in this case and the court’s examination of the contract language, the court held that the AIA dispute resolution clause is intended to survive termination of the contract by a party.

Comment
Arbitration clauses are contractual in nature and parties typically make an informed decision as to whether or not they should include such a clause in a construction contract. Therefore, as a matter of equity it seems appropriate that a party to a contract with an arbitration clause should be entitled to enforce that clause provided that they have followed the contract terms. The Aberdeen and Auchter cases are important decisions based on the fact that they involved the AIA form documents which are so prevalent in the construction industry today. However, these cases also highlight the practical importance of carefully complying with the terms of a contract especially when it comes to procedures concerning resolution of claims and termination.

Leonardo N. Ortiz
954-769-5325
[email protected]
Member of the State Bar of Florida

More Construction Articles

The material appearing in this web site is for informational purposes only and is not legal advice. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. The information provided herein is intended only as general information which may or may not reflect the most current developments. Although these materials may be prepared by professionals, they should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.

The opinions or viewpoints expressed herein do not necessarily reflect those of Lorman Education Services. All materials and content were prepared by persons and/or entities other than Lorman Education Services, and said other persons and/or entities are solely responsible for their content.

Any links to other web sites are not intended to be referrals or endorsements of these sites. The links provided are maintained by the respective organizations, and they are solely responsible for the content of their own sites.