SUBCONTRACTOR IS BOUND BY ADR PROVISION IN SUBCONTRACT UNDER WHICH GENERAL CONTRACTOR'S REPRESENTATIVE IS JUDGE AND JURY

Most contractors are familiar with the Westinghouse decision which held that dispute resolution provisions in public contracts which empower the employee of the public owner to make binding and final decisions under the contract do not violate New York's public policy. Recently, a New York court extended that rule to the private contract context and held that a provision empowering the general contractor's representative to make binding and final decisions under a subcontract does not violate public policy.

In that case, a subcontract between a GC and its Sub contained a provision which set up a mandatory dispute resolution process. In the event of a dispute between the GC and the Sub, the GC's "representative" was authorized to decide "all questions of any nature whatsoever" arising out of or in any way related to the subcontract. Pursuant to the subcontract, the decision of the representative was deemed to be "conclusive, final and binding on all parties." Moreover, the subcontract also specifically limited a Court's power to review the decision of the GC's representative to situations where the representative's decision was "arbitrary, capricious or grossly erroneous."

The subcontract also contained a provision which expressly stated that, "Exhaustion of these [ADR] procedures shall be a precondition to any lawsuit."

The dispute in this matter was commonplace. Following non-payment by the GC for services rendered by the Sub, the Sub filed a mechanic's lien against the project to protect its interests. However, instead of resolving the non-payment dispute with the contractor's representative through the procedure set forth in the subcontract, the Sub filed suit to foreclose on its mechanic's lien and to recover for breach of contract.

A lower court ruled for the GC and dismissed the Sub's action. Thereafter, an appellate court upheld the lower court's ruling. It held that the Sub was obligated to resolve the non-payment dispute with the GC through the procedure set forth in the subcontract. Since the Sub signed the subcontract and agreed to the dispute resolution procedure "with its business eyes open", it was bound by the "clear, explicit and unequivocal" terms of the dispute resolution provisions.

A&A Notes:

As the courts are under the impression that contracts in the public and private sectors are freely negotiated and are the result of "arms-length" transactions, a contractor/subcontractor which is presented with a contract which it itself did not prepare, must carefully read the contract and have its lawyer review same. By signing the contract, you will be held to have agreed to all of its provisions, including any "ADR" provisions. Provisions such as the one described above will obviously limit a contractor's recourse in the event of a dispute.

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