The Right to Arbitrate may be Waived if Opposing Party Suffers Prejudice

As discussed previously in this blog, arbitration is an alternative dispute resolution procedure, whereby the parties to a construction contract can agree to have their disputes heard by a private individual (or a panel of three individuals), whose decision is final and binding upon the parties.  Arbitration is favored by the Connecticut courts, and, when done correctly, can provide the parties with a fast, efficient, and economical resolution of their dispute.  The question, however, is to what extent may a party to a contract containing an arbitration clause avail himself of the courts before the right to arbitrate has been waived.  A recent Connecticut Supreme Court decision clarifies that situation.

In MSO, LLC v. DeSimone, 313 Conn. 54, the parties leave agreement included an arbitration clause.  The tenant, MSO, LLC, brought an action for damages against the landlord, DeSimone.  Id.  The landlord defended the action and brought a counterclaim against the tenant.  Id.  After two years of litigation, the landlord moved to stay the action pending arbitration.  Id.

If a motion to stay a lawsuit pending arbitration is brought pursuant to a valid agreement to arbitration, the court is without discretion to deny the motion. 

Recent Decision Discusses Procedure for Challenging the Arbitrability of a Dispute

Arbitration is a private dispute resolution procedure that is intended to be more efficient and less expensive than a traditional court trial.  In arbitration, a private individual or panel of private individuals act as both judge and jury and decide the outcome of a matter in controversy.  Because arbitration is a private process, parties can only be forced to arbitrate issues that they agree to arbitrate.  The arbitrability of any particular issue is based upon the parties’ agreement.  Of course, once a contractual relationship breaks down, the parties may disagree over the arbitrability of their dispute.

In construction contracts, arbitration clauses tend to be sufficiently broad that, in general, it is difficult to successfully challenge the arbitrability of any dispute arising out of or pertaining to the subject agreement and/or project.  In Girolametti v. Rizzo Corp., 152 Conn.App. 60 (Conn.App.,2014), the Connecticut Appellate Court elaborated on the procedure for preserving the issue of arbitrability for judicial review and the severable nature of arbitration clauses.

In Girolametti, the plaintiff sought to vacate the arbitration award that had entered in the defendant’s favor.  The court first questioned whether the plaintiff had properly preserved the arbitrability issue for judicial determination and noted that,

Arbitrators May Amend or Correct Their “Final” Decisions

Arbitration Awards May Be Amended by the Arbitrator

Arbitration is a procedure by which parties to a contract agree in advance that any disputes arising out of that agreement will be submitted to a private individual or a panel of private individuals to issue a final decision referred to as an “award” that is final and binding upon the parties.  Much like a court trial, in an arbitraiton, a single arbitrator or panel of arbitrators will hear testimony and take evidence presented by the parties or their legal counsel and then make findings of fact and law that lead to one party prevailing over the other.

Arbitration has become a very popular dispute resolution procedure in construction contract disputes because of its intended efficiency and finality.  In general, the courts favor arbitration and, as a result, judicial interference in arbitration awards is very limited.  In Connecticut, as in most states, a court will only vacate, modify or correct an arbitration award for a handful of statutory reasons, which do not include re-litigating the matter.  In other words, you cannot convince a court to throw out an arbitration award merely by pointing out the arbitrator made a mistake of fact or law. 

A Connecticut Court Grants Defendant’s Motion To Stay An Application To Discharge Mechanic’s Lien Pending Arbitration

As regular readers of this blog know, a mechanic’s lien provides a contractor with a security interest in the real property where its work was performed.  Because, however, it is not the intent of the mechanic’s lien laws to restrict the free transfer of title of real property, there are two statutory procedures by which an owner may obtain a release of a mechanic’s lien.  Specifically, the property owner may seek to substitute a surety bond for the lien or the property owner may seek an order discharging or reducing the lien.  In CDO Properties, LLC v. Bogaert Construction Co., Inc., Docket No. CV 13-6018411 (JD of New London), the Court issued a decision staying the property owner’s application for discharge of a mechanic’s lien.  Based upon this decision, an owner’s attempt to promptly discharge a lien may be thwarted or delayed by a court and an owner may be forced to live with a lien until after arbitration.

The decision was based upon the Connecticut General Statutes, which require the court to stay any legal proceeding if the dispute is subject to an agreement to arbitrate.  Conn. Gen. Stat. § 52-409 states:

If any action for legal or equitable relief or other proceeding is brought by any party to a written agreement to arbitrate,

Contractors Have Statutory Rights That They May Assert During Payment Disputes

A recurring problem in the construction industry is the failure of owners to issue timely payments.  The problem not only affects contractors but also the subcontractors and/or suppliers who have to wait for the money to pass through the project’s general contractor and/or a higher tier subcontractor.  Most contractors are aware of their right to secure payment of the monies owed through a mechanic’s lien (private work) or by filing a payment bond claim (public work or private work if applicable) but there are statutory rights of which contractors should be aware.

Connecticut General States § 42-158i defines a “construction contract” as “any contract for the construction, renovation or rehabilitation in this state on or after October 1, 1999, including any improvements to real property that are associated with such construction, renovation or rehabilitation, or any subcontract for construction, renovation or rehabilitation between an owner and a contractor, or between a contractor and a subcontractor or subcontractors, or between a subcontractor and any other subcontractor” but excludes contracts between a contractor and any local, state, or federal government, and it excludes contracts for building residential structures with less than 4 units.  Id.

According to § 42-158i,

Connecticut Statutes Provide Assistance with Receiving Prompt Payment on Public and Private Construction Projects

Under Connecticut law, an owner should pay its general contractor within 30 days of having received the general contractor’s application for payment; the general contractor, in turn, is required to pay its subcontractors and suppliers within 30 days of having received payment from the owner; and the subcontractors should then pay their sub-contractors and suppliers within 30 days of having received payment from the general contractor and so on down the line.  See Gen. Stat. § 49-41a and Conn. Gen. Stat. § 42-158j.

The provisions in § 49-41a and § 42-158j are substantially similar except that:

1.) Only private owners are required to make payment to their general contractors within a specified number of days after receiving an application for payment; and

2.) The statute only applies to public projects for which a payment bond is required, which is any public works project whose contract amount exceeds $100,000.

Both statutes also have similar enforcement procedures.  Either a subcontractor on a public project to which the statute applies or general contractors and subcontractors on a private project can make demand for payment by way of registered or certified mail and, within 10 days,

Arbitrability: Who Decides Who Gets To Decide?

Arbitration has become a popular alternative to traditional courtroom litigation for construction contract disputes; however, arbitration is a creature of contract.  No one can be forced to arbitrate an issue that they have not agreed to arbitrate.  The problem is that the parties sometimes disagree over what issues they have agreed to arbitrate.  In those instances, the issue is whether the court or the arbitrator(s) get to decide whether any specific dispute is subject to the contract’s arbitration clause.  The Superior Court addressed this issue most recently in Montowese Industrial Park, LLC v. The Thomas W. Golden Realty Company.

In Montowese, the Court started with the general rule, which states that it is for the Court to decide whether a specific dispute is arbitrable based upon the Court’s authority to interpret contracts.  The Court then went on to state that the parties had the authority to transfer that authority to the arbitrator(s) if they chose to do so.  In other words, the parties could, by contract, allow the arbitrator(s) to decide whether a particular dispute was within the subject agreement’s arbitration clause.

The Court then went on to state that the Court could imply that the parties had intended to leave the issue of arbitrability up to the arbitrator(s). 

The Contract and Not Common Sense Determines the Proper Parties to an Arbitration

Many construction contracts require the parties to resolve their disputes through alternate dispute resolution procedures such as mediation and arbitration.  Arbitration is intended to be a cost effective alternative to litigation.  The issue of whether arbitration works as well as intended will be the subject of a future post on this Blog but the topic of discussion here is the question of determining the proper parties to any given arbitration.  The answer is counterintuitive.

When it comes to arbitration, there are several well settled rules.  For example, courts favor arbitration, arbitration is a creature of contract, and no party will be forced to arbitrate when it has not agreed to do so.  In light of the foregoing, you might believe that a party, who is named in a demand for arbitration, files an answer to the demand, and participates in the arbitration hearing, has agreed to arbitrate and should be held liable for any arbitrator’s award that enters against it.  If you did believe that, however, you’d be wrong.

In CDIFUND, LLC v. Lenkowski, disputes arising out of home construction contracts were arbitrated.  CDIFUND, LLC v. Lenkowski, 2011 Conn. Super.