Disputes over construction projects can be costly, time-consuming, complex and unpredictable endeavors. Arbitration is a mechanism often used to avoid these pitfalls by many in New Jersey construction law. Attorneys from our firm have significant experience in litigating and arbitrating construction disputes. One of the most contentious areas is whether a dispute is subject to arbitration or whether it may be litigated in court. Even more complex is trying to figure out which parts, if any, are covered by an arbitration in multi-issue disputes. New Jersey’s courts recently faced just this problem and issued an important precedential decision.
Arbitration is an alternative dispute resolution process which is popular in the construction industry. It is voluntary, so it can only occur when the parties agree to use arbitration. In New Jersey’s construction industry this generally occurs in the contract for the construction project. Agreements to arbitrate are favored under New Jersey construction law, and courts normally enforce them.
In arbitration, a decision maker (or several decision makers) called an arbitrator takes the place of the judge and jury. The parties present evidence to the arbitrator, who hears testimony and examines the documents submitted by the two sides and makes a decision. That decision can then be taken to court and entered as a binding judgment. If the judgment finds one party owes the other money, it can be enforced through all the remedies available in the judicial system just as if it had been a jury trial, including having the county sheriff seize the losers assets to pay the judgment. If a party who sued another is found not to have presented sufficient evidence to prove its case and loses, its claim will be forever barred.
There are very limited grounds for appeal – absent fraud or corruption it is very difficult to overturn an arbitration award. Because discovery and appeals are limited, many parties find arbitration a very attractive to litigation in the court system.
However, many parties do not want to go to arbitration. They do not like the fact that discovery of the other side’s evidence is limited and an arbitration award is so hard to appeal. Many parties also worry that arbitrators are biased. Also, many parties either sign arbitration agreements without realizing it or understanding what they mean, or because of unequal bargaining power feel they have to agree to arbitration.
One of the difficult issues courts are faced with is determining what should go to arbitration when some claims are covered by an arbitration agreement, and some are not. This dilemma recently faced the Appellate Division of New Jersey’s Superior Court in the case of Greenbriar Oceanaire Community Association, Inc. vs. U.S. Home Corporation.
The Appellate Division’s Opinion
In this case U.S. Home Corporation was the developer and built a 1423 unit residential condominium community in Waretown, New Jersey. U.S. Home sold the individual units to homeowners. The contracts of sale included a provision that any disputes between the homeowners and U.S. Home would be resolved through arbitration, not litigatied in the courts.
U.S. Home formed the Greenbriar Oceanaire Community Association, Inc., which was responsible for the common areas of the development and the administration and management of the residential community. U.S. Home controlled the Association until seventy five percent of the units were sold, at which point under New Jersey condominium law the owners assumed control of the Association.
As is normal practice, when the homeowners took control of the Association, they retained an engineer to inspect the properties. The engineer found many defects. The Association therefore filed suit against U.S. Home on its own behalf and on behalf of the affected homeowners. The causes of action included construction defects, design and manufacturing defects, violation of building codes, breaches of warranties, violation of the New Jersey Planned Real Estate Full Disclosure Act (PREDFDA) and violation of U.S. Home’s fiduciary duties. U.S. Home asked the trial judge in New Jersey’s Superior Court to dismiss the lawsuit and compel the dispute to be decided in arbitration based on the contracts of sale with the homeowners. The Association said that U.S. Home could not compel the Association to arbitration because it had not signed any arbitration agreement with U.S. Home. The trial judge agreed with that the contracts of sale required arbitration, and since the Association was suing not just on its own behalf, but also on behalf of the homeowners who all signed arbitration agreements, the case belonged in arbitration.
The Association appealed. The Appellate Division rejected the trial judge’s decision and the arguments of both the Association and U.S. Home. In outstanding lawyerly fashion, the Appellate Division found both arguments correct and wrong at the same time. It was true, the Appellate Division explained, that the claims submitted on behalf of the homeowners needed to be arbitrated, and thus the trial judge’s decision was correct to that extent. But the Association never agreed to arbitrate, and therefore could not be compelled to arbitrate the claims it submitted on its own behalf. The Appellate Division decided it couldn’t tell which claims should have been dismissed and sent to arbitration and which should stay in the Superior Court because the trial judge made no findings and just dismissed them all. The case was therefore sent back to the Superior Court for the trial judge to determine which claims were submitted on behalf of the Association and which on were submitted on behalf of the homeowners.
The takeaway is that arbitration agreements will be enforced. If the particular claim falls within the scope of an arbitration agreement, then the court will dismiss claims and send them to arbitration if a party tries to sue. On the other hand, if a party didn’t agree to arbitrate a particular issue it may proceed with a law suit in court. If there are some claims that fall within an arbitration agreement and some that don’t at the same time, courts will send each claim where they are supposed to go, which could result in duplicate litigation and greater costs – exactly what arbitration is designed to prevent.
So, whether you want arbitration or don’t want it, you will get what you agree to – so make sure you understand what you are signing!