Arbitration of Construction Disputes

Be aware of arbitration clauses in contracts.

Greater Faith Deliverance Church, Inc. v. Designtec, Inc. (Conn. App. 2004)

Background. Church construction projects often begin with the execution of contracts with an architect and a contractor. These contracts usually contain an arbitration clause requiring any disputes between the parties to be resolved through arbitration. Church leaders should be aware of these provisions, and understand that arbitration awards, no matter how undesirable or unfair from the church’s perspective, are rarely overturned by the civil courts. A recent case in Connecticut illustrates these points.

Facts. A church entered into a standard “AIA” contract with an architect for the renovation of the church building. The contract dealt with the design phase of the project, and the contract price was $200,000. Within a few months after the project began the church failed to make payments due under the contract, and the architect ceased working on the project and filed a mechanic’s lien against the property.

The contract contained the following clause: “Claims, disputes or other matters in question between the parties to this Agreement shall be subject to and decided by mediation or arbitration.” The dispute was submitted to an arbitrator, and following a one-day arbitration hearing the arbitrator granted the architect’s claim for damages for breach of contract and ordered the church to pay $65,000 for services rendered.

The church asked a court to overturn the arbitrator’s award on several grounds, including the following: (1) there was no agreement to arbitrate; (2) the arbitration was incorrectly initiated; (3) the underlying contract was the product of fraud; and (4) denial of the church’s right to due process.

The court’s ruling. The court affirmed the arbitrator’s award. It made the following observations:

  • The law does not require “any particular words or form to create an arbitration agreement.”
  • The law strongly favors arbitration as a means to prevent litigation and expedite the settlement of disputes. As a result, the courts generally recognize arbitration awards.
  • When the parties to a contract agree to arbitration, the extent of the civil courts’ authority to review an award is determined by the contract. If the contract does not permit civil court review, then an arbitration award is not subject to review by a court even for errors of law.
  • The courts have recognized the following exceptions to the general rule that arbitration awards are not subject to civil court review: (1) the award violates clear public policy; (2) the award violates a statute; (3) the award was procured by fraud; or (4) the arbitrators exceeded their powers.

The court concluded that none of these narrow grounds for overturning the arbitration award was present in this case, and so it affirmed the award. It noted that “when a contract contains a broadly worded arbitration clause, as does the contract in the present case, then the clause reflects the parties’ general desire to settle any disputes relating to their contract speedily and finally through arbitration.”

Relevance to church treasurers. Church treasurers should note the following points about arbitration:

  • Most architectural and construction contracts contain binding arbitration clauses, meaning that a church will have no recourse to the civil courts in the event of a dispute.
  • Arbitration awards are favored by the courts, since they result in a non-judicial resolution of disputes.
  • Arbitration awards will be overturned by the courts only in limited circumstances, as noted in this article.
  • Arbitration clauses are increasingly common, and are frequently found in the following contracts: construction, employment, medical services, new cars, banking agreements, securities, telephone service, cable television, fitness centers, computer and office equipment, and health insurance. Virtually every citizen, and church, is covered by multiple arbitration agreements, in most cases unwittingly.
  • While many view arbitration clauses as a desirable way to avoid the time and expense associated with litigation, there are critics. Some consumer advocates complain that arbitration results in an abdication of important rights, is often biased against consumers, prevents consumers from presenting all relevant evidence, and results in an award that cannot be appealed.
  • Arbitration is different from mediation. Arbitration is a binding resolution of a dispute, while mediation is a nonbinding attempt by a third party to resolve a dispute. If mediation fails, a contract may call for arbitration.
  • Church leaders should be aware of arbitration clauses in contracts they sign. If you are opposed to an arbitration clause in a particular contract, attempt to have the clause removed. Also, be aware of the procedure for selecting arbitrators. This is a very important provision in any arbitration agreement, and you should be comfortable with the objectivity and competence of the arbitrators.

This article first appeared in Church Treasurer Alert, July 2005.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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