| Indiana
Case Illustrates Dispute Resolution Clauses
By
John S. Mrowiec
Commonly, construction contracts contain
dispute resolution provisions. When litigation ensues, often one of the first
issues argued is whether the party initiating the suit has complied with the dispute
resolution provision.
Sometimes the question is whether the claimant filed
suit prematurely. Other times the question is whether the claimant selected the
correct forum, that is, the place that has power over the parties to provide the
relief requested.
Indianapolis Library 'Saga' Both
of these questions were raised in the case of Indianapolis-Marion County Public
Library v. Shook, LLC, 2005 Ind. App. LEXIS 1932 (1st Dist. Oct. 13, 2005). The
case "stems from the saga regarding the renovation of the Indianapolis-Marion
County Public Library" Shook, LLC, 2005 Ind. App. LEXIS 1932, * 1.
Shook
was the prime construction contractor for the parking garage phase of the new
library construction. The library was the owner, and work commenced in March 2003.
The
construction contract entitled the contractor "to monetary compensation and
time extensions for additional work that had to be performed" Shook, LLC,
2005 Ind. App. LEXIS 1932, * 4. During construction, the contractor asserted a
number of claims to recover additional costs allegedly incurred such as for a
revised traffic management plan, major structural design change, storm damage,
winter heating, active interference by library representatives and suspension.
The
owner's representatives discovered alleged defects with the garage structure.
By letter dated March 19, 2004, the owner provided a "Notice of Default"
to the contractor's bonding company alleging failure to follow plans and specifications,
improper placement of reinforcing steel and visible voids in the concrete.
On
May 6, 2004, the owner suspended the contractor from further work. Eventually,
the owner issued a directive to the contractor allowing the contractor to be involved
in a repair and remediation process.
Regarding disputes, Supplemental Condition
J of the prime contract agreement provided the following:
"If Contractor
has a dispute with Owner regarding the application or interpretation of any provision
of this Agreement or the breach thereof, the Contractor shall, within ten (10)
days after such dispute arises, submit its claim, in writing, to Owner attaching
all supporting documentation. Should Owner request additional documentation or
information, Contractor shall provide such documentation and/or information promptly.
Within thirty (30) days after receiving Contractor's written claim and
all required documentation and information, Owner shall respond with its position
and proposed resolution of the dispute. . . . As a condition precedent to initiating
any court or arbitration proceeding as provided for in this Article, Contractor
must first comply with the provisions set forth herein."
Once the
30-day period expired, Supplemental Condition J provided the following:
"Contractor
must make a written request to Owner to determine whether the dispute shall be
submitted to a court or to arbitration. Owner shall respond to the Contractor's
request within ten (10) business days after receipt thereof. Owner's response
shall identify whether the matter will be submitted to a court or to arbitration."
If
the owner did not respond within those 10 business days, the contractor could
"initiate any court or arbitration proceeding as provided for in this Article."
On
June 1, 2004, the contractor submitted a letter summarizing 25 claims previously
rejected by owner and then requesting that the owner indicate whether the contractor's
claims, to the extent they are disputed by the owner "shall be submitted
to a court or to arbitration." The owner did not respond to the contractor's
letter within 10 business days.
On June 22, 2004, more than ten business
days after the contractor's letter, the contractor sued the owner in Boone County
court. The contractor alleged that the county had failed to pay claims in excess
of $1.75 million. On June 30, 2004, the owner finally responded to the contractor's
June 1 letter noting that the owner "previously responded to many of these
claims."
Library Files Suit On Aug. 31, 2004, the owner started
its own lawsuit not only against the contractor but also against several engineering
firms. The owner also sued in its home county, Marion.
The owner then moved
to dismiss the contractor's Boone County suit, or, in the alternative, to transfer
the contractor's Boone County suit to the owner's home court, Marion County. At
some point, the contractor submitted to the trial court a spreadsheet summarizing
the 25 claims and the date each was rejected by owner.
The Boone County
court denied the owner's motion. The owner filed an interlocutory appeal.
The
owner's first argument on appeal was that the contractor's suit should be dismissed
because the trial court had no jurisdiction to consider the contractor's suit
on the ground that the contractor had not "exhausted its remedies."
The Shook LLC court said that the owner's exhaustion of remedies argument essentially
applies to statutory or administrative remedies, not contractual remedies. The
only context outside a statutory or administrative remedy to which Indiana courts
had applied the exhaustion of remedies doctrine was to a private association whose
rules established a remedial procedure.
The Shook LLC court reasoned that
the owner, in receiving and acting upon the contractor's request for additional
compensation, was not responding to questions within the scope of the owner's
statutory competence. Because there was no agency administrative process implicated
by contract extra compensation requests, the owner was not statutorily or administratively
charged with developing a factual record for appellate review by a court and there
was no risk that any established administrative procedures were being avoided
or flouted by the contractor's suit. The Shook LLC court held that "[t]he
claim submission provisions set forth in the Agreement are not statutorily based,
and they are not a proper basis upon which to raise a jurisdictional challenge
on the grounds of the failure to exhaust remedies" Shook LLC, 2005 Ind. App.
LEXIS 1932, * 12-13. Instead, if the contractor sued too early, the Shook LLC
court said the owner could raise that as a breach in the suit.
The owner's
second "unclear" argument was that the trial court lacked jurisdiction
because the contractor's June 1 letter allegedly was the first claims submission,
giving the owner 30 days to respond. The Shook LLC appellate court made quick
work of the owner's argument.
Trial courts have jurisdiction over contract
claims. The owner's arguments on notice requirements and waiting periods set forth
in the owner's motion do not affect the trial court's jurisdiction (Shook LLC,
2005 Ind. App. LEXIS 1932, * 15). Therefore, the Shook LLC appellate court affirmed
the trial court's denial of owner's motion to dismiss.
The owner's argument
for transfer of the contractor's case was that Boone County, the contractor's
selected venue, was neither a "preferred venue" under Indiana Trial
Rules or the Agreement. The Shook LLC court noted that "when parties consent
to venue in a contract, that agreement overrides the preferred venue analysis
that is set forth in [Indiana] Trial Rule 75" Shook LLC, 2005 Ind. App. LEXIS
1932, * 17.
The agreement provided that if the owner made an election within
the 10-business day period, the owner could choose the forum, which could be Marion
County or "any adjacent county." But the fact that the Owner never elected
a forum did not make an "adjacent county" an improper choice by the
contractor, the Shook LLC court held.
The owner argued that the "non-waiver"
language in the Agreement meant that the Owner had the right to choose the forum
even after expiration of the 10-business day period. The court responded that
it must read the agreement, if possible, to avoid rendering any provision meaningless.
Thus,
giving meaning to the 10-day provision, the owner's right to choose "is a
limited one, and it expired when the Library failed to exercise it within the
ten-day period set forth in the Agreement" Shook LLC, 2005 Ind. App. LEXIS
1932, * 21.
The court concluded by remarking that the agreement did not
say that Marion County became the sole acceptable venue if the owner failed timely
to select a forum. Nor does it state that the contractor was precluded from filing
suit until the owner informed contractor of owner's choice of forum. The Shook
LLC appellate court affirmed the trial court's refusal to transfer the case to
Marion County.
Shook LLC teaches that a dispute resolution provision that
is drafted by owner and designed to maximize the owner's advantage might fail
where the owner does not follow the provision's terms. This owner now must face
the contractor in one county while the owner sues the design team in another.
John
S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction
and public contracts law and litigation practice. He may be reached at (312) 658-1100.
For information, go to the firm's Web site at www.cmcontractors.com.
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