The Supreme Court of Nevada Enforces AIA Contract Document’s Arbitration Provision in Contractor-Subcontractor Dispute Where Owner Is Not a Named Party

{"version":"0.3.0","atoms":[],"cards":[],"markups":[["i"],["u"],["sup"],["a",["href","https:\/\/www.aiacontracts.org\/contract-documents\/25131-general-conditions-of-the-contract-for-construction"]],["b"],["a",["href","#_ftn1","name","_ftnref1"]],["a",["href","#_ftn2","name","_ftnref2"]],["a",["href","#_ftn3","name","_ftnref3"]],["a",["href","#_ftn4","name","_ftnref4"]],["a",["href","#_ftn5","name","_ftnref5"]],["a",["href","#_ftn6","name","_ftnref6"]],["em"],["a",["href","https:\/\/www.aiacontracts.org\/contract-documents\/6232027-owner-construction-manager-as-constructor-agreement"]],["strong"],["a",["href","#_ftnref1","name","_ftn1"]],["a",["href","#_ftnref2","name","_ftn2"]],["a",["href","#_ftnref3","name","_ftn3"]],["a",["href","#_ftnref4","name","_ftn4"]],["a",["href","#_ftnref5","name","_ftn5"]],["a",["href","#_ftnref6","name","_ftn6"]]],"sections":[[1,"p",[[0,[],0,"June 17, 2022"]]],[1,"p",[[0,[],0,"A\nrecent court decision out of Nevada is sure to provide comfort to those who use\nAIA Contract Documents. In "],[0,[0],1,"SR Construction, Inc. v. Peek\nBrothers Construction, Inc."],[0,[],0,", 138 Nev. Adv. Op. 41, 2022 WL 1815435 (2022), the\nSupreme Court of Nevada interpreted and enforced the arbitration provision\ncontained in many of the AIA\u2019s standard forms. In this case, SR, a general\ncontractor, and a medical facility owner entered into the "],[0,[1],0,"A133"],[0,[2],1,"\u00ae"],[0,[],1,"-2009,\nStandard Form of Agreement Between Owner and Construction Manager as Constructor\nwhere the basis of payment is the Cost of the Work Plus a Fee with a Guaranteed\nMaximum Price"],[0,[],0,", supplemented with the "],[0,[3],1,"A201-\n2017 General Conditions of the Contract for Construction"],[0,[],0," (prime\ncontract) for construction services on a medical center in Reno, Nevada. Under\nthe A133, parties may seek to increase the Guaranteed Maximum Price (GMP) and\nrecover additional necessarily incurred costs through change orders. Where\ncosts exceed the GMP, the prime contractor is responsible for the excess costs.\nThe prime contract included the AIA Contract Documents\u2019 standard definition of \u201cClaim,\u201d\na consolidation of arbitration provision, as well as the AIA\u2019s standard dispute\nresolution provision. The prime contract\u2019s\narbitration provision stated:"]]],[1,"p",[[0,[],0,"\u0022Arbitration shall be utilized as the method for binding dispute\nresolution in the Agreement[.] [A]ny "],[0,[0],1,"Claim "],[0,[],0,"subject to, but not resolved\nby, mediation shall be subject to arbitration which, unless the parties\nmutually agree otherwise, shall be administered by the American"],[0,[4],1,"\n"],[0,[],0,"Arbitration Association in accordance with its Construction\nIndustry Arbitration Rules in effect on the date of the Agreement.\u0022"],[0,[5],1,"[1]"]]],[1,"p",[[0,[],0,"\n\n\n\n\n\n\n\n"]]],[1,"p",[[0,[],0,"SR, under a preexisting master subcontract agreement\n(subcontract), issued a work order to Peek, a subcontractor, for core and shell\ncivil work on the project."],[0,[6],1,"[2]"],[0,[],0," Under this subcontract, SR\nand Peek agreed to arbitrate disputes where (i) the prime contract required\narbitration, and (ii) the dispute involved \u201cissues of fact or law which [SR]"],[0,[0],1,"\n"],[0,[],0,"is required to arbitrate under the terms of the prime contract.\u201d"],[0,[7],1,"[3]"],[0,[],0," The subcontract also\nincluded a consolidation clause, which required SR and Peek to use the same\narbitrator that was used in any SR-owner dispute."]]],[1,"p",[[0,[],0,"A\ndispute later arose concerning Peek\u2019s deviation from the bid-based plans, which\nadded $140,000 to Peek\u2019s costs. Peek sought to recover the extra costs from SR\nin two change orders requests. These change orders costs were rejected by the owner\nas unnecessarily incurred costs. Before SR initiated arbitration about these\nchange order costs, Peek sued SR in district court. Notably, Peek did not\ninitiate suit against the owner."]]],[1,"p",[[0,[],0,"At\nissue before the Supreme Court of Nevada was whether the parties\u2019 dispute fit\nwithin the scope of the subcontract\u2019s arbitration provision. On the one hand, SR\nargued that the dispute involved issues of fact and law about the\nreasonableness of additional costs that SR must arbitrate with the owner under\nthe prime contract, so the matter was arbitrable as between SR and Peek under\nthe subcontract. On the other hand, Peek argued that the dispute did not\ninvolve the owner because SR was solely responsible for additional costs over\nthe GMP, and thus, the subcontract did not require arbitration because the\nprime contract only mandates arbitration of owner-SR disputes. "]]],[1,"p",[[0,[],0,"In\ninterpreting the arbitration provisions of both the subcontract and the prime contract,\nthe Court held that SR and Peek\u2019s dispute is subject to arbitration. The Court\nreasoned that the subcontract does not limit arbitration to specific issues,\nand instead, it incorporates the prime contract by looking to (1) whether the\nprime contract requires arbitration, and (2) whether the dispute involves issues\nof fact or law which SR is required to arbitrate with the owner. In reaching\nits decision, the Court found that the prime contract\u2019s arbitration provision\nis broad because it covers all SR-owner disputes, including \u201cmatters in question\n... arising out of or relating to the contract.\u201d"],[0,[8],1,"[4]"],[0,[],0," The Court also found the subcontract\nprovision to be broad because it requires arbitration of disputes that SR must\narbitrate under the prime contract. The Court stated that even if the\nsubcontract\u2019s arbitration provision was narrow, the parties\u2019 dispute fit within\nits scope because SR must arbitrate whether change order costs are reasonable and\nreimbursable under the prime contract. The Court also relied on other terms of\nthe prime contract and subcontract in holding that the dispute is arbitrable,\nsuch as the prime contract\u2019s consolidation-of-arbitration provision."],[0,[9],1,"[5]"],[0,[],0," In all, the Court reasoned that the owner has\nultimate authority to approve or reject change order requests up to the GMP. Potential\noutcomes of the Peek-SR dispute implicate the owner\u2019s financial interests, such\nas SR seeking reimbursement from the owner if Peek\u2019s change order costs are\nfound to be reasonable. However, since the owner\u2019s responsibility for Peek\u0027s\nchange order costs was undetermined, arbitration cannot be avoided under the\nprime contract and the subcontract, even though the owner was omitted from the\ncomplaint."],[0,[10],1,"[6]"],[0,[],0," "]]],[1,"p",[[0,[],0,"What "],[0,[11],1,"SR"],[0,[],0," confirms is that parties to\nstandard AIA construction contracts can rely on the arbitration provisions\nwhere they flow down into lower-tier subcontracts, eliminating uncertainty over\nthe applicability and enforceability of those clauses. As the above case\nshows, this remains true regardless of whether both prime contracting parties\nare directly involved in the dispute."]]],[1,"p",[[0,[],0,"View\nthe revised "],[0,[12],1,"A133-2019,\nStandard Form of Agreement Between Owner and Construction Manager as\nConstructor where the basis of payment is the Cost of the Work Plus a Fee with\na Guaranteed Maximum Price "]]],[1,"p",[[0,[0,13],2,"AIA Contract Documents has provided this\narticle for general informational purposes only. The information provided is\nnot legal opinion or legal advice and does not create an attorney-client\nrelationship of any kind. This article is also not intended to provide guidance\nas to how project parties should interpret their specific contracts or resolve\ncontract disputes, as those decisions will need to be made in consultation with\nlegal counsel, insurance counsel, and other professionals, and based upon a\nmultitude of factors. "]]],[1,"p",[[0,[],0,"\n\n\n\n\n\n\n\n"],[0,[14],1,"[1]"],[0,[],0," "],[0,[0],1,"Id.\n"],[0,[],0,"\n\n\n\n\n\n"],[0,[15],1,"[2]"],[0,[],0," "],[0,[0],1,"Id.\nat "],[0,[],0,"2.\n\n\n\n\n\n"],[0,[16],1,"[3]"],[0,[],0," "],[0,[0],1,"Id.\nat "],[0,[],0,"3.\n\n\n\n\n\n"],[0,[17],1,"[4]"],[0,[],0," "],[0,[0],1,"Id. "],[0,[],0,"at 4.\n\n\n\n\n\n"],[0,[18],1,"[5]"],[0,[],0," "],[0,[0],1,"Id."],[0,[],0," at 5.\n\n\n\n\n\n"],[0,[19],1,"[6]"],[0,[],0," "],[0,[0],1,"Id."],[0,[],0," at 6.\n\n \n\n\n\n"]]]]}