April 2002
By ALEXANDER A. MIUCCIO, CIC Legal Counsel
Public construction contracts frequently contain dispute resolution provisions which empower architects or engineers, even those employed or paid by the owner, to decide all claims and disputes. These provisions typically provide that the determination is final and may not be reviewed in the courts except on the grounds that the decision is arbitrary, capricious or lacking a rational basis.
In a previous column discussing the case of Westinghouse v. N.Y.C. Transit Authority, it was noted that New York's highest court determined that such clauses did not violate New York public policy and were enforceable. The Court of Appeals' decision could have a devastating impact on contractors, effectively eliminating lawsuits by contractors who are subject to such alternative dispute resolution provisions. The most recent case, Matter of Arkay Construction Inc. v. Nagaraja, once again illustrates the draconian effect of these ADR provisions.
Background
Arkay Construction, Inc., was awarded a contract by the New York City Transit Authority for the rehabilitation of substation enclosures at four locations. The NYCTA was the agent for the MTA. The project was to be substantially completed by Sept. 30, 1998. The contract provided that all technical disputes must be submitted to NYCTA's Chief Engineer, Mysore L. Nagaraja, whose decision was final and binding. Court review was limited by the contract to an Article 78 proceeding pursuant to which the court could only determine the question of whether or not the chief engineer's determination was arbitrary, capricious or lacking a rational basis.
On Sept. 10, 1998 NYCTA terminated the contract for convenience, deleted from the contract specifications some of the work that the contractor had not yet performed and insisted that all remaining work be completed by Sept. 30, 1998. The parties made numerous attempts to come to a mutual agreement as to the value of the work done and the contractor's final payment under the contract. The contractor claimed it had performed 90 percent of the contract and was entitled to a final payment of $1,092,946.00. The contractor's claim included termination expenses, unabsorbed office overhead and costs, disputed extras, interest and lost profits. NYCTA's construction manager determined that only 75 percent of the work had been completed and that the final payment should be $122,000.00, rejecting more than $900,000.00 of the contractor's claim.
In accordance with the contract, the dispute was submitted for resolution to the chief engineer. The chief engineer essentially adopted the determination of the construction manager and rejected the contractor's claim that it was entitled to recover any amount greater than $122,000.00. NYCTA paid that amount to Arkay on or about Nov. 14, 2000.
The contractor commenced an Article 78 proceeding to challenge the chief engineer's determination. In its petition, the contractor claimed that the chief engineer committed numerous errors and failed to apply the contract requirements. According to the contractor, the chief engineer failed to credit the contractor for work actually performed prior to the termination for convenience; erred in his computation of the value of the work performed; deducted $46,200.00 previously allocated and approved and paid by NYCTA for mobilization costs, ignored admissions by NYCTA that it failed to properly calculate the final payment and attributed greater value to the deleted items than those originally ascribed to them in the scheduled approved by NYCTA at the outset of the contract.
In response, NYCTA argued that the construction manager conducted a detailed and accurate audit of the value of all work performed by the contractor and determined final payment accordingly. The chief engineer reviewed all relevant information, including the audit, and reasonably based his decision upon the construction manager's audit and analysis.
Decision
The court upheld the chief engineer's determination and dismissed the contractor's petition. The court relied on the Westinghouse case to hold that the parties may contractually limit the parameters of judicial review in any manner they choose. Accordingly, the court strictly construed the limited review powers under the Article 78 proceeding. The court stated that the chief engineer's decision should be affirmed if it is founded on a rational basis. The court may not substitute its judgment for that of the agency. According to the court, even if the contractor had established that the chief engineer erred in his calculation, or misconstrued the contract, those errors would not be sufficient to overturn his decision. The court found that the chief engineer considered all relevant facts and reasonably concluded that the contractor had completed only 75 percent of its work, and that all work actually done had already been included in previous payments.
Comment
Just as the Court of Appeals had in the Westinghouse case, the court in this case failed to give due consideration to the fact that the chief engineer is paid by the owner and is the owner's representative in administering the contract. These factors affect his ability to make impartial determinations. Common sense indicates that he will more likely protect the owner's interest than the contractor's. No judge would be permitted to preside over a case in which he or she had a personal interest; yet ADR clauses that permit the employee of one of the parties to a dispute to make final and binding determinations regarding the controversy continue to be upheld by the courts.
When the courts will not even consider errors in computation or misapplication of the contract provisions as grounds for overturning the chief engineer's decision, contractors have little chance of obtaining a fair and unbiased consideration of their claims, regardless of merit.
Conclusion
Contractors who enter into contracts with ADR provisions that empower the owner's architect or engineer to be the final arbiter of disputes face an unacceptable risk. The contractors' claims may never receive an unbiased consideration. Contractor trade associations should continue to promote changes to public contracts in order to restore some measure of fairness to the resolution of disputes, whether by lobbying the contracting agencies or urging legislative measures to bar such one-sided provisions.
About the author: Mr. Miuccio is a partner in the New York City-based law firm Altieri, Kushner, Miuccio & Frind, P.C., and legal counsel to the Construction Industry Council of Westchester and the Hudson Valley, Inc.