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A Problem with Madison Area Construction Contracts

Over the last year, we had the opportunity to review several construction contracts from Madison area builders. We observed a significant problem with the dispute resolution provision that many contractors use in their form contract. As written, the provision may be unenforceable. We recommend that Madison area contractors and builders review their form contracts. Likewise, homeowners should review any potential construction contract before entering into a contract with a builder.

Origin of the Problem

Many contractors will use a trade association such as the Madison Area Builders Association’s form contract as their contract.  These contractors may not realize that trade associations occasionally update and modify their form contracts.  As a result, contractors may continue to use contract forms that have problems without realizing they are doing so.

The Arbitration Problem

When done properly, arbitration can be an efficient means to resolving a dispute. Murdock Law cautions, however, that arbitrations provisions are not uniform and arbitration is not appropriate for every business. If a business believes that arbitration is an appropriate form of dispute resolution, it must ensure that the provision is well-drafted and enforceable. Herein lies the problem.

A popular version of the Madison Area Builders Association’s standard form contract contains the following arbitration provision:

MEDIATION, ARBITRATION.  Any dispute or controversy between Builder and Buyer arising out of or related to the Contract shall be decided by arbitration which, unless the parties agree otherwise, shall be in accordance with the rules of the Construction Arbitration Services (CAS) organization.  As a precondition to arbitration proceedings, the parties shall submit the dispute or controversy to mediation in accordance with the CAS rules, provided an arbitration demand may be filed prior to completion of mediation.

This provision is problematic because in 2009, the Construction Arbitration Services organization announced that it will no longer perform construction arbitrations:

To Whom It May Concern

RE: Arbitration Case Management Business for Home Warranty Disputes and Private Construction Disputes

The purpose of this notice is to inform you that Construction Arbitration Services (“CAS”) has made a strategic decision to permanently exit from the binding construction arbitration dispute case administration business effective July 1, 2009.

As a result, CAS is not accepting any new cases as of July 1, 2009. CAS will continue to administer cases existing as of June 30, 2009 until such time as the arbitration process is concluded.

Lester Wolff
Chief Executive Officer

Implications

A well-drafted contract should remove uncertainty and the costs of resolving uncertainty. The Construction Arbitration Services’ closure of its arbitration business leaves the standard arbitration provision, contained in many form contracts, vulnerable to claims of impossibility, which makes the provision unenforceable. Yet even if the provision is enforceable and arbitration is required, the provision leaves open the questions of whom will enforce it and what rules apply. In other words, it creates uncertainty that is in no one’s best interest.

Conclusion

Murdock Law strongly recommends that Madison Area Contractors review their contracts with a construction lawyer to determine whether revisions need to be made.

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