It’s all in the language—the importance of drafting construction contracts

Construction disputes are not uncommon, both between the owner and the general contractor and between the general contractor and any subcontractors. Generally, the larger the construction project, the more money is at issue. A recent decision by the Tennessee Court of Appeals, Lasco Inc. v. Inman Construction Corp., highlights the importance of the contract language when disputes arise.

The facts of the case

Lasco involved a subcontractor and a general contractor on a large construction project at the University of Tennessee. A dispute soon arose concerning the installation of fire protection equipment; the contractor notified the subcontractor that it was in breach of the contract. In spite of this dispute, and others along the way, the project was completed. The subcontractor demanded payment and the contractor refused. A suit was filed seeking compensatory damages in the amount of $376,544.95.

The subcontract between the parties provided that any claim arising out of or related to the subcontract would be subject to arbitration. The contract further provided that arbitration would be in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. This particular provision would turn out to be key in the court's decision.

The parties participated in arbitration and the arbitrator denied the subcontractor's claim in its entirety. But the arbitrator did not stop there; he ordered the subcontractor to pay the contractor's attorney's fees and costs in the amount of $174,445.65. The subcontractor appealed arguing that the arbitrator exceeded his authority when ordering the payment of such fees.

The language in the contract makes the difference

In the earlier Tennessee Supreme Court decision of Arnold v. Morgan Keegan & Co. explained, Tennessee's adoption of the Uniform Arbitration Act limited a court's role to review arbitrators' decisions to certain statutory provisions. The Supreme Court there held that arbitrators go beyond their powers when they exceed the authority granted by the arbitration agreement. Thus, the s cope of an arbitrator's authority "is determined by the terms of the agreement between the parties which includes the agreement to arbitrate the dispute." In an earlier case, D & E Constr. Co., Inc. v. Robert J. Denley Co., Inc., the Supreme Court found that contract language that submitted all claims or disputes arising out of or relating to the contract, or the breach thereof to arbitration, similar to the present case, did not give the arbiter the authority of award attorney's fees and costs.

However, while the subcontract in this case contained such language, it also specifically provided that it would be governed by the Construction Industry Arbitration Rules. Therefore, the arbitrator was entitled to consider the provisions of these rules in deciding whether attorney's fees were authorized by the parties' agreement. Rule 45 of those rules provides that an award may "include ... an award of attorney's fees if all the parties have requested such an award." As it turned out, both parties clearly requested that attorney's fees be awarded to them in the arbitration proceeding. Thus, the arbitrator's award was upheld and the subcontractor was on the hook.

Seeking experienced legal counsel

The language of any construction contract is very important in dealing with construction disputes and how such disputes are handled and can have a profound effect on the outcome. Had the subcontractor in Lasco not requested attorney's fees, he might well have saved himself $174,455.65. The representation of an experienced Tennessee construction lawyer in drafting construction agreements and representing parties in a dispute is vitally important.