GOETZ FITZPATRICK LLP ESTABLISHES NEW CASE LAW THAT A CONSTRUCTION MANAGER AS AGENT FOR OWNER CANNOT AVOID ARBITRATION WITH A TRADE CONTRACTOR EVEN WHERE THERE IS A LACK OF DIRECT PRIVITY
Goetz Fitzpatrick, LLP recently prevailed at the Appellate Division, First Department, wherein the appellate court affirmed the ruling of the motion court which compelled a construction manager (“CM”) as agent for a disclosed principal to arbitrate the Third-Party claims of a trade contractor client, even though direct privity of contract between the CM and trade contractor was questionable. Where the CM acts as agent for a disclosed principal (the owner), standard language in the construction management agreement (“CMA”) usually provides:Notwithstanding anything to the contrary which may be set forth in this Agreement, it is expressly acknowledged and agreed that the Construction Manager is acting as agent for Owner and all benefits of this Agreement shall run to the Owner as if the Owner were a signatory hereto.
It is also standard form that trade contracts entered into between the CM as agent for owner are signed by the “[the CM] As Agent for Owner.”
The obvious purpose of such language and manner of execution of the CMA is to attempt to shield the CM as agent from any direct claims and/or liability asserted by any of the trade contractors since it is long-established that an agent which signs a contract on behalf of a known principal cannot be held to have made a commitment in its individual capacity. (See e.g., Shoenthal v. Bernstein, 276 A.D. 200, 205, 93 N.Y.S.2d 187 (1st Dept 1949), appeal dismissed 276 A.D. 831, 93 N.Y.S.2d 908). This principle has been consistently applied in the context of arbitration. (See e.g. Matter of Metamorphosis Constr. Corp. v. Glekel, 247 A.D.2d 231, 668 N.Y.S.2d 594 (1st Dept 1998).
However, that consistency is no longer a constant thanks to the compelling arguments provided to the Appellate Division, First Department, by attorneys from Goetz Fitzpatrick.
In Sciame Construction, LLC v. Accurate Specialty Metal Fabricators, Inc., NY Co. Index No. 655666/2021, Sciame Construction LLC (“Sciame”) commenced an arbitration “on behalf of owner” against Accurate Specialty Metal Fabricators, Inc. (“Accurate”). Accurate answered and asserted Third-Party claims against Sciame for breach of the trade contract. Sciame then filed a Petition to stay the Third-Party claims in arbitration based on the premise that Sciame was merely an agent for a disclosed principal and, as such, there was no contract between Sciame and Accurate which would subject Sciame to arbitrate the claims directly with Accurate.
Goetz Fitzpatrick filed a cross-motion to the Sciame Petition and argued, among other things, that Sciame cannot avoid arbitration of Accurate’s Third-Party claims because Sciame obtained direct benefits from both the construction management agreement and the trade subcontract, both of which contained arbitration clauses. In other words, Sciame was estopped from avoiding arbitration.
The motion court agreed with Accurate’s arguments and specifically ruled:
“even if Sciame was not in privity with Accurate due to it having entered into the Subcontract as agent of Owner, Sciame received direct benefits from the CMA and the Subcontract – serving as the Construction Manager and being entitled to a Construction Services Fee based on work performed by Accurate under the CMA – such that it is estopped from disputing that it is subject to the broad arbitration clauses [citations omitted].”
Sciame unsuccessfully appealed the motion court ruling to the First Department. It its ruling, the First Department recognized that although, generally, an agent who signs a contract on behalf of a known principal does not bind itself individually, the language in the parties’ contract documents unequivocally evinced the intent of all the parties to arbitrate their disputes.
In short, there is now clear case law from the Appellate Division, First Department, that a CM as agent for owner cannot avoid arbitration of direct claims asserted by a trade contractor where the contract documents clearly indicate that all parties intended to resolve their disputes solely through arbitration.
The bottom line is that with good legal counsel, one party to a contract must be innovative in its approach to contract interpretation as the words do not always mean what they appear, at first glance to say.
The attorneys on the case were Gerard S. Strain and Donald J. Carbone.
Goetz Fitzpatrick LLP has been offering clients insightful solutions throughout the New York Metropolitan area since 1967. The firm provides its clients with expertise in the areas of Construction and Real Estate, Trusts & Estates Administration & Litigation, Commercial Litigation, Corporate, Bankruptcy, and Labor & Employment. The firm’s office is located at One Penn Plaza, Suite 3100, New York, NY 10119, Telephone 212 695 8100, [email protected], www.goetzfitz.com. You can learn more about Goetz Fitzpatrick on: LinkedIn | X (Twitter) | Soundcloud | YouTube | Facebook | Instagram