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City of Union City v. Ac Construction Corp


December 2, 2011


On appeal from the Superior Court of New Jersey, Law Division, Hudson County, Docket No. L-2761-09.

Per curiam.


Argued October 24, 2011

Before Judges Sabatino and Ashrafi.

This matter returns to our court following an evidentiary hearing the trial court conducted in November 2010, pursuant to a remand this court ordered in an unpublished opinion. City of Union City v. AC Constr. Corp., No. A-1645-09 (App. Div. Aug. 30, 2010). As a result of that hearing, the trial court reinstated its prior finding that the parties had contractually agreed to arbitrate any dispute arising between them, if such a dispute were not first resolved in mediation. Plaintiff, City of Union City ("Union City"), now appeals that ruling, contending that it never consented to arbitration and that the trial judge misconstrued the contract documents and the testimony adduced at the remand hearing. We affirm the trial court's decision.

We incorporate by reference the facts and procedural history set forth in our prior opinion. City of Union City, supra, slip op. at 1-5. By way of brief summary, this case arises out of a $2.159 million publicly-bid contract entered into in September 2007 by Union City and defendant, AC Construction Corp. ("AC"), for the building of an amphitheater. AC was the low bidder. Among other things, the agreement specified that soil remediation costs on the project would not exceed $50,000. Apparently, the soil remediation proved to be far more extensive and costly than expected, prompting AC to cease work in October 2008.

Union City was unable to get AC to complete its work. According to Union City's complaint, AC refused to cure the defects in its work and also refused "to properly shore up and/or secure the property." Union City therefore alleged that AC had breached its contractual obligations. AC, meanwhile, contended that Union City was liable to it for extra costs it sustained, asserting in its arbitration demand a claim for $213,850, plus counsel fees, interest, and arbitration costs.

The parties' dispute persisted, and they participated in a one-day mediation. The mediation was unsuccessful. The parties continued to wrangle over how the contract documents should be construed with respect to what process of dispute resolution should be pursued if mediation failed to produce a settlement. AC contended that the contract documents required binding arbitration if the mediation failed. Union City, which has a general policy of disfavoring binding arbitration, insisted that the contract documents did not require arbitration in this case and that Union City was entitled to pursue its claims in the Superior Court.

After AC served its arbitration demand and the one-day mediation failed, Union City filed its complaint in the Law Division and moved to have the dispute removed from arbitration. AC cross-moved, seeking to compel arbitration. The neutral attorney appointed by the American Arbitration Association ("AAA") as the arbitrator read the contract documents as requiring binding arbitration.

In her initial ruling in October 2009, Judge Mary K. Costello concluded that the dispute was required to go to binding arbitration. Union City appealed. Our panel found that the record at that time was inadequate to resolve the forum issues and remanded to Judge Costello for an evidentiary hearing and fact-finding. In particular, we directed the judge to determine "(1) precisely what documents are included in the contract, either directly or incorporated by reference; and (2) what were the understanding and intent of the parties in negotiating and executing this contract, specifically with reference to dispute resolution mechanisms." City of Union City, supra, slip op. at 8.

The parties' "base" contract contains language in Article XV directing that "all disputes" arising under or relating to the agreement "shall be submitted to non-binding mediation[.]" Article XV of the base contract is silent as to what process should ensue if the mediation is unsuccessful. Article XV does state that "[n]othing in this section shall prevent the Owner [Union City] from seeking injunctive or declaratory relief in court at any time." Notably, this sentence does not address whether Union City could also seek monetary relief.

AC takes the position that the base contract is supplemented by provisions in an industry form document, AIA A201.*fn1 Section 4.6.1 of AIA A201 states that "[p]rior to arbitration, the parties shall endeavor to resolve disputes by mediation[.]" The next section of AIA A201, 4.6.2, states that "[c]laims not resolved by mediation shall be decided by arbitration [] unless the parties mutually agree otherwise."

AIA A201 was apparently not attached to the base contract. Union City maintains that AIA A201 should not be treated as though it were incorporated into the parties' agreement and that the AIA created that form to be used with a different "family" of form documents. AC contends that AIA A201 is, in fact, part of the agreement and that it is not in conflict with Article XV since Article XV does not say what should happen if mediation fails.

The base contract does have a "priority of supersession" clause, Section 00800, Provision, which instructs which terms control if such a conflict exists, and it gives the base contract priority over any "supplementary conditions."

On remand, Judge Costello conducted two days of testimonial hearings on November 15 and 18, 2010. Three witnesses testified: AC's president, Art Christy; the project's architect who prepared the plans and specifications, Orestes Valella; and Union City's mayor.

Christy testified that because the contract was the product of public bidding, there was no "negotiation" of its terms and that the terms were dictated by Union City. He understood the terms to call for mediation and then binding arbitration if the mediation failed.

The mayor testified that the City's general policy is not to agree to binding arbitration. Although he signed the base contract, he was not involved in the drafting process and left the details to the City's lawyers and professionals.

Valella, the architect who had prepared the contract documents at the behest of Union City, initially testified that the parties had intended to designate mediation as the sole dispute resolution process and that Union City would not be required to go to arbitration. However, when pressed further on this subject by AC's counsel, Valella stated that he would "assume" that arbitration would be "the next step" if mediation failed because arbitration is "part of the documents." Indeed, both Valella and Christy testified that AIA A201 was part of the parties' agreement.

Following the remand hearing, Judge Costello issued a written opinion, in which she again adopted AC's position and found that the parties were required to go to binding arbitration. The judge determined that the operative contract documents consisted of the base contract of September 19, 2007, the supplemental conditions, and AIA A201. The judge found that "the plain language of the AIA A201 provision that provides for arbitration following unsuccessful mediation should control."

On this second appeal, the City maintains that the trial judge misread the contract documents; that AIA A201 is not part of the agreement; and that the City has the statutory right to litigate this dispute in court under N.J.S.A. 40A:11-50.

Having considered the points raised by Union City, we affirm the trial court's renewed decision to refer the parties' dispute to arbitration with the AAA, substantially for the cogent reasons expressed in Judge Costello's November 30, 2010 letter opinion. Only a few additional comments are in order.

We agree with Judge Costello that AIA A201 and the arbitration provisions within that document were part of the overall agreement of the parties. The arbitration provisions in AIA A201 and Article XV are by no means incompatible. Article XV does not say that mediation is the sole form of alternative dispute resolution selected by the parties. Neither that article nor any modification of AIA A201 in the contract documents shows an intent to exclude binding arbitration as the second form of alternative dispute resolution if mediation under Article XV fails. Consequently, the duty to arbitrate this matter in the wake of the failed mediation session flows from "the parties' intentions as set forth in the writing." Martindale v. Sandvik, Inc., 173 N.J. 76, 92 (2002).

We recognize that, as the mayor testified, Union City has a general policy disfavoring binding arbitration with its vendors and contractors and instead maintaining its ability to assert its rights in court pursuant to Title 40A. We are also mindful that, as the City's attorney noted to us previously at oral argument, certain joinder constraints in the arbitration rules may make it more difficult for the City to pursue indemnification from potentially responsible third parties.

The problem here is that Union City, as the drafter of the contract documents and the associated bid package, is responsible for the contents of those documents, including the arbitration provision in AIA A201. Any ambiguity must be construed against Union City and its agent Valella, as the contract drafters. In re Estate of Miller, 90 N.J. 210, 221 (1982). The City's unwillingness to take part in arbitration should have been clearly communicated in the contract documents, and it was not. To the contrary, as the trial judge soundly concluded, the contract documents specified arbitration as an agreed-upon dispute resolution procedure.


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