I have written several columns over the last 15 years on cases dealing with the final resolution of contract disputes by the DOT chief engineer or other government officials. Needless to say, I believe it is unfair for a DOT official to act as the final umpire in a contract dispute.
Recently I came across an interesting case involving a contract between the Port Authority Trans-Hudson Corp. (PATH), a subsidiary of the Port Authority of New York and New Jersey (Port), and a joint venture between Gothic and Robert Charles Enterprises Inc. (Gothic) for construction of a parking deck in the Journal Square Transportation Center parking garage in Jersey City, N.J. Under the contract, Gothic was required to remove the top layer of concrete on the parking deck by means of hydrodemolition to expose the rebar. After this was completed, Gothic was to re-pour the parking deck using a special weather resistant concrete mix.
The contract provided for completion of the work within 210 days. However, the work was subject to numerous delays due to weather, unexpected technical reasons and imprecise descriptions in the contract specifications. As a result, Gothic requested an extension of time, which was granted with a specified schedule of milestone dates.
Later, PATH’s chief engineer terminated Gothic’s contract for an alleged breach. Gothic replied, acknowledging that PATH was terminating the contract, but refusing to accept the declared breach. Instead, Gothic asserted that PATH was the breaching party, characterizing deadlines as unrealistic, and vacated the project under protest.
After Gothic vacated the project, PATH solicited bids for a different contractor to complete the Journal Square Project with a new recalculated schedule and justified the recalculated schedule in an internal memo. The rebid contract was awarded to a new contractor at a higher bid than the contract which Gothic had been awarded.
Gothic filed suit against PATH, alleging breach of contract and in the alternative, quantum meruit (payment for the reasonable value of its work). PATH answered and counter-claimed, alleging Gothic had breached the contract. As its 15th separate defense, PATH alleged that Gothic “failed to satisfy the contractual [sic] required alternative dispute resolution mechanism which is mandated before resorting to the judicial system.” That defense was based on the following contract clause:
To resolve all disputes and to prevent litigation the parties to this contract authorize the chief engineer to decide all questions of any nature whatsoever arising out of, under, or in connection with, or in any way related to or on account of, this contract (including claims in the nature of breach of contract or fraud or misrepresentation before or subsequent to acceptance of the contractor’s proposal and claims of a type which are barred by the provisions of this contract) and his decision shall be conclusive, final and binding on the parties.
The chief engineer mentioned in the contract provision was the same person who wrote the Sept. 26, 1994 letter declaring Gothic in breach and terminating its further performance under the contract. Gothic did not submit to the alternate dispute resolution provision in the contract.
The court’s ruling
In court, PATH argued that the contract required use of this alternative dispute mechanism as a precondition to suit, and that if Gothic was not willing to use the dispute mechanisms in the contract it should not have signed the contract. Gothic agreed that the clause called for what is in effect arbitration, and the arbitrator designated under the contract was the very chief engineer who informed Gothic that it was in breach of the contract. In essence, his function as arbitrator would have been to determine whether or not his own decision to terminate the contract was justified.
The court concluded under the circumstances, considering Gothic’s contract with PATH was terminated and that the dispute did not arise in the course of continuing performance under the contract, the clause was the equivalent of imposition of a binding arbitration requirement with the drafter of the contract in effect designating itself as the arbitrator.
The court further noted Gothic’s contract with PATH had the hallmarks of a contract of adhesion. The contract was obtained through the bidding process and Gothic had no real say as to its provisions. It is evident that utilizing PATH’s chief engineer as arbitrator presented a conflict of interest. The chief engineer had “unbridled decision making power” under the dispute resolution clause.
The court concluded that although Gothic was aware of the contract provision and did not object to it when the contract was executed, it did not thereby waive its bias objection. The provision was part of a standard form contract, which was a contract of adhesion. After Gothic was terminated by the chief engineer it was free to institute suit, and later to object to the disposition of the chief engineer on the ground of bias or partiality.
Given the fact that the chief engineer posed a high potential of bias towards PATH, the appeals court reversed the lower court’s granting of the motion to dismiss and held that the bias issue had to be determined before any arbitration or alternate dispute resolution could proceed.