April 2002
By ALEXANDER A. MIUCCIO, CIC Legal Counsel
Public construction contracts frequently contain dispute resolution provisions which empower architects or engineers, even those employed or paid by the owner, to decide all claims and disputes. These provisions typically provide that the determination is final and may not be reviewed in the courts except on the grounds that the decision is arbitrary, capricious or lacking a rational basis.
In a previous column discussing the case of Westinghouse v. N.Y.C. Transit Authority, it was noted that New York's highest court determined that such clauses did not violate New York public policy and were enforceable. The Court of Appeals' decision could have a devastating impact on contractors, effectively eliminating lawsuits by contractors who are subject to such alternative dispute resolution provisions. The most recent case, Matter of Arkay Construction Inc. v. Nagaraja, once again illustrates the draconian effect of these ADR provisions.
Background
Arkay Construction, Inc., was awarded a contract by the New York City Transit Authority for the rehabilitation of substation enclosures at four locations. The NYCTA was the agent for the MTA. The project was to be substantially completed by Sept. 30, 1998. The contract provided that all technical disputes must be submitted to NYCTA's Chief Engineer, Mysore L. Nagaraja, whose decision was final and binding. Court review was limited by the contract to an Article 78 proceeding pursuant to which the court could only determine the question of whether or not the chief engineer's determination was arbitrary, capricious or lacking a rational basis.
On Sept. 10, 1998 NYCTA terminated the contract for convenience, deleted from the contract specifications some of the work that the contractor had not yet performed and insisted that all remaining work be completed by Sept. 30, 1998. The parties made numerous attempts to come to a mutual agreement as to the value of the work done and the contractor's final payment under the contract. The contractor claimed it had performed 90 percent of the contract and was entitled to a final payment of $1,092,946.00. The contractor's claim included termination expenses, unabsorbed office overhead and costs, disputed extras, interest and lost profits. NYCTA's construction manager determined that only 75 percent of the work had been completed and that the final payment should be $122,000.00, rejecting more than $900,000.00 of the contractor's claim.
In accordance with the contract, the dispute was submitted for resolution to the chief engineer. The chief engineer essentially adopted the determination of the construction manager and rejected the con