A recent federal appellate decision involving a luxury-home cabinet and closet project illustrates an important—and potentially costly—lesson about the consequences of arbitration. It also demonstrates how the doctrines of res judicata and collateral estoppel can extend the reach of an arbitration decision beyond the parties and issues that were actually addressed in the arbitration.
In Design Gaps, Inc. v. Distinctive Design & Construction LLC, No. 24-1860 (4th Cir. 2025), a federal district court confirmed an arbitration award in favor of homeowners involved in a dispute over cabinet and closet work performed on a luxury residence. The U.S. Court of Appeals for the Fourth Circuit affirmed the judgment.
The case is noteworthy not simply because the arbitration award was upheld, but because the courts concluded that principles of res judicata and collateral estoppel barred many of the claims subsequently asserted in federal court—even though some of the defendants in the federal lawsuit had not been parties to the original arbitration.
The Dispute Did Not End With the Arbitration
Dissatisfied with the outcome of the arbitration, Design Gaps, Inc., along with its owners, filed a new lawsuit in federal court. The lawsuit named some of the parties who had participated in the arbitration, but it also added a new company and new individuals. Some of those newly named defendants were parties whom Design Gaps had previously, but unsuccessfully, attempted to bring into the arbitration.
The defendants responded by seeking dismissal and summary judgment. Their principal argument was that the new lawsuit was barred by res judicata and collateral estoppel because the underlying disputes had already been resolved—or should have been resolved—in the arbitration.
The district court agreed.
It dismissed and granted summary judgment to the defendants on most of Design Gaps’ claims based on those doctrines. The court also granted summary judgment on other claims because they were barred by the statute of limitations, waiver, or laches.
Design Gaps appealed.
Res Judicata and Collateral Estoppel
The Fourth Circuit affirmed the district court’s decision.
The court observed that most of the claims were asserted either against parties who had participated in the arbitration or against parties who were in privity with them. Just as importantly, the claims and issues raised in the federal lawsuit either had already been decided in the arbitration or arose from the same underlying facts and therefore could have been raised during the arbitration proceedings.
That distinction is important.
Res judicata, sometimes called claim preclusion, generally prevents a party from bringing a subsequent action based on the same claim or transaction after that claim has been finally adjudicated.
Collateral estoppel, or issue preclusion, operates somewhat differently. It can prevent a party from relitigating an issue of fact or law that was previously actually litigated and determined.
In this case, those doctrines proved to be formidable barriers to Design Gaps’ attempt to pursue additional claims after the arbitration had concluded.
The appellate court therefore agreed that res judicata and collateral estoppel precluded many of Design Gaps’ claims. The court also affirmed the dismissal of other issues that were distinct from those previously arbitrated, concluding that those claims were nevertheless subject to other defenses.
The result was a comprehensive victory for the defendants.
Arbitration Can Have a Broader Impact Than Expected
One particularly interesting aspect of the case is that the preclusive effect of the arbitration was not limited strictly to the parties who participated in the arbitration.
The subsequent lawsuit included a new company and new individuals, including some parties whom Design Gaps had unsuccessfully attempted to add to the arbitration. Nevertheless, the courts concluded that preclusion principles protected certain defendants who were not themselves parties to the arbitration.
That outcome underscores a critical point for contractors, subcontractors, design professionals, owners, and other participants in construction disputes: the consequences of an arbitration proceeding may extend beyond the immediate arbitration itself.
A party that loses an arbitration may not be able to avoid the consequences of that result simply by repackaging the dispute as new claims, naming additional parties, or presenting the same underlying controversy under a different legal theory.
Once the underlying transaction and issues have been adjudicated, res judicata and collateral estoppel may substantially limit what can be litigated afterward.
Was It Worth It?
The court does not indicate the amount of money originally in dispute. That makes it difficult to assess the economics of the dispute, but it is hard not to wonder whether the amount at stake could possibly have justified the costs incurred over the years of arbitration, litigation, and appellate proceedings.
That is one of the practical concerns that construction professionals should consider when deciding how disputes should be resolved.
Arbitration is often promoted as a faster and less expensive alternative to litigation. In some circumstances, it can be. But arbitration is not necessarily inexpensive, and a complicated construction dispute can still require extensive discovery, expert testimony, hearings, briefing, and attorney involvement.
There is another consideration: appellate review is extremely limited in arbitration.
Courts generally give substantial deference to arbitration awards. An unsuccessful party ordinarily cannot obtain judicial review simply by arguing that the arbitrator reached the wrong factual conclusion or made an ordinary error of law. The grounds for vacating an arbitration award are narrow.
That finality can be an advantage when the goal is to bring a dispute to an end. But it can also be a significant disadvantage to a party that believes the arbitrator got the facts or law wrong.
Why Construction Contracts Matter
At ConstructionRisk, LLC, our approach to dispute-resolution provisions in design professional contracts reflects these concerns.
When we review such contracts, we generally strike arbitration provisions and replace them with provisions requiring disputes to be litigated in courts of competent jurisdiction in the state where the project is located.
That approach is based on several considerations.
First, we believe that motions practice in court can provide an important and cost-effective mechanism for disposing of claims and issues without taking every dispute through a full trial. Motions to dismiss and motions for summary judgment can allow courts to resolve claims that are legally deficient, time-barred, waived, or otherwise incapable of succeeding.
Second, we believe litigation can, in appropriate circumstances, be more cost-effective than arbitration, particularly in complex construction disputes involving multiple parties, contractual relationships, experts, and overlapping claims.
Finally, we value the availability of appellate review. While an appeal is certainly not guaranteed to produce a different result, the ability to obtain meaningful appellate review provides an important safeguard when a party believes the trial court has made a significant error.
Arbitration offers finality—but that finality comes with a price. Once an arbitration award has been issued, the opportunity to challenge it is substantially narrower than the opportunity to challenge a trial-court decision through the appellate process.
A Cautionary Lesson for Construction Professionals
Design Gaps is ultimately a reminder that the dispute-resolution provision in a construction or design contract can have consequences extending far beyond the initial dispute.
Parties should consider not only how they want a dispute to be resolved, but also what happens after the decision is made. An arbitration award may become the foundation for precluding subsequent claims and issues, potentially affecting parties who were not themselves participants in the arbitration.
For construction professionals, the lesson is straightforward: the dispute-resolution clause deserves careful consideration before a contract is signed—not after a dispute arises.
The choice between arbitration and litigation can affect the cost of resolving a dispute, the procedures available to the parties, the scope of discovery and motion practice, the availability of appellate review, and ultimately the ability to obtain a second look when something goes wrong.
The Design Gaps decision demonstrates that an unsuccessful arbitration may not necessarily be the end of the story—but it can make subsequent litigation extraordinarily difficult.
And for parties considering whether to arbitrate in the first place, that is a decision worth getting right.
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