ConstructionPro Week, Volume: 3 - Issue: 3 - 01/17/2014

Arbitration Clauses: Say It Right or Don’t Say It at All

By Bruce Jervis

 

The drafters of construction contracts sometimes try to have it both ways with arbitration clauses. They would like to lock the other party into binding arbitration of disputes, but they don’t want to similarly commit themselves. It is widely understood that unilateral arbitration clauses (binding arbitration only at the option of Party A) are unenforceable. So drafters are coy.

 

A recent example is found in a construction contract prepared for a public project owner. The contract mandated nonbinding mediation of claims or disputes in accordance with the rules of the American Arbitration Association. The contract went on to say, “If the dispute is not resolved through mediation, the parties may submit the controversy or claim to arbitration.”

 

The contractor brought a differing site condition claim against the owner. Two days of mediation failed to resolve the matter. The contractor demanded arbitration. The project owner refused. The contractor attempted to compel arbitration in court, but the owner prevailed. Because of the permissive term “may” rather than the mandatory term “shall,” there was no enforceable agreement to arbitrate disputes.

 

Have you seen arbitration clauses which stop short of mandating binding arbitration while still indicating that arbitration is a possibility? What assumptions do you then make regarding the dispute resolution mechanism under the contract? I welcome your comments.

 

COMMENTS

Bruce: You say: "It is widely understood that unilateral arbitration clauses (binding arbitration only at the option of Party A) are unenforceable." Do you have any cases that did not enforce unilateral arbitration clauses? I had the opposition impression but have done no research. Thx. Marilyn
Posted by: Marilyn Klinger - Friday, January 17, 2014 11:09 AM


I agree with Marilyn. Given that most states have caselaw that says we won't interfere with contract language agreed to by commercial parties no matter if one sided, I would be interested in cases that go against this general rule.
Posted by: Sam Laurin - Friday, January 17, 2014 11:17 AM


I've been involved with cases re arbitration clause in contracts. would welcome the cite on your case; our language has been "shall" not "may" and not unilateral.
Posted by: Rick Morris - Friday, January 17, 2014 12:01 PM


I believe that it is actually settled law in NY that unilateral arbitration clauses- in non-consumer contracts- are enforceable as written.

Sablosky v. Edward S. Gordon Co., Inc., 73 N.Y.2d 133, 137, 535 N.E.2d 643, 646 (1989)(recognizing that mutuality of remedy is not required in arbitration)
Posted by: Michael Catania - Friday, January 17, 2014 4:22 PM


This one's a zebra of a different stripe!

Adroit black letter contract word-smithing by the owner, which has the appearance of an mediation | arbitration agreement, but is only an agreement to mediate.

Here's the case, which is available on PACER and Justia.

QUAM CONSTRUCTION CO., INC., A MINNESOTA CORPORATION Plaintiff, v. CITY OF REDFIELD, A SOUTH DAKOTA MUNICIPALITY Defendant

UNITED STATES DISTRICT COURT DISTRICT OF SOUTH DAKOTA NORTHERN DIVISION

CASE NO. CIV 13-1017; ORDER DATED 19TH DECEMBER, 2013

"In this case, no agreement to arbitrate was made. The words of the contract's arbitration clause allow for one or the other party to simply disagree and not allow arbitration to proceed."

IT IS ORDERED that petitioner's motion to compel arbitration, Doc. 4, is denied.

Dated this 19th December, 2013.

BY THE COURT

United States District Judge

CHARLES B. KORNMANN
Posted by: Richard Bull - Friday, January 17, 2014 6:07 PM


Thank you Mr. Bull for providing the case information. It is also available at: 2013 U.S. Dist. LRXIS 178884
Posted by: Bruce Jervis - Saturday, January 18, 2014 8:16 AM


Think that's bad? I just finished a project where the architect unilaterally re-wrote the AIA standard spec to remove all their responsibility for designing the project and put the onus on the contractors for any issues. The standard AIA papers looked like a redacted, re-written report out of the White House. Unfortunately our estimators did not read the AIA specs as they are normally boilerplate in content. READ THE SPECS CAREFULLY!!!!
Posted by: Bud - Monday, January 20, 2014 11:12 AM


Two readers questioned my comment that unilateral arbitration clauses are unenforceable. Their skepticism was well founded. My comment was incorrect. In a commercial context, such as a construction contract, where an arbitration clause is part of a broader agreement supported by adequate consideration, unilateral arbitration clauses are generally enforceable. Cases holding them unenforceable have involved home builders and sellers. In these transactions, the unilateral clauses frequently run afoul of state consumer protection statutes.
Posted by: Bruce Jervis - Tuesday, January 21, 2014 3:47 PM


You're welcome, Bruce.

For everyone's info, the contractor has appealed the Order. I think this matter is "one-to-watch" because the owner's clause may well have serious legal flaws.

The owner's mediation | arbitration provisions in the general conditions (i.e., Para. 26 MEDIATION/ARBITRATION) are mandatory except with respect to: (i.) the potential use of a qualified alternative dispute organization (other than the AAA) for mediation, and (ii.) submission of a controversy or claim to arbitration, each require the parties to agree. Certain mandatory provisions appear intended to work in concert to foreclose the contractor's ability to pursue a claim beyond mediation.

Hat Tip to Bud! Yes, please "READ THE SPECS CAREFULLY!!!!"

Here's the full text of the owner's ADR clause. Heed Bud's advice whilist reading it!

26. MEDIATION/ARBITRATION

a. Any controversy or claim arising out of or related to the contract, or the breach thereof, shall first be submitted to the American Arbitration Association Mediation Department. A mutually agreed upon qualified alternative dispute organization may be used.

Mediation shall continue (1) until resolution of the dispute or (2) until the mediator notifies the parties that it is unlikely that the dispute will be resolved through mediation.

Arbitration: If the dispute is not resolved through mediation, the parties may submit the controversy or claim to Arbitration. If the parties agree to arbitration, the following will apply:

The Contractor shall not cause a delay of the work because of the pendency of arbitration proceedings, except with the written permission of the Engineer. and then only until the arbitrators shall have an opportunity to determine whether or not the work shall continue until they decide the matters in dispute.

The demand for arbitration shall be delivered in writing to the Engineer and the adverse party, either personally or by registered mail to the last known address of each, within ten days of the receipt of the Engineer's decision, and in no case after final payment has been accepted except as otherwise expressly stipulated in the Contract Documents. If the Engineer fails to make a decision within a reasonable time, a demand for arbitration may be made as if his decision had been rendered against the demanding party.

b. Arbitrators -No one shall be nominated or act as an arbitrator who is in any way financially interested in this Contract or in the business affairs of the Owner, or the Contractor, of the Engineer. or otherwise connected with any of them. Each arbitrator shall be a person in general familiar with the work or the problem involved in the dispute submitted to arbitration.

Unless otherwise provided by controlling statutes, the parties may agree upon one arbitrator; otherwise there shall be three, one named in writing by each party to this Contract. to the other party. and the third chosen by those two arbitrators, or if they should fail to select a third within fifteen days, then he shall be appointed by the presiding officer, if a disinterested party, of the Bar Association nearest the location of the work. Should the party demanding arbitration fail to name an arbitrator within said ten days, then said presiding officer shall appoint such arbitrator within ten days, and upon his failure to do so then such arbitrator shall be appointed on the petition of the party demanding arbitration by a judge of the Federal Court in the district where such arbitration is to be held.

The said presiding officer shall have the power to declare the positions of any arbitrator vacant by reason of refusal or inability to act; sickness. death, resignation, absence or neglect. Any vacancy shall be filled by the party making the original appointment. and unless so filled within five days after the same has been declared, it shall be filled by the said presiding officer. If testimony has been taken before a vacancy has been filled, the matter must be reheard unless a rehearing is waived in the submission or by the written consent of the parties.

If there be one arbitrator, his decision be binding. If three. the decision of any two shall be binding in respect to both the matters submitted to and the procedure followed during the arbitration. Such decision shall be a condition precedent to any right of legal action.

c. Arbitration Procedure -The arbitrators shall deliver a written notice to each of the parties and to the Engineer, either personally or by registered mail to the last known address of each of the time and place for the beginning of the hearing of the matters submitted to them, Each party may submit to the arbitrators such evidence and argument as he may desire and the arbitrators may consider pertinent The arbitrators shall, however, be the judges of all matters of faw and fact relating to both the subject matters of and the procedure during arbitration and shall not be bound by technical rules of law or procedure, They may hear evidence in whatever form they desire, The parties may be represented before them by such person as each may select, subject to the disciplinary power of the arbitrators if such representative shall interfere with the orderly or speedy conduct of the proceeding.

Each party and the Engineer shall supply the arbitrators with such papers and information as they may demand, or with any witness whose movements are subject to their respective control, and upon refusal or neglect to comply with such demands the arbitrators may render their decision without the evidence which might have been elicited therefrom and the absence of such evidence shall afford no grounds for challenge of the award by the party refusing or neglecting to comply with such demand.

The submission to arbitration (the statement of the matters in dispute between the parties to be passed upon by the arbitrators) shall be in writing duly acknowledged before a notary. Unless waived in writing by both parties to the arbitration, the arbitrators, before hearing testimony, shall be sworn by an officer authorized by law to administer an oath; faithfully and fairly to hear and examine the matters in controversy and to make a Just award according to the best of their understanding.

The arbitrators. if they deem the case demands it. are authorized to award to the party whose contention is sustained such sums as they shall consider proper for the time, expense and trouble incident to the arbitration. and if the arbitration was deemed without reasonable cause. damages for delay and other losses.

The arbitrators shall fix their own compensation, unless otherwise provided by agreement, and shall assess the costs and charges of the arbitration upon either or both parties.

The award of the Arbitrators shall be in writing and acknowledged like a deed to be recorded, and a duplicate shall be delivered personally or by registered mail. forthwith upon its rendition, to each of the parties to the controversy and to the Engineer. Judgment may be rendered upon the award by the Federal Court or the highest State Court having jurisdiction to render same.

The award of the arbitrators shall not be opened to objection on account of the form of the proceedings or the award, unless otherwise provided by the controlling statutes. In the event of such statutes providing on any matter covered by this Section otherwise than as herein before specified the method of procedure throughout and the legal effect of the award shall be wholly in accord with said statutes, it being the intention hereby to lay down a principle of action to be followed, leaving its local application to be adapted to the legal requirements of the jurisdiction having authority over the arbitration.

The Engineer shall not be deemed a party to the arbitrators to explain the basis of his decision and give such evidence as they may require.
Posted by: Richard Bull - Friday, January 24, 2014 7:09 PM


 









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