Where you are is what matters

Oct. 4, 2018

Enforcement of arbitration clauses is not a cut-and-dry issue

The construction industry has a long history of favoring arbitration as an alternative means of resolving disputes. Nevertheless, contractors’ opinions and prejudices regarding the use of arbitration vary widely across the spectrum between outright insistence on its use to repugnance. Others believe certain types of disputes are more suited for arbitration than others. Of course, one cannot predict what type of dispute might occur when considering whether to insert an arbitration provision in a contract. For this reason, there appears to be a movement among non-public entity owners and some prime contractors to draft arbitration clauses giving one party the absolute right to determine whether arbitration will be used after a dispute arises. But are such clauses enforceable? The answer, like so many things in the law, is that it depends where you are.

United States of America ex rel. Harbor Constr. Co., Inc. v T.H.R. Enter., Inc., 311 F.3d 797 (E.D. Va. 2018), involved a prime contractor that entered into a contract with the federal government to renovate existing buildings on an Air Force base in Virginia. After the prime finished all work on the project, it received a demand from its electrical subcontractor for $269,056.87 in connection with additional work allegedly performed. Paragraph 13 of the subcontract contained the following language that essentially gave the prime sole discretion and control over whether a dispute will be arbitrated: At CONTRACTOR’s sole election, any and all disputes arising in any way or related in any way or manner to this Agreement may be decided by mediation, arbitration or other alternative dispute resolution proceedings as chosen by CONTRACTOR . . . .

On Dec. 15, 2017, the subcontractor filed a breach of contract and payment bond lawsuit against the prime and its surety in federal court in Virginia. On April 9, 2018, the prime and surety filed a motion to dismiss the complaint and, in the alternative, to stay the lawsuit pending arbitration of the dispute. However, the contractor had not yet filed a demand for arbitration when it filed its motion, and on April 9, 2018, the federal court denied both motions. On April 12, 2018, the prime and surety filed motions to compel arbitration and once again to stay the case pending completion of the arbitration. This time, to show that it had elected to arbitrate the dispute, the prime included with its motion a copy of a formal demand for arbitration it had filed that same day with the American Arbitration Association and which it had served upon the subcontractor.

Opposing the motion, the subcontractor argued that the arbitration clause is invalid and unenforceable because it is impermissibly vague and in that only one of the parties controls whether a dispute is arbitrated, there is no mutuality of obligation. Alternatively, it argued that the prime waived its right to elect arbitration at this stage.

The subcontractor first argued that Paragraph 13 was impermissibly vague because it stated disputes “may be decided” by arbitration, etc., rather than “shall be decided” in that manner. However, the court disagreed and pointed to a prior case in Virginia holding that the mere use of the term “may” in an arbitration provision does not render it vague or otherwise suggest that both parties must agree before they must resort to arbitration.

On the more important issue of whether a unilateral arbitration provision (i.e., a clause giving the decision whether a dispute shall be arbitrated to only one party) is enforceable, the court noted that no Virginia court had decided that matter. It acknowledged, however, that Maryland, North Carolina and West Virginia courts had, with only Maryland deciding such clauses are enforceable because they lacked “mutuality of obligation.” In the end, it predicted that a Virginia court would side with North Carolina and West Virginia decisions, because in other similar decisions Virginia refused to find a contract lacking mutuality of obligation simply because some provisions in a contract are one-sided.

Finally—and consistent with holdings in the past—the court held that the prime contractor’s participation in the litigation was not substantial enough to warrant a finding that it waived the right to arbitrate.

Although the use of arbitration clauses like the one in Harbor Construction is becoming more commonplace, not many courts have weighed in on whether they are enforceable. It is, therefore, important for contractors to keep abreast of the law in the states in which they operate.

About The Author: Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Caudle can be contacted via e-mail at [email protected].