Custom Arbitration Language in Construction Contracts

By: Werner Sabo

Most construction contracts include dispute resolution provisions, including situations where the parties decide not to use industry-standard agreements. Using custom language in such provisions poses real danger, including potential litigation regarding the meaning of the contract. Below are two recent cases that illustrate this danger.

1.    Did the parties intend to arbitrate disputes?

The word “may” was used in a dispute resolution provision in a subcontract in Matrix North American Construction, Inc. v. SNC Lavalin Constructors, Inc., 2018 WL 3707838 (D. MD, August 2, 2018). Incredibly sloppy drafting created an ambiguous methodology. Here is the language from the contract:

22. RESOLUTION OF DISPUTES

22.2 NEGOTIATION—If the Parties cannot reach resolution on a matter relating to or arising out of the Agreement, the Parties shall endeavor to reach resolution through good faith direct discussions between the Parties’ representatives, who shall possess the necessary authority to resolve such matter and who shall record the date of first discussions. If the Parties’ representatives are not able to resolve such matter within five (5) business Days of the date of first discussion, the Parties’ representatives shall immediately inform senior executives of the Parties in writing that resolution was not affected. Upon receipt of such notice, the senior executives of the Parties shall meet within five (5) Business Days to endeavor to reach resolution. If the dispute remains unresolved after fifteen (15) Days from the date of first discussion or longer period if the Parties agree, the Parties shall submit such matter to the dispute mitigation and dispute resolution procedures selected herein.

22.3 MEDIATION—the dispute may be settled by a single arbitrator, in accordance with the rules of the American Arbitration Association (“AAA”), which shall use commercially reasonable efforts to make a determination within two (2) weeks of such arbitrator’s engagement, which determination shall be in writing and final and binding on the Parties. The parties shall cooperate in providing reasonable disclosure of relevant documents. The exclusive venue and place of arbitration shall be in Maryland pursuant to the AAA’s Construction Industry Arbitration Rules and Mediation Procedures then in effect. Seller agrees to participate in and be bound by anything between Owner and Construction Manager that relates in any manner to the Work furnished by Seller. Each party shall bear its own expenses, and the costs and fees of the arbitration shall be borne equally by the Parties. The arbitrator shall not award punitive damages nor include interest in any determination [.]

22.4 LITIGATION—Any Dispute not resolved through negotiation or mediation shall be decided by litigation brought exclusively in either the state or federal court within Prince George’s County, Maryland. Construction Manager and Trade Contractor hereby consent to personal jurisdiction in any legal action, suit, or proceeding brought in any court, federal or state, within Prince George’s County, Maryland, having subject matter jurisdiction and irrevocably waive, to the fullest extent permitted by applicable laws and the laws of the state of Maryland, any claim or any objection it may now or hereafter have, that venue or personal jurisdiction is not proper with respect to any such legal action, suit, or proceeding brought in such a court in Prince George’s County, Maryland, including any claim that such legal action, suit, or proceeding brought in such court has been brought in an inconvenient forum. Each Owner and Contractor further consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such Party at its address specified herein for the giving of notices, or by such other notice given in accordance with the rules and procedures of such courts.

When a dispute arose between the general (SNC) and the subcontractor (Matrix), the parties entered into negotiations, followed by mediation, which also failed. Matrix then filed suit and SNC moved to compel arbitration. SNC argued that arbitration was required and litigation was not an option.  Matrix believed that the contract required a three-step dispute resolution procedure, and, having fulfilled the first two steps, it could bring litigation as the third step. The court found the language confusing and closely examined the words used. It found that the “Mediation” section discusses only binding arbitration, without once referencing non-binding mediation. The use of the word “may” was examined and the court held that, in this contract, that word was mandatory. Finally, it addressed the question of when, if ever, litigation was contemplated in this contract. The court held that this could be harmonized by permitting litigation when a party either files suit to enforce the arbitration award or to vacate it. Thus, the motion to compel arbitration was granted.

The contract contained non-standard language in the dispute resolution section. While there is nothing wrong with creating custom language, it must be done very carefully by an attorney who is familiar with dispute resolution. The language in this provision was confusing and the problem should have been spotted before any contract was signed. As a result, the parties spent considerable time and money in having a court determine what their contract meant.

2.   Part 2 – Did the parties intend to give themselves the option to require arbitration?

In Mississippi State Port Authority at Gulfport v. Southern Industrial Contractors LLC, 2018 WL 6616983 (Ct. App. Miss., Dec. 18, 2018), the contract had this provision:

The Subrecipient [Port Authority] and the Contracted Party [SIC] agree to resolve all claims and contract disputes by negotiations, arbitration, litigation, or other means as provided in the Contract documents and state law, prior to submission of any related change order or Contract Amendment to MDA for review and approval, in order to obtain a grant eligibility or allowability determination.

When a dispute between the owner and contractor developed, the contractor moved to compel arbitration based on this provision. The owner argued that the contract did not contain a binding arbitration clause. After the trial court ordered arbitration, the appellate court reversed, agreeing with the owner. The contractor argued that the provision gives a party the option to choose one of the alternative methods of dispute resolution. If that party elects arbitration, the other party cannot neutralize that choice by insisting on litigating in court. The appellate court rejected that argument, finding that the open-ended language of this contract provision did not convert to a binding arbitration agreement simply because the parties left the matter of dispute resolution open to options provided by state law.

Once again, a poorly drafted dispute resolution provision created unnecessary litigation. Simply reading the dispute resolution provision makes one wonder what the parties actually intended. Were these choices; were they steps to resolution; or was this simply a list of various dispute resolution methods? The contract does not tell the parties how to go about resolving a dispute.

A good contract gives a clear roadmap that the parties will follow in resolving disputes. Again, having an experienced construction attorney review such a contract can be very important.

Chicago, Illinois 312-377-1501 | Schererville, Indiana 219-488-2590

Chicago, Illinois

312-377-1501


Schererville, Indiana

219-488-2590