The Importance of Making Sure Arbitration Provisions are Unambiguous

By: Jennifer Cromheecke and Werner Sabo

Two recent cases underscore the importance of ensuring that contractual dispute-resolution provisions are clear, unambiguous, and reflective of the parties’ intentions.

In Matrix North American Construction, Inc. v. SNC Lavalin Constructors, Inc., Case No.: PWG-17-3763, 2018 WL 3707838 (D.Md. Aug. 2, 2018), a subcontractor (Matrix) agreed to provide labor and materials to SNC for the construction of an energy center. The parties disputed the scope of work and attempted to resolve their differences through negotiation and then mediation. When both attempts failed, Matrix sued SNC for breach of contract and a violation of Maryland’s Prompt Payment Statute. SNC then moved to stay the proceedings based upon the parties’ contract, which contained a three-step “Resolution of Disputes” provision “relating to or arising out of” the parties’ agreement.

  1. The first step, “negotiation,” required good-faith direct discussions between the parties’ representatives.
  2. The second step, “mediation,” stated that “the dispute may be settled by a single arbitrator.”
  3. The third step, “litigation,” provided that “[a]ny dispute not resolved through negotiation or mediation shall be decided by litigation.”

Matrix argued that arbitration was not mandated by the contract’s three-step dispute resolution process. SNC argued that the contract included an arbitration clause and that the litigation provision only related to issues that fell outside of the scope of that clause. The court agreed with SNC, noting that the “mediation” section discussed binding arbitration without once referencing non-binding mediation. The court also focused on the phrase “may be settled by a single arbitrator,” and concluded that the term may, although permissive-sounding, was in reality only giving an “aggrieved party the choice between arbitration and abandonment of his claim.” Id. at *5 (Austin v. Owens-Brockway Glass Container, Inc., 78 F.3d 875 (4th Cir. 1996)). Relying on Austin, the court concluded that had the parties intended for the arbitration provision to be permissive, the provision would be rendered meaningless because parties are always free to submit to voluntary arbitration. In sum, the court concluded that “the most direct way to harmonize all three contract sections is to read [the “litigation” provision] to permit litigation when a party either files suit to enforce the arbitrator’s award or to vacate it.” Id. at *6.

In AVR Davis Raleigh, LLC v. Triangle Construction Co., Inc., No. COA17-958, 2018 WL 3732811 (N.C. Ct. App. Aug. 7, 2018), AVR hired Triangle to construct an apartment complex on AVR’s land. AVR claimed that Triangle failed to adhere to the construction schedule or to pay for 112 change orders, and accordingly filed suit. Triangle filed a motion to dismiss and to compel arbitration pursuant to the following clause in the parties’ construction contract:

“Arbitration of claims under $500,000 with litigation of claims over $500,000. In the event there are several claims under $500,000, but the aggregate of all claims exceeds $500,000, all the claims shall be arbitrated.”

The trial court denied the defendant’s motion to compel arbitration on the basis that the parties had not selected a method of binding dispute resolution other than litigation. The ruling was reversed on appeal. Noting that North Carolina has a strong public policy favoring arbitration dispute resolution, the appellate court concluded that any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. Therefore, even though the arbitration provision was ambiguous, the appellate concluded that the parties had in fact selected a method of binding dispute resolution other than litigation and remanded the case for entry of an order compelling arbitration.  

Illinois courts likewise embrace arbitration as a dispute-resolution mechanism because it “promotes the economical and efficient resolution of disputes.” Phoenix Insurance Co. v. Rosen, 242 Ill. 2d 48, 59 (2011). When entering into contracts that include arbitration clauses or dispute-resolution provisions, keep in mind that many courts strive to enforce or construe these provisions to require arbitration, even when they are ambiguous. Spend extra time in the drafting or negotiation of these clauses to ensure they reflect your intentions in the event a dispute arises.  

 

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

Chicago, Illinois

312-377-1501


Schererville, Indiana

219-488-2590