So You Want to Arbitrate? Better Make Sure Your Contract Covers All Bases.
Stephanie Nolan Deviney Partner, Fox Rothschild LLP
Posted: July 16, 2021 | Legal
As a General Contractor, you may prefer to arbitrate any contractual disputes rather than engage in protracted litigation. Many Courts favor arbitration clauses and will enforce them if there is a sufficient reason to do so. However, there are several issues that a General Contractor should consider when including an arbitration clause in its construction agreement with its client. When an arbitration clause is not properly crafted, questions can arise as to who must arbitrate? Who decides whether to arbitrate? Who selects the arbitrator? What will the subject matter of the arbitration be? A look at a recent case in Pennsylvania highlights the need for properly crafted arbitration clauses.
A Recent Case Highlights The Importance Of Arbitration Clauses
In TEC Construction, LLC v. Greg Rich and Lora Rich filed in the Court of Common Pleas, Allegheny County, Pennsylvania, TEC Construction, LLC (“TEC”) and Greg and Lora Rich (the “Riches”), entered into a Construction Agreement with an arbitration clause. Specifically, the parties to the Construction Agreement, TEC and the Riches, agreed to arbitrate any disputes with the American Arbitration Association. Five subcontractors completed the work under the Construction Agreement but none of the subcontractors agreed to arbitrate.
Nine years after the subcontractors substantially completed the work, the Riches filed a Demand for Arbitration claiming that TEC breached the Construction Agreement and was negligent in the selection and supervision of its subcontractors. The Riches also alleged in their Demand for Arbitration that TEC and its subcontractors violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law (“UTPCPL”).
In response to the Demand for Arbitration, TEC filed a Declaratory Judgment in the Court of Common Pleas, Allegheny County, requesting a declaration that the dispute between TEC and the Riches is not subject to arbitration. Specifically, TEC alleged that it should not be required to arbitrate the dispute because the Riches allegations involved the work of TEC’s subcontractors who did not agree to arbitrate and could not be compelled to arbitrate. As such, TEC alleged that judicial efficiencies would not be served if it were forced to arbitrate the dispute with the Riches and then litigate the dispute with its subcontractors. TEC also argued that the arbitration clause was not intended to apply to statutory violations such as the UTPCPL. Thus, the Riches claim under the UTPCPL was not subject to arbitration.
While the Court has not yet ruled on TEC’s Declaratory Judgment Complaint, there are lessons General Contractors can learn from the mere filing of it.
Do You Really Want To Arbitrate?
First, a General Contractor should decide if it really wants to arbitrate. There are pros and cons to both arbitration and litigation. Before inserting an arbitration clause in a construction agreement, the General Contractor should seriously consider the cost, timing, discovery obligations, convenience, and finality of an arbitration versus litigation.
Once a General Contractor decides that it wants to litigate, then the General Contractor should include contractual clauses that will identify who will make the decision to arbitrate, who is subject to arbitration, how the arbitrator will be selected, and the subject matter of the arbitration. Obviously, these clauses should be most favorable to the General Contractor, subject to negotiation with its clients. However, the arbitration clauses cannot be so one-sided that they are conscionable. Courts will not enforce unconscionable arbitration clauses.
Who Will Make The Decision To Arbitrate?
To retain control over the decision to arbitrate, a General Contractor may consider language in its construction agreements that allow arbitration at the sole discretion of the General Contractor. This allows the General Contractor, on a case-by-case basis to decide whether it wants to arbitrate.
Who Should Be Subject To Arbitration?
If the General Contractor wants to arbitrate, then the General Contractor needs to make sure that its subcontractors are also obligated to arbitrate. Given that most Courts prefer arbitration and will enforce arbitration clauses, so long as such an arbitration clause is included, a Court will likely enforce it, allowing all necessary parties to participate in the arbitration. There are several ways to achieve this result.
One way to ensure that a subcontractor must arbitrate any disputes with the General Contractor and client is to include a specific arbitration clause in the subcontract that mirrors the arbitration clause in the construction agreement between the General Contractor and its client. Another way to ensure that the subcontractor is required to participate in arbitration, is to include a clause in the subcontract that incorporates all the terms and conditions of the construction agreement between the General Contractor and its client.
However, a General Contractor should also consider if it really wants to arbitrate issues between itself and the subcontractor. If not, then the General Contractor should consider contractual language which only requires the subcontractor to arbitrate if there is a dispute between the General Contractor and its client or even at the General Contractor’s sole discretion.
Who Will The Arbitrator Be?
The General Contractor should consider whether it wants to preselect how the arbitration will take place. Many construction agreements simply state that the parties will arbitrate with the American Arbitration Association.
Another option is to state only that the parties will follow the rules of the American Arbitration Association. Under such a scenario, the parties are free to select their own private arbitrator, but still utilize the rules of the American Arbitration Association.
If the General Contractor wants to provide for flexibility in the determination, it can always include a clause that states that the parties will arbitrate with the American Arbitration Association, unless otherwise agreed to in writing by all parties.
What Will The Subject Of The Arbitration Be?
The General Contractor who selects arbitration as the preferred method of dispute resolution and ensures that its subcontractors are also required to arbitrate, should also decide if there are any limitations to the subject matter of the arbitration. For instance, a General Contractor might want to exclude statutory violations from arbitration. A General Contractor may also consider placing a monetary value on the claims that are subject to arbitration. For instance, a General Contractor might want to arbitrate claims that are only above or below a certain dollar value threshold.
Arbitration can be an effective dispute resolution method. However, before a General Contractor inserts an arbitration clause in its construction agreements with its clients, the General Contractor should consider whether it really wants to arbitrate, how the arbitrator will be selected, who should be part of the arbitration, how the arbitration will proceed, and what the subject matter of the arbitration will be. By putting time and effort into the decision to arbitrate, and the clauses related to arbitration, the General Contractor can hopefully avoid litigation over whether the arbitration clause is enforceable.
Fox Rothschild LLP is home to one of the deepest Construction Practice Groups in the United States. With offices in major construction hubs nationwide, Fox’s experienced team advises on major construction and infrastructure projects, including drafting and negotiating contracts and litigating disputes involving such projects. Harnessing the combined strength of a nationally recognized construction practice and a deep bench of lawyers focused on Federal Government Contracts, we provide business-friendly advice to help our clients complete projects in the United States and internationally. Fox construction law practice is backed by a national firm of 950 attorneys providing a comprehensive suite of legal services from 27 offices coast to coast. For more information, visit foxrothschild.com/construction.
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