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Is Your Project Subject to Binding Arbitration?


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By Chase Fisher

Multiple disputes arise
The parties, the general contractor and the highway department, originally entered into a written contract in 1995, which stated that disputes between the parties would first be decided by a dispute review board, which would issue findings and nonbinding recommendations to the project director.  The project director could then accept, revise, or reject the recommendations.  Further, the project director’s decision could be appealed to a local court.  

As work progressed, hundreds of disputes arose.  Most of these disputes involved additional costs due to delays and construction problems.  To prevent delays in construction, the parties entered into another agreement in 1999 that would replace the 1995 agreement and give the dispute resolution board the authority to make binding arbitration decisions.  However, the parties agreed that the board’s decisions would only be binding for all disputes that arose prior to 1999, and they compiled a list of all the binding disputes and attached the list as exhibit to the 1999 agreement.  

The contractor then proceeded to bring disputes to the dispute resolution board.  Yet, the disputes brought by the contractor for binding arbitration included disputes that were not part of the 1999 exhibit. The contractor attempted to piggyback those additional claims on the basis that they were related to the binding disputes, despite the fact that they were clearly not part of the 1999 exhibit.  While the highway department mentioned the discrepancy during the arbitration, it stayed in the arbitration proceeding until the end, when the arbitrator awarded the contractor $56 million.

The highway department appealed the decision arguing that the arbitrability (i.e., the ability of a dispute to be subject to arbitration) of claims not specifically included in the 1999 exhibit should be determined by a court, not an arbitrator.  The court agreed with the highway department and reversed the arbitrator’s award.

Clear as mud
The court noted that courts should not assume that the parties agree to arbitrate the arbitrability of claims unless there is ‘clear and unmistakable’ evidence that the parties did so.  Significantly, this standard is different from the general approach that courts take to interpret contracts.  Typically, if a contract is silent or ambiguous regarding certain terms and conditions, the court will make certain presumptions regarding what the parties intended.  However, the bar is raised in situations involving whether claims will be subject to arbitration.  

Here, the parties’ 1999 agreement did not clearly and unmistakably set forth whether claims not listed in the 1999 exhibit would be subject to binding arbitration.  However, the 1995 agreement did set forth a process for all arbitration disputes that arose between the parties.  Thus, the clear and unmistakable standard resulted in the 1995 agreement controlling any claims not explicitly set forth in the 1999 exhibit.

Of particular note, the court could not easily separate which amount of the arbitration award was attributable to the 1999 exhibit, so it overturned the entire award.

Take away
While it is imperative for contractors to always review their contracts and to have their contracts carefully drafted, courts may have the ability to make presumptions as to what the parties intended, even when some terms and conditions are not specifically included in a contract.  However, as this case makes clear, to the extent that parties wish to have claims arbitrated, it is very important that an arbitration clause is clear and unmistakable regarding the terms of the arbitration and what disputes will be subject to arbitration.

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