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Although the common law presumes that contractual disputes
will be resolved through litigation, many in the construction
industry sign contracts under which the parties agree to resolve
their disputes through binding arbitration. Although
arbitration certainly has its advantages (i.e., the arbitrator is
usually familiar with the industry and associated terminology),
some general contractors draft
subcontracts with language making
arbitration optional at the discretion
of the general contractor. In Wolverine
Fire Protection Co. v. Atlantic
Marine Construction Co., Inc., 2008
U.S. Dist. LEXIS 33785 (E.D.Va.
2008), the subcontractor challenged
the enforceability of such a contractual
provision, arguing that the arbitration
provision was too vague to
be enforceable.
In Wolverine Fire Protection Co.,
the subcontractor provided the general contractor with fire
protection equipment and other associated products. A dispute
arose as to billing and, following demand for payment,
the subcontractor filed suit against the general contractor,
claiming breach of contract and unjust enrichment. The general
contractor, in turn, filed a motion to dismiss, seeking to
enforce an arbitration provision in the contract. Specifically,
the arbitration provision provided, in relevant part, “At sole
discretion of [general contractor], claims…may be arbitrated.”
The clause continued, “If [general contractor] determines
that resolution of any dispute between the [s]
ubcontractor and [general contractor] shall be made in such
manner, litigation…shall not be permitted.”
The general contractor, in making the motion to compel arbitration,
argued that, insofar as it elected to arbitrate the subcontractor’s
dispute, proceeding with litigation would be inappropriate.
The subcontractor argued that the court should
not enforce the arbitration provision because the clause “is
too vague and indefinite, in that it does not prescribe a location,
a number of arbitrators, procedural rules, or any enforcement
mechanism for an arbitration.”
The court noted that the Federal Arbitration Act (the “FAA”)
“establishes that, as a matter of federal law, any doubts concerning
the scope of arbitrable issues should be resolved in
favor of arbitration, whether the problem at hand is the construction
of the contract language itself or an allegation of
waiver, delay, or a like defense to arbitrability.” In other
words, the issue before the court was whether an arbitration
provision exists, not whether the arbitration clause is enforceable.
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The enforceability of an arbitration provision is an issue
often left to the arbitrator to decide.
The court further observed that the FAA operates to provide
arbitration terms if the contract is silent on this issue. Accordingly,
the court rejected the subcontractor’s contention that the lack of definite location, number of arbitrators, procedural
rules, or enforcement mechanism rendered the arbitration
provision too vague and indefinite to enforce.
The court, therefore, focused solely on whether the clause
cited by the general contractor amounted to an agreement to
arbitrate. The court found particularly
persuasive an unpublished opinion
from another jurisdiction holding
“that the phrase ‘arbitration clause,’
standing alone in a reinsurance contract
was enough to bind the parties
to arbitration.” Accordingly, the
court granted the general contractor’s
motion to compel arbitration, reasoning
that, if arbitration could be compelled
by the simple phrase
“arbitration clause,” so too should
the instant arbitration provision be
enforced.
The lesson of Wolverine Fire Protection Co. is that subcontractors
should be cognizant of the dispute resolution provisions
in their contracts, as even an arguably vague or indefinite
arbitration provision will likely be enforced by courts.
Additionally, if faced with a contract under which the general
contractor is provided the discretion to elect arbitration in
lieu of litigation, an aggrieved subcontractor should communicate
with the general contractor regarding the general contractor’s
preferences for dispute resolution prior to incurring
the cost of initiating litigation or arbitration.
continued from page 1
The contractor also argued that the equipment idle time
change order was not valid because it was not in writing, as
required by the subcontract. The court, however, noted that a
non-modification provision in a written contract, stating that
the contract may be modified only by a writing signed by the
parties, can, like any other provisions in a contract, be expressly
or impliedly waived. The court found that the contractor
waived that provision of the subcontract when it made
the oral equipment idle time agreement with the subcontractor.
As a result, the oral equipment idle time change order
was binding on the contractor, even though the original subcontract
stated that change orders must be in writing.
In re R&D Contr., L.L.C. is instructive for two reasons. First,
the court held that a contractor would be bound by the actions
of its agents, even when its agent issues an oral change order
in contravention of the terms of the written subcontract. Second,
the court held that a contractual provision requiring that
changes be in writing, itself, can be waived orally. This case
suggests a cautionary approach to the delegation of authority
and to the issuance of oral directives.
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