Contractors can force arbitration but.......

The decision by the Supreme Court in Arthur Andersen LLP v. Carlisle requires adherence to Section 3 of the Federal Arbitration Act if the litigant is entitled to a stay under relevant state contract law. 

So now we need to look at both federal and state law in regard to government contracts?

Arbitration In Kansas City Construction

Thanks to Kate Whitby of Spencer Fane Britt & Browne LLP regarding the following important subject.

Complete your negotiations and get it in writing!

The Missouri Court of Appeals recently refused to compel arbitration between a contractor and a subcontractor concerning construction work at 46th and Washington in Kansas City. The parties' written contract allowed arbitration of disputes only at the contractor's discretion. A dispute arose, and it turned out the subcontractor wanted to arbitrate. The parties' lawyers came to an agreement about the arbitrator to use, the dates and duration of the arbitration, documents to be exchanged, and the types of presentations that would be allowed at the arbitration. The subcontractor's lawyer sent the other side a letter outlining all the areas of agreement, but left one item potentially open: the scope of the award the arbitrator could issue, and whether that scope also was within the arbitrator's right to decide. The contractor's lawyer responded with an e-mail which said that he believed the letter correctly outlined "the type of arbitration we have agreed upon."

The lawyers apparently never reached closure on the "scope of arbitration" issue, but the subcontractor thought they had a sufficiently detailed agreement that this term could be filled in by the arbitrator. The contractor disagreed, and opposed the subcontractor's motion to compel arbitration.

The trial court denied arbitration and the appeals court agreed, finding that the lawyers' letter and e-mail had been nothing more than negotiations. The appellate court needed some confirmation or acknowledgement from the parties or their lawyers that the negotiations had finished and the parties had agreed to actually arbitrate a defined something. Absent such proof, the appeals court decided that the parties had never agreed to arbitrate at all.

Lesson to be learned? Complete your negotiations and get the agreement in writing!

Arbitration provisions

Kate Whiby of Spencer Fane Britt & Browne LLP summarizes a recent case from the Missouri Supreme Court of note.....

The Missouri Supreme Court held, relative to the agreement between a home builder and the home purchasers, that: 1) though an arbitration clause in a contract of adhesion would not be enforceable, the fact that the contract was a preprinted form did not meet the requirements of a contract of adhesion; 2) though an arbitration clause may give only one party the right to select the arbitrator, the clause was not invalid due to a lack of mutuality of obligations, since both parties had exchanged consideration; 3) the method set out in the contract for the selection of arbitrator is substantively unconscionable and must fail because the clause does not provide for the selection of an unbiased arbitrator; and (4) the cost shifting provision of the arbitration clause that requires the consumer to bear all of the fees of the arbitration is unconscionable and unenforceable. State ex rel. Gayle Vincent, et al., Relators, v. Honorable Nancy Schneider, Judge, Eleventh Judicial Circuit, Respondent, No. 87203 (Mo. banc, June 30, 2006), Price, Jr., J.

 

I question whether or not the same would be true in a commercial transaction...but take note all commercial contractors...arbitration will be upheld if the procedure for choosing an arbitrator and the costs of the arbitration are not unconscionable (read "fair" here)....

Call Kate at Spencer Fane's offices in St. Louis for more details. THANKS KATE!

Plaintiffs in the underlying suit were the purchasers (purchasers) of a single family home from defendant McBride & Sons Homes (McBride). McBride's preprinted contracts for home purchases contained a provision that gave McBride the unilateral right to require that any claim by the purchasers arising out of the contract was to be decided by binding arbitration. In the instant case, purchasers placed their initials in the margin of the contract next to the arbitration clause.
  Problems arose with the home that was purchased and purchasers filed suit. McBride filed a motion to compel arbitration, which was sustained. Purchasers contended that the contract clause requiring the dispute be resolved by arbitration constituted a contract of adhesion and, as a result, should be unconscionable.
  The Supreme Court agreed that an arbitration clause in a contract of adhesion is not enforceable. The court recited that a contract of adhesion is a form contract that is created and imposed by the party with the greater bargaining power. However, in this case, there was no proof from purchasers that they were unable to look elsewhere for a better contract, that all St. Louis area builders used the same arbitration terms, that purchasers were forced to purchase the home from McBride, or that McBride had an unexpected surprise advantage.
  The Missouri Supreme Court held that a preprinted form contract in and of itself does not constitute a contract of adhesion.
  The court next looked at the claims that the contract was unconscionable. The court noted that there are two doctrines associated with unconscionable contracts. There is procedural unconscionably that deals with the formalities of the making of the contract, such as high pressure sales, unreadable fine print or misrepresentation. The second type is substantive unconscionably that deals with the terms of the contract itself, such as undue harshness of the terms. The claims of the purchasers here dealt with substantive unconscionably.
  The purchasers argued that the arbitration clause was unconscionable because only McBride had the right to select the arbitrator. The purchasers argued there was a lack of “mutuality of obligations” in light of this clause. The court held that “the majority of courts adhere to the Restatement of Contract's view that mutuality is satisfied if there is consideration as to the whole agreement, regardless of whether the included arbitration clause was . . .one-sided.” The court concluded that because the parties to this agreement exchanged consideration in the sale of the home, the contract will not be invalidated for a lack of mutuality of obligation as to the arbitration clause.
  Next the court considered that the arbitration clause at issue provided that the president of the Home Builders Association of Greater St. Louis had the sole discretion to choose the arbitrator. In this instance, the president of that organization happened to be the president of McBride.
  The Missouri Supreme Court concluded that even if the president of McBride was not the person designated by the agreement, the terms outlining the method of designating the arbitrator were unconscionable because the clause provided that a person in a position of bias is the sole selector of the arbitrator, who must be unbiased. When the means of selecting the arbitrator fails, as here, the court noted that the trial court shall appoint the arbitrator, pursuant to §435.360.
  The purchasers also argued that the arbitration clause was unconscionable because it placed all costs of the arbitration on the purchasers regardless of the outcome of the arbitration. The court concluded that, under these circumstances, a contractual provision that puts all fees for the arbitration on the “consumer” is unconscionable. The court considered that the costs of the arbitration would be so prohibitively expensive that, for all practical purposes, the clause would preclude an aggrieved party from seeking redress. The Missouri Supreme Court concluded that the cost-shifting terms could, in effect, grant immunity from legitimate claims made under the contract. As a result, the Missouri Supreme Court concluded that the cost shifting provisions should not be enforced."

Arbitration Clause held to be unconscionable!

A home developer's arbitration clause is unconscionable....because of the process for selecting an arbitrator and that the cost of both parties must be borne by the homeowner. In State ex. rel. Vincent v. Schneider, 194 S.W. 3d 853 (Mo., 2006) the Court ruled that while the contract was not an adhesion contract (which could have allowed the provision to be thrown out), no evidence was submitted to prove this point. However, the balance of the provision was found to be unconscionable for appointing the head of the Homebuilders Association of Greater St. Louis as the arbitrator and the Court ruled it would appoint the arbitrator. As well, the cost assessment attributable to the homeowner was thrown out under the Missouri Arbitration Act.

Another rant regarding the continuing arbitration v. lawsuit debate

Other issues to consider regarding whether or not you should go with arbitration over the traditional court system.....is it really cheaper to use arbitration as a way to resolve matters? I do not have a universal answer to this...if you can move the case in one year in arbitration litigation could be cheaper, but I have not seen the savings when the case take the same amount of time to resolve be it through arbitration or litigation...as it always is important to look a the time and cost of money and truly I question whether or not arbitration is truly cheaper.

Continuing the arbitration v. lawsuit debate

How do you feel about the use of arbitration in contrast to litigation?  Richard Flake in his recent article appearing in the April addition of CFMA’s magazine entitled “Building Profits” suggest arbitration will help to curtail litigation costs,.  You know, I have had mixed results in this regard.  Sometimes valid in two entity disputes, I have not had great luck in multi-party arbitration proceedings.  Given the nature of a limited amount of guidelines for conducting arbitration, I have seen a real abuse of arbitration by plaintiffs and defendants, each declaring their own way to proceed wit such things as sharing information, depositions, pre-arbitration motions and the like.  Arbitration seems to me to be valuable in situations where the attorneys involved are specialists committed to fast and efficient resolution of matters…does this happen in the majority of cases?

Arbitration clauses

In yet another arbitration clause decision, a Texas court (In re Kellogg, Brown & Root, Inc., 166 S.W. 2d 732 [Texas 2005]) ruled a sub-subcontractor was not bound by the arbitration provision between the subcontractor and its principal, where the sub-subcontractor's claim is based upon quantum meruit. Note that the court found it difficult to relay the claim of quantum meruit to the arbitration provision. The reverse may be true....IF the duties and responsibilities of the underlying claim are based upon the terms of the contract. Claims of quantum meruit are usually NOT based upon a contract provision.

I question this decision....many, many other cases would cite the opposite. Bottom line...know about the contract that the person you are contracting with have signed, as you may be bound by the terms...even if you are not signatory to the contract. This case may show only one of the rare exceptions to this rule.

Arbitration

A recent case out of California (Trend Homes, Inc. v. Superior Court, 131 Cal. App 4th 950 (2005)) points out that an arbitration provision in a subdivision sales contract requiring a construction defect claim to be adjudicated a forum similar to an arbitration provisions is not unconscionable. What does this mean? Well, if a consumer in a consumer transaction can not avoid such a provision, then most likely there will be few arbitration provisions in a commercial transaction that can not be avoided......

So....to protect your business, should have ALL of your contracts  have arbitration provisions?

Arbitration provision

A new 9th Circuit case will decide whether or not arbitrators can decide when arbitration provisions are enforceable. Apparently the impression is that the judges feel only they can make such decisions...why so important? Well, if every time you wish to invoke such a provision say in an employment matter, an employee's counsel may automatically file a petition for a court to review whether or not such an arbitration decision is enforceable...and oh, by the way, while here, judge, why don't you just decide the case???? And, if the plaintiff's attorney runs to the courthouse and files the case in Florida for one of the employees who lives in Florida while the base of the company's operations is in say Ohio, what chance will there be the Florida court will give up jurisdiction of the case? Or another option...the employee goes through arbitration but not liking the result, cuts short the arbitration and files an action in court to ask the judge to determine whether or not such a provision is enforceable....man, this could get messy.....

DRB treated like an arbitrator

The Massachusetts Supreme Judicial Court in a recent decision treated a dispute resolution board like an arbitration panel.  Massachusetts Hwy. Dep't. v. Perini Corp., 828 N.E. 2d 34 (2005). Hmmmmmmmmmmmmm.....wonder how many times this has come up in your business situation. Could mean that any group you throw together to resolve issues could be given the same authority to settle disputes...............