Viewpoint: Arbitration Agreements Can Create Uncertainty in Construction Contracts
|J. David Arkell|
We have all heard many times that arbitration is a contractual or consensual process. That is, the parties need to agree in writing to arbitrate their disputes in order for one party to require another party to arbitrate. No signed agreement, no arbitration.
But construction executives and project managers should be aware of the exceptions to arbitration agreements to avoid surprises and help manage risks.
Here are a few examples of exceptions that can require a person to arbitrate even if he or she did not sign an arbitration agreement:
- When the nonsignatory is an officer or principal of the signing entity, such as when the president of a corporation may be forced to arbitrate claims asserted against her personally that arise under an agreement signed by the corporation.
- When the nonsignatory is an assignee of a signing party, such as when a person executes an assignment of loan documents to him, and the loan documents (but not the assignment documents) include an arbitration clause.
- When a parent or subsidiary relationship exists between the nonsignatory parent company and the subsidiary that signs the agreement, and the relationship between the two entities is too close.
- When a firm signs a subcontract that includes a flow-down clause incorporating the general contract. The subcontract does not contain an arbitration clause, but the general contract does.
- When the owner of a residence engages a general contractor to replace shingles on a roof damaged by hail. The owner purchases shingles for the project, and the shingles come in bundles wrapped in paper. The wrappers include warranty terms and an arbitration clause, in prominent lettering. The general contractor installs the shingles, but the owner never sees the shingles or the wrappers. Unfortunately, the shingles are defective, and the manufacturer can require the owner to arbitrate disputes over the shingles. This unusual example is included because it’s based on a factual situation found under a recent Colorado Court of Appeals decision.
All of the above exceptions have been applied by one or more states or under federal law. As in many contexts, the absence of specific law only increases the uncertainty inherent in judging potential risks.
In all of the exceptions, some relationship must exist between the person or entity signing the contract and the nonsignatory that may wish to be insulated from the arbitration clause.
This relationship may arise through a related agreement, such as in the second and fourth examples above. In all cases, the relationship may provide an opportunity for the nonsignatory to negotiate and influence, if not determine, provisions of the arbitration clause.
So, how to fix this? Nonsignatories who want to make sure arbitration clauses will not apply to them could negotiate a clause saying that the nonsignatory is not bound by the arbitration clause; they could negotiate a release of obligations on the part of the nonsignatory; or they could negotiate a clause stating explicitly that only the parties who actually sign the agreement are bound by the arbitration clause.
But before embarking on such negotiations, the nonsigning party needs to understand that these clauses would probably insulate the nonsignatory from being compelled to arbitrate. However, this also means that the nonsignatory would not be able to enforce the arbitration clause that he or she did not sign.
There’s a lot of uncertainty in this area. Nationwide, cases have gone both ways—either enforcing or not enforcing an arbitration clause against or by a nonsignatory—in cases involving all of the circumstances mentioned above and several others.
However, it’s helpful to be aware, particularly if you don’t like arbitration, that you or your entity may be forced to arbitrate disputes arising under an agreement that you didn’t sign.