Wednesday, October 7, 2009

Agreement to Arbitrate

The principle concept of every contract or agreement is to achieve the desires of the parties. The courts will examine the language of a contract to determine if the terms are clear and unambiguous. It is not the responsibility of the court to rephrase the language or to add any missing terms. Reasonably clear contract construction must take place when forming the contract.

In a recent Federal Circuit case, the Court held that if parties wish to include an arbitration clause, the word ‘arbitration’ must appear clearly in the agreement. Ganier v. Inglewood Homes, Inc., 944 So.2d 753 (4th Cir. 2006). Use of alternative words such as ‘final determination’ will not bind the parties to arbitration. A failure to stipulate a desire for a binding arbitration may render the clause null and void.

In the Ganier case, the homeowners initiated a suit against the builder on a breach of warranty claim. The claim stemmed from unresolved damages due to faulty workmanship and a failure to remedy by the builder. The builder took the position that the homeowners did not adhere to a provision of the contract that required disputes to be determined by a third party. The builder filed an ‘Exception of Prematurity or, in the Alternative, Motion to Stay’ based on the contractual language. The language that the Builder relied upon stated that “any dispute relating to the contract be referenced for final determination by the Orleans Parish Inspection Department, or another expert mutually agreed on by the parties.”

The homeowners opposed the Exception on the premise that the contract did not contain a valid and enforceable arbitration clause. They argued that the clause was vague and ambiguous and did not contain the words “binding arbitration.” In addition, they argued that the “Orleans Parish Inspection Department” did not exist.

The burden of proving the existence of a valid arbitration clause was on the builder because it requested the Exception. To succeed, the builder had to show that a valid agreement to arbitrate existed between it and the homebuilders. It further had to show that the disputed claim was within the scope of the arbitration agreement.

In reaching a determination on this case, the court relied upon both state law and the United States Arbitration Act. The court noted that although state and federal laws favor arbitration, an arbitration clause is not enforceable unless its meaning is “reasonably clear and ascertainable.” Moreover, the law requires that an interpretation of a contract is determined by the common intent of the parties. Where a contract does not contain language that is “a clear, unequivocal written expression that the parties agreed to arbitrate” their disputes the court will not enforce the clause.

The court also stated that no where in the clause did it contain the word “arbitration.” The builder did not cite to any case law that supported the premise that arbitration can be forced upon parties even when the contract did not contain the word arbitrate. The builder also failed to prove the existence of the referenced ‘Orleans Parish Inspection Department.’ Thus the holding of the court was that the arbitration clause was unenforceable.

Practical Application/Comments
Although the courts favor arbitration in lieu of formal litigation, if the contract does not specifically state “arbitration” the courts may not impose it. The language of the contract must be “reasonably clear and ascertainable” that it is the intent of the parties to arbitrate their disputes.

To enforce an arbitration clause the court will determine (1) whether a valid agreement to arbitrate between the parties exist; and (2) whether the disputed claim is within the scope of the arbitration agreement. It is advisable to use words such as “arbitrate” or “arbitration” in the actual clause. Relying upon synonyms or ambiguous forms of expressions, such as “final determination,” may render the clause unenforceable. It is also important to ensure that if arbitrators are referred to by name in the arbitration agreement that they actually exist, and will continue to exist, at the time enforcement of the agreement is sought.

This blog is intended to be solely a source of general information on topics related to construction, contract and commercial law. It is not intended to render legal advice on specific problems. If advice is required to address specific matters please feel free to contact me or another qualified attorney.

Ian C. Clarke