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
icclarke@smithcurrie.com

No license, No Rights!

Georgia and other states require that certain contractors have a license to file liens, recover damages, and to enforce contracts

Several states, including Georgia, require those desiring to engage in construction-related activities to obtain a license or to associate with a licensed individual. Failing to comply with the state’s licensing requirements can negatively affect your ability to enforce a contract or recover costs for any work performed. For example, in JR Construction/Electric, LLC v. Ordner Construction Co., 294 Ga. App. 453, 669 S.E.2d 224 (Ga. App. 2008), the court held that the subcontract between a contractor and a subcontractor was void as against public policy and unenforceable because the subcontractor was unable to show that it had conformed to the state’s licensing requirements.

Georgia’s Licensing Requirement

JR Construction/Electric, LLC (“JR”), a Wisconsin company, entered into an agreement with Ordner Construction Company (“Ordner”) to install electrical systems. At the time of contracting, JR was not directly associated with a Georgia licensed electrician. Georgia statute O.C.G.A. § 43-14-8(a), states that “[n]o person shall engage in the electrical contracting business as an electrical contractor unless such person has a valid license from the Division of Electrical Contractors.” Under section 43-14-8(f), the statute further provides that “[n]o partnership, limited liability company, or corporation shall have the right to engage in the business of electrical contracting unless there is regularly connected with such partnership, limited liability company, or corporation a person or persons actually engaged in the performance of such business on a full-time basis who have valid licenses issued to them” from the Division of Electrical Contractors.

In an effort to comply with the statute’s licensing requirement, JR entered into a joint venture agreement with Moore Electric Company (“Moore”). Moore had one licensed electrician, whose role, as project manager, was to supervise and monitor each Moore project and insure that all work was in accordance with the plans, codes and specifications. After performing the work outlined in the Ordner subcontract, JR filed a claim against Ordner for breach of contract, unjust enrichment and expenses of litigation. Ordner moved for summary judgment asserting that JR was not licensed to perform work in Georgia. The trial court granted Ordner’s motion for summary judgment. On appeal, JR asserted that it complied with the state’s licensing statute through the creation of a joint venture with Moore. JR claimed that Moore’s project manager supervised and monitored the work performed under the Ordner subcontract. However, no evidence was produced to show that Moore’s project manager did more than present his electrical license to obtain permits for the work.

The court determined that Moore’s project manager’s involvement with the project was too remote to comply with the Georgia licensing statute. JR failed to produce any additional evidence that it complied with the “being regularly connected to a Georgia-licensed electrician” requirement of the statute. Because JR failed to show compliance with the statute, the court held that it was unable to enforce the subcontract agreement against Ordner.

Additionally, JR was prohibited from recovering the value of its services under the theories of unjust enrichment or quantum meruit. In the decision, the court stated that where “an express agreement is unenforceable because it violates public policy, the agreement cannot be made legal and binding as an implied contract, by merely praying for a recovery on quantum meruit of a portion of the amount expressly agreed upon.” In other words, JR’s failure to produce evidence that it complied with Georgia’s licensing requirements voided the Ordner subcontract as against public policy and any implied promises to pay for services were also void when made.

New York’s Licensing Requirement

Similarly, licensing requirements in other states have prevented unlicensed contractors from enforcing mechanic’s liens or recovering payments under contract or in quantum meruit. In Vanguard Construction & Development Co., Inc., 879 N.Y.2d 300 (N.Y. 2009), the New York court held that although the homeowner was aware that the contractor was unlicensed and planned to take advantage of such fact, the contractor could not recover any further payments under the contract or in quantum meruit. New York’s public policy prohibits an unlicensed contractor from recovering for breach of contract or in quantum meruit and renders the underlying contract unenforceable by the contractor. However, the statute does not prevent the homeowner from recovering damages for breach of contract from the unlicensed contractor. Thus, while a contractor was unable to pursue damages arising from an express or implied contract, nor could it foreclose on a mechanic’s lien, the homeowner was entitled to enforce the contract and recover damages for breach of contract.

New Mexico’s Licensing Requirement

Likewise, in Romero v. Parker, 207 P.3d 350 (N.M. Ct. App. 2009), the New Mexico court held that public policy prevented an unlicensed subcontractor from bringing suit to recover payment for work performed on five different projects. Further, an unlicensed contractor risks having to repay payments already made to him. The court stated that “an unlicensed contractor may not retain payments made pursuant to a contract which requires him to perform in violation of the statute” and entitles a “landowner a full refund.” The general contractor that hired the unlicensed subcontractor filed a counterclaim seeking recovery of payments made to the subcontractor. However, the court denied the general contractor’s counterclaim because the general contractor failed “to furnish and maintain evidence of responsibility.” New Mexico statute § 60-13-1.1(c) requires that “contractors be required to furnish and maintain evidence of responsibility.” There was no indication that the subcontractor withheld information from the general contractor or that the general contractor made any attempt to obtain information concerning the subcontractor's licensure. Therefore, the court concluded that New Mexico’s statute barred “both an unlicensed subcontractor from recovering compensation from a general contractor and a general contractor who did not act responsibly in hiring an unlicensed subcontractor from recovering compensation already paid to the unlicensed subcontractor.”

Practical Note

Each state has its own contractor licensing requirements. Before performing work in a particular state, ensure that you have complied with and understand that state’s licensing requirements. A failure to fully comply may leave you with an unenforceable contract and no rights to file a lien, enforce a lien, make a claim on a bond, or to receive any payments.

Unenforceable contracts are contracts that have no remedy in damages or specific performance because they arise out of illegal bargains, which are void at their inception. If you take the risk and perform work without a license, in violation of a state statute, not only is the contract unenforceable as to you, you open yourself up to a plethora of other claims. Some states require that you reimburse the property owner any amounts they have paid for work you performed without a license. Additionally, you may be held liable to the property owners, general contractors, subcontractors, insurance companies, and bonding companies for damages for breach of contract, fraud, and indemnification.

Don't get caught doing business without a license.

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
icclarke@smithcurrie.com