What Did I Agree to Arbitrate and Who Decides?
It is common for construction contracts to include an arbitration provision because of the perceived advantages: cost, speed, privacy, finality, and the ability of the parties to choose an arbitrator with experience in the construction industry. Despite the intent to arbitrate, sometimes the parties are redirected to the courts because of different interpretations of the arbitration provision and the contract. For example, the parties may not agree on whether the dispute is within the scope of the arbitration agreement; they may not agree on whether a contract was formed, or they may not agree on the validity or enforceability of the arbitration provision or the contract as a whole. When those issues arise, the first question is “Who decides — the arbitrator or the court?” Who decides this issue may have an impact on the determination of the underlying action.
General Rules Concerning Arbitration
Assuming your contract contains an arbitration provision, challenges to the validity and enforceability of the contract will be decided by the arbitrator. All other disputes concerning arbitration provisions are for the court unless there is “clear and unmistakable” evidence that the parties agreed to submit them to arbitration. Whether there is “clear and unmistakable” evidence depends on the precise language of your arbitration provision.
American Arbitration Association Rules
At first glance, “clear and unmistakable evidence” would appear to be an arbitration provision which expressly provides that the arbitrator either has the power or does not have the power, to make particular decisions. However, most arbitration provisions are not that precise, and in many cases, parties will utilize “standard-form” contracts — like those prepared by the American Institute of Architects. AIA contracts contain general arbitration provisions which typically provide that disputes are to be decided “by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect.” Although that provision is fairly standard, it may have a significant effect on whether or not your particular dispute is decided by an arbitrator or a court. One of the AAA Rules that the standard AIA arbitration provision includes is Rule R-9, which provides that “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” Although Pennsylvania and New Jersey’s appellate courts have not yet ruled on whether this language is enforceable, many other courts, including federal courts based in Pennsylvania and New Jersey, have ruled on the language and have determined that it meets the “clear and unmistakable evidence” standard. Therefore, if your contract incorporates the AAA Rules, then there is a good chance that you have agreed that an arbitrator — and not a court — will decide whether your dispute is within the scope of the arbitration provision, whether your arbitration provision is valid or whether you have even formed a contract.
What Difference Does it Make?
Although it may seem somewhat inconsistent to agree to an arbitration provision in your contract, allow courts to become involved in your disputes, it is an important decision that may significantly affect the resolution of disputes under your contract.
Judges — unlike arbitrators — are strictly bound by the law and may be overruled by a higher court if the law is not followed. On the other hand, in Pennsylvania, an arbitrator’s decision may only be vacated if a party is denied a hearing or if fraud, misconduct, corruption or other irregularities caused an unjust, inequitable or unconscionable award. Generally, an arbitrator’s decision is not subject to reversal if he or she made a mistake of fact or an error of law in rendering an award. Therefore, the question of whether an arbitrator has the power to decide your dispute — particularly if you are challenging the arbitrator’s ability to do so — is critically important, regardless of the position you are advancing.
In these situations, it is generally preferable to allow the courts to decide if the arbitrator has the power to decide your dispute, and whether or not your arbitration provision is valid under the law. If you have incorporated the AAA Rules in your arbitration provision, then you should expressly exclude Rule R-9. If your arbitration provision does not incorporate the AAA Rules, then you should consider expressly stating that the arbitrator does not have the power to rule on his or her own jurisdiction, and does not have the power to decide the existence, scope, or validity of the arbitration provision, but, instead, those decisions are for a court of competent jurisdiction to decide.
Although the language of arbitration provisions often flies under the radar, such language is critically important because it, along with the law, defines your rights and obligations. Knowing how your rights and obligations are affected by your contract language may be critically important to the ultimate resolution of a dispute. The lawyers at Cohen Seglias Pallas Greenhall & Furman, P.C. are ready to provide you with the legal advice you need to make those decisions.