Maryland Federal Court Upholds One-Way Arbitration Provision

Last month, the U.S. District Court for the District of Maryland considered whether an arbitration provision found in a contract between a public owner and a contractor required the parties to arbitrate all disputes. In PC Constr. Co. v. City of Salisbury, Civil No. L-12-62, 2012 WL 2552864 (D. Md. June 29, 2012), the City of Salisbury had retained an engineer, construction manager, and general contractor to design, engineer, and construct a waste water treatment plant.  The city filed suit against all three, as well as the contractor’s surety, for defective work in state court. The contractor and surety then sought to compel arbitration of the city’s claims in Maryland federal court.

The court began its analysis by reviewing the applicable contract provisions. The general conditions of the prime contract originally provided for arbitration for “[a]ny Claim arising out of or related to the Contract.”  However, the parties had modified the provision to require arbitration of only “Contractor claims.”  The city argued that this limitation necessarily restricted arbitration to only those claims submitted by the contractor, and that litigation was permissible in state court because the claims were initiated by the city against the contractor and did not constitute “Contractor claims.”  The contractor attempted to broaden the scope of the provision by pointing to the definition of “Claims by the Contractor against the Owner” which included “demands or assertions by one of the parties….” The contractor argued that the term “contractor” in the arbitration provision actually included claims by both the city and the contractor.   The federal court was not persuaded and noted that the definition upon which the contractor relied did not come from the original AIA general conditions, but instead from a document issued by the National Construction Law Center, Inc. “Construction Contract Between Owner and Contractor,” which was incorporated into the contract.  The court determined that this lack of consistency likely resulted from the cobbling together of various documents to form the contract, and that such inconsistency did not necessarily render the arbitration provision ambiguous.  Although the Federal Arbitration Act reflected a liberal federal policy favoring arbitration agreements, the express terms of this arbitration provision limited its application to claims by the contractor against the city. Therefore, the court denied the petition to compel arbitration.

The PC Construction decision teaches two important lessons for drafting and reviewing contract provisions. First, as the court itself noted, borrowing from different contract forms to “cobble together” contract documents can often cause confusion, or even direct conflict, with the meaning of words or phrases used. Second, one-way arbitration provisions will be upheld and can be restricted to specific types of claims; just because a construction contract contains an arbitration provision does not necessarily mean litigation will be avoided. While it should go without saying, careful review of changes made to standard-form contract documents is critical when negotiating contract terms.

To read the decision, click here.

Categories: Legal Updates