One-Sided Arbitration Clause in Construction Contract Held Unenforceable by Maryland Federal Court

This last month, the U.S. District Court for the District of Maryland considered the question of whether a “one-sided” arbitration clause is enforceable in a construction contract. As many readers know, these kinds of clauses grant only one contractual party the option to demand arbitration.

In United States ex rel. Birckhead Electric, Inc. v. James W. Ancel, Inc., No. WDQ-13-2498, 2014 WL 2574529 (D.Md.  June 5, 2014), a subcontractor installing electrical systems at the Baltimore Army Reserve Center filed suit against the general contractor and its surety for the remaining balance owed under its subcontract. The electrical subcontract contained the following provision: “All disputes between the Contractor and Subcontractor…shall, at the Contractor’s sole option, be resolved by arbitration in accordance with the rules of the American Arbitration Association.” Based upon this provision, the general contractor and its surety moved to stay the lawsuit pending arbitration. The subcontractor objected, arguing that the arbitration clause was unenforceable due to a lack of mutual consideration.

In considering the defendants’ motion, the District Court first looked to Maryland law because, under the Federal Arbitration Act, the arbitration agreement must be valid and enforceable as determined by state law. Under Maryland law, the arbitration provision itself – not the contract as a whole – must be supported by mutual consideration to find enforceability of the arbitration provision. Relying on Maryland decisions analyzing consumer contracts, the District Court found that an arbitration provision that binds only one party lacks mutual consideration and is therefore unenforceable. As the instant arbitration provision could only be employed by the general contractor, it was unenforceable under Maryland law. While the defendants attempted to argue that the decisions relied upon by the District Court involved parties of unequal bargaining power, the District Court found that commercial contracts should not be treated any differently from consumer contracts. Therefore, the District Court denied the defendants’ motion to stay pending arbitration.   

Throughout the country, jurisdictions differ over whether one-sided arbitration provisions are enforceable. For instance, while the Birckhead Electric decision found that such provisions are unenforceable in Maryland, Virginia courts have previously upheld such provisions even in consumer contracts. Therefore, contracting parties wishing to include a one-sided arbitration clause must take care to review the state law applicable to the construction contract at the time of drafting, or risk losing their right to demand arbitration altogether.