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In our practice we see many subcontracts that include a one-way arbitration clause – a provision which permits one party, usually the general contractor, to decide whether a dispute will be arbitrated or litigated in court. The subcontractor must abide by the general contractor’s choice and has no say in the matter. We often advise our subcontractor clients to revise those terms to make them mutual, so that either party can demand arbitration. If left unchanged, Virginia courts will enforce those unilateral arbitration clauses.
For example, in the recent decision United States ex rel. Harbor Construction Company v. T.H.R. Enterprises, Inc., No. 4:17-cv-146, 2018 WL 1999538 (Apr. 26, 2018), the United States District Court for the Eastern District of Virginia granted relief to the general contractor, T.H.R. Enterprises, Inc. (“T.H.R.”), to stay a subcontractor’s lawsuit for a period of six months to permit arbitration under the unilateral arbitration clause in its subcontract with Harbor Construction Company, Inc. (“Harbor”).
In that case, Harbor opposed T.H.R.’s motion to stay pending the arbitration on three grounds. First, Harbor argued the arbitration clause was invalid and unenforceable because it was vague. Second, Harbor contended that the arbitration clause contradicted the Miller Act by, in effect, negating Harbor’s rights under the Miller Act. And, third, Harbor argued that the unilateral nature of the arbitration clause rendered it unenforceable. The Court rejected each of Harbor’s claims, stayed the case, and ordered the parties to arbitration. Specifically, the Court looked to the actual terms of arbitration clause and found the clause was neither vague nor negated Harbor’s rights under the Miller Act because Harbor retained its remedy under the Act but suffered only a brief stay pending the arbitration of the construction dispute. Finally, the Court held that the unilateral nature of the arbitration clause did not invalidate it, where the subcontract as a whole was supported by adequate consideration.
While arbitration is generally the preferred avenue for construction disputes, if a contractor has a strong aversion to arbitration, particular care must be taken when reviewing and executing contracts so as to avoid agreeing to a unilateral arbitration clause like the one found enforceable in this case. BrigliaMcLaughlin frequently reviews contracts for our clients and advises on the effects of certain contract terms. More information about our construction risk management practice can be found here.