Construction Contracts: It Pays to Get Specific in Your Arbitration Clause

Construction Contracts: It Pays to Get Specific in Your Arbitration Clause

By David V. Rose, Esq. and Matthew P. Malczynski, Esq.
Vandeventer Black LLP

A recent decision in the California Court of Appeal regarding arbitration clauses in construction contracts makes it clear that although a lack of specificity in selecting an arbitrator does not render the clause invalid, your arbitration clause should have a clear method of arbitrator selection, and should also contain its own attorney’s fees clause.

The Arbitration Clause

In HM DG, Inc. v. Amini, 2013 DJDAR 12805 (Monday, September 23, 2013) [version available to subscribers], a homeowner (Amini) and contractor (HM DG, Inc.) entered into a remodel contract for a high end home. The contract contained an arbitration clause. The clause was located directly above the signature line of the contract. The arbitration clause was drafted by the contractor and read in part:

In the event a dispute shall arise between the parties to this contract, it is hereby agreed that the dispute shall be referred to [one of the following choices: (1) designate a specific USA&M office or alternate service by agreement of the parties; (2) provide a method of selecting the arbitrator and suits of the hearing…or for multi-jurisdictional disputes (3) inset ‘a USA&M office to be designated by USA&M Headquarters’]…

()In the event a party fails to proceed with arbitration, unsuccessfully challenges the arbitrators award, or fails to comply with the arbitrator’s award, the other party is entitled to costs of suit, including a reasonable attorney’s fee for having to compel or defend or enforce the award.” HM DG, Inc. v. Amini, 2013 DJDAR 12805

Essentially the clause contained multiple alternatives to the selection of a mediator, but did not contain a primary arbitrator selection process.

A dispute arose regarding the homeowners’ requests for substantial changes to the project and the failure to make prompt payments. The contractor ignored the arbitration clause in its own contract and filed a complaint in Superior Court. The homeowner immediately demanded that the parties enter arbitration pursuant to the arbitration clause in the contract.

The contractor refused to arbitrate, stating that the contract does not require arbitration. Following the refusal to arbitrate by HM DG, Inc., the homeowners filed a motion to compel arbitration.

The Trial Court Ruling

The trial court denied the motion to compel arbitration, ruling that the homeowners had not established the existence of a valid arbitration agreement. The trial court noted that the arbitration clause in the contract was “uncertain” because it did not specify a particular arbitrator or a particular arbitration agency. The arbitration clause was further “uncertain” because it did not specify how the arbitrator would be selected. The Court said the purported arbitration agreement “provides that these questions are to be resolved in the future…”, and the agreement carried no legal obligation “until such future agreement.” (Id. at 12806)

In denying the motion to compel arbitration, the trial court awarded the contractor its attorney’s fees incurred in opposing the motion to compel arbitration, in accordance with attorney’s fee clause within the arbitration clause.

The Court of Appeal Ruling

The decision was appealed to the Court of Appeal. There the Court ruled that the intent of the parties to arbitrate is clearly spelled out in the contract and therefore the need to set forth a specific mechanism for arbitrator selection does not render the clause invalid.

The Court stated that California Code of Civil Procedure § 1281.6 [version available to subscribers], specifically contemplates the existence of an enforceable arbitration agreement even where the agreement does not set out a specific procedure for selecting an arbitrator. The court concluded that neither the absence of a definite method, nor the presence of “alternative options,” for appointing an arbitrator renders an otherwise valid arbitration agreement unenforceable. HM DG, INc. v. Amini, 2013 DJDAR 12805

Additionally, the Court vacated the attorney’s fees award to the HD MG, Inc. but not because the clause was invalid, but rather because the motion to compel arbitration was proper. The Court awarded fees and costs to the homeowners related to the appeal under the arbitration clause attorney’s fee provision.

The Impact of the Decision

The impact of this decision is two-fold. First, although the Court ruled that a definite method for selecting an arbitrator is not necessary to keep a clause enforceable, it would be wise to lay out the method of selection in the contract. Generally, during contracting time the parties are much more agreeable and willing to work together. The selection of the arbitrator could become a sticking point that potentially could be left up to the Courts to decide. If either arbitrator or the process of selection is already laid out, the underlying dispute will likely be heard in arbitration instead of in court.

The second important take away from this decision is that when putting together your contracts you should always include an attorney’s fees clause within the arbitration clause. While every contract should have an attorney’s fees clause in the dispute section, this case makes it clear that including attorney’s fees within the arbitration clause is important.

Having an attorney’s fees clause in the arbitration agreement will likely facilitate resolution of disagreements related to the language. Most importantly, it provides a “sword” to any resistance as to the enforceability of an arbitration clause of a contract.

Often an arbitration clause is overlooked by the parties and becomes somewhat of an optional process. Including an attorney’s fees clause within the arbitration clause ensures that the arbitration will be enforced and the clause will have teeth. This is always important for a construction company that is always watching the bottom line and trying to avoid costly courtroom battles. Thus, it pays to be specific with the arbitration clause language in your contracts.

David Rose is the managing partner of Vandeventer Black LLP’s Pasadena, California office. Matthew Malczynski is an associate who works in the firm’s Pasadena office. Both David and Matthew focus their practice on the representation of contractors, architects, engineers and construction managers. Should you need assistance in dealing with a legal matter David and Matthew can be reached at 626-768-1260.

These articles are meant to bring awareness to these topics and are not intended to be used as legal advice.

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