I’ve blogged about arbitration in construction disputes on numerous occasions. Just like any other construction contract dispute, the resolution in arbitration often comes down to the language used in the parties’ agreement. This is especially true when the gateway question is: Who decides whether the dispute is arbitrable—the court or the arbitrator?
In Massachusetts Highway Dept. v. Perini Corporation, 83 Mass. App. Ct. 96 (2013), the court addressed this age old question of “arbitrability” or “who decides whether the dispute is subject ot arbitration." The appellate court vacated a $56 million arbitration award in favor of Perini-Kiewit-Cashman Joint Venture (“PKC”), one of the general contractors for portions of the “Big Dig” Central Artery/Tunnel Project. The court concluded that the Dispute Review Board (“DRB”) incorrectly determined the threshold issue of whether the parties agreed to arbitrate arbitrability (i.e., whether a panel of arbitrators should determine what disputes are subject to arbitration).
The Original Agreement. The contract between PKC and the Owner provided that disputes were to be presented to a three-member DRB, which would issue findings and nonbinding recommendations to the project director. In turn, the project director could accept, revise, or reject the DRB’s recommendations. The parties could then appeal the project director’s decision to the appropriate state agency or court.
The Second Agreement. As the work on the Project progressed, hundreds of disputes arose involving additional costs incurred by PKC for delays and problems with construction. In 1999, the parties entered into a subsequent agreement requiring that existing claims arising before January 1, 1999 would be subject to binding arbitration with the DRB. Those claims were identified in Exhibit 1 to the agreement. As of result of this agreement, the DRB functioned in a hybrid manner, adjudicating final claims for Exhibit 1 disputes and making nonbinding recommendations for other disputes.
The Disputes. When the dispute resolution process commenced, PKC and the Owner disagreed as to which claims were subject to binding arbitration and which were not. The DRB issued a decision on arbitrability and proceeded to award PKC $56 million, of which $44 million was designated as binding under the terms of both the 1995 contract and the 1999 agreement. The Owner appealed, arguing it never agreed to binding arbitration on the issue of arbitrability.
The Holding. The law requires “clear and unambiguous” evidence in resolving whether the parties agreed on who should decide arbitrability. Unlike deciding whether a particular merits-based dispute is arbitrable, a party’s silence or ambiguity does not create a presumption in favor of arbitration. The court concluded that the 1999 agreement did not contain any language indicating that the DRB should act as a binding arbitrator on disputes over arbitrability. Therefore, the court held that the DRB was authorized only to make nonbinding recommendations as to arbitrability to the project director who could then, at his discretion, accept, revise, or reject the recommendation.
Lessons Learned. Parties should be "clear and unambiguous" in drafting their dispute provisions, particularly where you are deciding that some disputes should be subject to arbitration and others should be be litigated. Equally important is making sure that the decision-maker for arbitrability is clearly identified, whether it is to be the arbitrator or the court.
Image: o K o