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Enforcing and possibly escaping construction arbitration clauses

Enforcing and possibly escaping construction arbitration clauses

The use of private arbitration to resolve disputes in the construction industry has, for many years, been a popular alternative to traditional litigation. Perhaps the most attractive feature of arbitration is the degree of control over the dispute resolution process that it affords parties.  Arbitration clauses are similar to any other contractual provision, and parties can freely bargain for the location of the arbitration, the identity of the arbitrator or arbitrators, and the amount of discovery that will occur between the parties, among other things.

That said, parties to construction contracts containing arbitration clauses should be aware that these clauses are enforceable contractual promises, and Georgia courts will not hesitate to issue an order compelling arbitration if the court determines that the arbitration clause is valid.  See O.C.G.A. § 9-9-6.  Federal law, namely the Federal Arbitration Act (“the FAA”), also strongly favors arbitration when contracts contain evidence of intent to submit claims to arbitration. See 9 U.S.C. § 2.  In most all cases, construction arbitration clauses will fall under the ambit of the FAA and not state arbitration law, because necessary building supplies, subcontractors, and other goods and services will come from out-of-state and thereby implicate interstate commerce.  See Wise v. Tidal Const. Co., Inc., 261 Ga. App. 670, 675 (2003).
While federal law strongly supports arbitration, there is one major exception to this rule: when the party seeking to compel arbitration is deemed to have waived its right to do so.  See, e.g., Krinsk v. SunTrust Banks, Inc., 654 F.3d 1194 (11th Cir. 2011).  To determine whether waiver should apply, courts will use a two-part test; first, courts ask if “under the totality of the circumstances, the party has acted inconsistently with the arbitration right and, second, [they] look to see whether, by doing so, that party has in some way prejudiced the other party.” Id. at 1200 (quoting Ivax Corp. v. B. Braun of Am., Inc., 286 F.3d 1309, 1315 (11th Cir. 2002)).
The most common situation in which a party will be deemed to have waived its right is when the opposing party files suit, and the party in question significantly participates in the litigation process before filing its motion to compel arbitration.  See S&H Contrators, Inc. v. A.J Taft & Coal Co., Inc., 906 F.2d 1507 (1990) (holding that a party that “[s]ubstantially invok[es] the litigation machinery” prior to demanding arbitration may be considered to have waived its right to arbitrate) (quoting E.C. Ernst, Inc. v. Manhattan Constr. Co., 559 F.2d 268, 269 (5th Cir. 1977)).  Courts view substantial participation in litigation prior to filing a motion to compel arbitration as inequitable conduct; a party will not be permitted the proverbial “two bites at the apple.”  See Wise, 261 Ga. App at 674 (holding that a party had waived its right to compel arbitration after it participated in 16 months of discovery and filed its motion after jury selection in the trial).
Therefore, parties to a construction contract containing an arbitration clause must make a choice when faced with a lawsuit by the other party.  Assuming that the contract contains a valid arbitration clause, a motion to stay the proceedings and compel arbitration, filed early—ideally as soon as the complaint is received, must be granted by both federal and state courts.  However, if for some reason invoking the arbitration clause the parties bargained for is no longer an attractive strategic option, the defendant may respond to the lawsuit in the usual manner and the arbitration clause will be deemed to mutually waived.   However, as noted above, once a party choses this option, courts will not look favorable upon late-filed motions to compel, notwithstanding that the arbitration clause may have been perfectly valid and enforceable earlier.
By Crighton T. Allen
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