Enforceability of Arbitration Clause in Construction Agreement
As most contractors are aware, it is common to have an Arbitration Clause within a typical AIA Construction Agreement that requires the parties to the contract to participate in arbitration in lieu of Court proceedings in the event of a dispute.
Most contractors simply take for granted that the clause is enforceable, and therefore, believe that their only remedy is before an Arbitration Panel. The reality, however, is that many of these clauses are unenforceable due to improper construction.
This blog will focus on what is required for an Arbitration Clause to be found enforceable before the Courts.
Despite the New Jersey Court’s favorable view of Arbitration Clauses, the Arbitration Clause must nonetheless unequivocally demonstrate the mutual agreement of the contractors to participate in Arbitration. Further, there must be direct and clear language that by agreeing to the Arbitration Clause, that the parties are waiving their right to file an action in State Court. Finally, in order to ensure the enforceability of an Arbitration Clause, there must be waiver of the right to a Trial by jury. Thus, in order for the Arbitration Clause to be enforceable, it must be clear that the parties mutually agreed to Arbitration as an alternate forum, that the parties are affirmatively waiving any right to proceed in State Court, and finally, that the parties are waiving a right to a Trial by jury.
While Arbitration may be a preferred way to resolve a dispute, at times it is not always the best forum. As such, a contractor should be keenly aware whether an Arbitration Clause within a construction agreement is enforceable in light of the above requirements.
If the clause is unenforceable, the contractor can proceed with a State Court action, and thereafter, can seek to defeat any motion to transfer the matter to Arbitration. As I indicated in a previous blog, Arbitration is not always the best way to resolve a dispute. For these reasons, a contractor must be aware as to whether the Arbitration clause is enforceable. Further, if a contractor strongly wants to proceed with Arbitration on all of its matters, than the Arbitration clause should be appropriately worded to withstand any previous challenge.