Friday, July 25, 2014

Unbalanced Arbitration Clauses: Are They Enforceable?

A Tenth Circuit case from earlier this year in a non-construction context raises an important question in every context in which arbitration clauses are used.  Generally, construction arbitration agreements are structured in a way which allows either party to the relationship to compel arbitration.  Similarly, most construction arbitration agreements do not limit the types of actions which can be pursued in an arbitration.  In THI of New Mexico at Hobbs Center, LLC, v. Patton, 741 F.3d 1162 (10th Cir. 2014), however, the Tenth Circuit considered the enforceability of an arbitration clause requiring a nursing home patient to arbitrate all of her claims but allowing the nursing home to file suit on certain limited claims -- here, small claims under $2,500, or claims related to guardianship, collections, or evictions.

The arbitration clause in question was upheld initially by the U.S. District Court.  Then, the New Mexico Court of Appeals held an identical arbitration agreement to be unconscionable under New Mexico law.  See Figueroa v. THI of N.M. at Casa Arena Blanca, LLC, 306 P.3d 480 (N.M. Ct. App. 2012).  The question before the Tenth Circuit then became whether an arbitration provision which was unenforceable under state law could nonetheless be enforced under the Federal Arbitration Act.  741 F.3d at 1165.  The Tenth Circuit determined that the decision of the New Mexico Court of Appeals was based on the notion that arbitration as a dispute-resolution process was inferior to litigation.  As a result, the Tenth Circuit held that the FAA would enforce the arbitration provision and, further, would preempt the state court decision on the issue.

How does this relate to construction?  In many large-project contracts and especially for international projects, arbitration clauses allowing one party the right to choose whether it pursues its claims in arbitration or litigation are becoming more common.  Based on case law as it appears currently, it is likely that the United States would enforce such provisions.

A recent article by Alexandra Douglas published by CPR raised the issue as to whether a rule of law similar to would be followed in other countries.  As with many issues in the law, the answer is, "it depends."  In cases from both Russia and France, unilateral arbitration clauses which allow only one party to the agreement to choose litigation or arbitration are unenforceable.  On the other hand, it appears that Spanish courts would be more likely to enforce such unilateral clauses.

As a lawyer, if you are involved with international arbitration and, in particular, with drafting arbitration provisions in international construction contracts, it is important to keep these decisions in mind when advising your clients.

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