Contract InterpretationMandatory arbitration clauses have become commonplace in construction contracts.  Various groups have formulated generic arbitration language to insert into disputes clauses of contracts. A good example of such language comes from the AIA suite of forms and reads, in part:

Any Claim arising out of or related to the Contract…shall…be subject to arbitration. Prior to arbitration, the parties shall endeavor to resolve disputes by mediation…

Claims not resolved by mediation shall be decided by arbitration which, unless the parties mutually agree otherwise, shall be in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect. The demand for arbitration shall be filed in writing with the other party to the Contract and with the American Arbitration Association…

Despite their widespread use, parties continue to argue about the enforceability of such provisions. These arguments often arise when parties modify the generic language found in standard form documents like the AIA text above. Even when altered, most courts have determined that such provisions make arbitration mandatory and subject to compulsion by either party to the contract. In such case, arbitration may only be avoided if both parties to the contract mutually agree to resolve their disputes in court.

Alabama courts have followed a similar approach. The Supreme Court of Alabama made that clear in a recent 2016 ruling. In that case, the parties altered the AIA language above by replacing “shall” in the first line of each paragraph with “may at the election of either party.” After a lawsuit was filed, one of the parties moved to compel arbitration. The other party opposed that motion on the basis that the removal of the word “shall” changed the arbitration requirement from mandatory to one that required mutual consent of the parties.

The Alabama Supreme Court disagreed and granted the motion to compel. The Court reasoned that:

A plain reading of the arbitration provision as modified…indicates that either party has the option to pursue resolution of a dispute in arbitration. The paragraphs that constitute the arbitration provision say nothing about mutual consent being required to invoke arbitration…The changes in the addendum retain more meaning if it is assumed that they stemmed from the parties’ desire to provide that arbitration is not the only initial avenue available to the parties for resolution of disputes in contrast to the language in the form contract in which ‘the parties committed…dispute[s] to resolution only in an arbitral forum. Hanover Insurance Co. v. Kiva Lodge Condominiums, 2016 WL 6135201 (Ala. 2016).

The Alabama Supreme Court’s approach to such language is not unique. Other courts are likely to view arbitration provisions similarly. Nevertheless, parties desiring arbitration should think carefully before modifying disputes clause language to avoid: (1) expensive and time-consuming court motions challenging enforceability; and (2) the risk of having an arbitration clause voided by a court which interprets the modified contract language differently from what appears to be the trend.

In contrast, parties who wish to avoid arbitration because they believe their legal defenses will fare better in a court setting, they dislike the arbitration clause’s choice of forum, or for some other reason, should recognize the slim chances of avoiding arbitration requirements in contracts.

Regardless, all contracting parties should pay particular attention to disputes clauses in their contracts. While no contractor wants or plans for a claim to arise, when one does, you want to have a disputes provision in your contract that accounts for and addresses your concerns and matches your expectations for resolving claims when you entered into that contract.