Three Contracts, But Only One Arbitration Provision, Means Arbitration Cannot Be Compelled

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

What happens when the same parties enter into three contracts, all related to the same underlying services, the first two of which require the parties to litigate any disputes while the third provides that the parties “may” settle any disputes through binding arbitration? When a dispute arises, do you have to sue in court, can you arbitrate instead, if one side chooses arbitration, is the other side stuck with that choice? These were the issues in the Appellate Division’s recent decision in Medford Township School District v. Schneider Electric Building Americas, Inc.

In Medford Township, plaintiff contracted with defendant to “design and implement upgrades to several of [plaintiff’s] schools and its transportation and operations center.” The initial contract between the parties did not contain an arbitration provision. To the contrary, it contained a provision requiring that any disputes be resolved under the law of the state where the services were provided, and in the “federal, state, or municipal courts serving the county in which the services [were] performed.”

Some time later, plaintiff issued a request for proposals (RFP) for a related job. The RFP did not contain an arbitration provision. Instead, it required the winning bidder to agree that “any action or proceeding that [arose] in any manner out of performance of the RFP [or the resulting contract] . . . shall be litigated in the Superior Court of New Jersey, Burlington County.”

Defendant was awarded the project and entered into a second contract with plaintiff. Notwithstanding the provision in the RFP, that contract contained a dispute resolution provision, which provided:

[A]ny controversy or claim arising out of or relating to this contract, or contract documents, or any breach thereof, may be settled by binding arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association (AAA).

After the project ended, defendant filed an arbitration demand, alleging that plaintiff improperly withheld certain payments due to defendant. Plaintiff responded by filing a verified complaint and order to show cause seeking to dismiss the arbitration. (It also included claims against defendant for breach of contract.) Defendant opposed the order to show cause, arguing that the arbitration provision in the second contract was valid and enforceable.

The trial court rejected defendant’s arguments. It held that the arbitration provision was valid, finding “no indication that it was included without negotiation or that it was an inconspicuous part of the [second contract].” But the trial court held that it was permissive, not mandatory, and therefore could not be enforced over plaintiff’s objection. The trial court based this decision on both the language of the provision, which used “may” instead of “shall” when describing its applicability, and the language of the RFP, which “distinctly gave the Burlington Vicinage of the Superior Court . . . jurisdiction over disputes arising from” the second contract. Defendant appealed

The Appellate Division affirmed.

On appeal, defendant essentially agreed that the arbitration provision was permissive, but a different kind of permissive than what the trial court had in mind. It argued that the arbitration provision allowed either party to select arbitration, which then compelled the other party to mediate. It further argued that the trial court’s interpretation of the provision rendered it “superfluous” because “a dispute resolution provision is unnecessary when both parties agree to arbitrate.”

The Appellate Division acknowledged that it had, in the past, accepted arguments like the one advanced by defendant “in certain contexts.” For example, a provision that provides, “either party may make a written demand for arbitration,” is permissive, but, once invoked by one party, “the other party may be bound to arbitrate the dispute.” Thus, “under certain circumstances,” the arbitration provision in Medford Township, “standing alone, might support [defendant’s] argument that it is mandatory because the term, ‘may’ permitted either of the two ‘sophisticated’ parties to invoke arbitration” (emphasis in original).

But the arbitration provision in Medford Township did not “stand alone.” Instead, it had to be read in conjunction with the choice of law/venue provisions in the first contract between the parties and in the RFP that led to the second contract. Both required defendant to litigate, not arbitrate, and the second one required that any lawsuit be filed in Superior Court in Burlington County. Thus, both “mandate litigation and do not evince a clear intent to waive the right to sue in court,” and, because plaintiff did not clearly waive its right to litigate, it could not be compelled to arbitrate.

The Appellate Division rejected defendant’s argument that reading the arbitration provision in this manner rendered it “superfluous.” It held that both the first contract and the RFP required the parties to litigate in state court. All the permissive arbitration provision in the second contract allowed them to do was agree to arbitration without violating either of these agreements. “Put another way, had [plaintiff] consented to arbitration after that forum was invoked by [defendant], the parties would not have violated the governing law provisions of the [first contract] and RFP.”

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