Ambiguous 'Arbitration' Provision Means Dispute must be Litigated
by John S. Mrowiec

Many standard construction industry contracts contain dispute resolution provisions requiring arbitration of disputes. Some such as the 1997 edition of the American Institute of Architects, A201 General Conditions of the Contract for Construction provide for mediation as a condition precedent to arbitration (see AIA, A201, Paragraphs 4.5 & 4.6 (1997 ed.)).

Careless modification of the standard form, at best, might result in confusion about the method of dispute resolution. At worst, careless modifications could result in legal fees, expenditures and wasted time on an issue that accomplishes nothing toward resolution of a dispute.

An example of careless drafting resulting in the waste of one year and legal fees spent merely to determine the dispute resolution method is a new case, Showboat Marina Casino Partnership v. Tonn & Blank Construction, 790 N.E.2d 595 (Ind. Ct. App. 3d Dist., June 26, 2003).

Showboat, as owner, and Tonn & Blank, as contractor, entered into a construction contract for the Harrah's East Chicago Hotel in East Chicago, Ind. The contract was a "cost plus" with a guaranteed maximum price. Showboat drafted the contract.

Disputes arose concerning cost overruns and payments. The contractor filed a complaint to foreclose a mechanics lien, for breach of contract, and for unjust enrichment in Lake County, Ind., court. The owner filed a motion to compel arbitration citing the contract's "arbitration" clause.

The contract's "arbitration" clause actually was entitled "Dispute Resolution." The essential portions of the provision read:

A. Should the Parties to this Agreement have any dispute as to any term, covenant or condition of this Agreement, the Parties agree to meet in good faith and attempt to resolve such dispute. If such informal resolution does not occur, then either party may institute an arbitration as provided below. Any and all of said disputes arising out of this Agreement, and/or the Project shall be decided by a court of competent jurisdiction, within the State of Indiana, with the prevailing party in any action being entitled to full reimbursement of all it's [sic] reasonable attorney fees and costs.

B. If a dispute arises out of or relates to this Agreement, including any dispute about the existence of a breach of this Agreement, and if the dispute cannot be settled through direct discussions, the Parties agree to attempt to settle the dispute in an amicable manner by mediation administered by the American Arbitration Association under its Commercial Mediation Rules. . . . Thereafter, any unresolved controversy or claim shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. (emphases added).

Therefore, in the very same dispute resolution provision, the contract provides that a party "may" institute arbitration, "said disputes . . . shall be decided by a court" and any controversy unresolved following mediation "shall be decided by arbitration." So are disputes to be arbitrated or to be litigated?

Courts frame the legal issue as: What did the parties intend regarding resolution of disputes based on the language used in the contract? The legal principles in such a case are:

1. Under Indiana law, the parties seeking to compel arbitration have the burden of demonstrating the existence of an enforceable arbitration agreement.

2. When construing arbitration agreements, every doubt is to be resolved in favor of arbitration and the parties are bound to arbitrate all matters, not explicitly excluded, that reasonably fit within the language used.

3. However, parties are only bound to arbitrate those issues that by clear language they have agreed to arbitrate.

4. Words, phrases, sentences, paragraphs and sections of a contract cannot be read alone. The entire contract must be read together and given meaning, if possible.

5. Any ambiguities in a contract are to be strictly construed against the party who employed the language and who prepared the contract.

6. In Indiana, to prevent resort to the courts, the agreement must not only provide for arbitration but make such arbitration a condition precedent to any litigation.

The trial court read the contract, found it to be ambiguous and denied the owner's motion to compel arbitration. The owner appealed.

The appellate court reviewed the contract and agreed with the trial court: "The Agreement contains a definite ambiguity, and we agree with the trial court that such ambiguity is to be construed against Showboat, the drafter of the contract." Therefore, the dispute is required to be litigated, as the contractor wanted.

It is unclear whether the "prevailing party" would be able to recover its legal fees if the dispute first had been arbitrated with the arbitration award being subsequently confirmed by a court. Perhaps that uncertainty motivated the contractor to oppose arbitration even though doing so would delay resolution. Maybe the contractor was uncomfortable with arbitration under the "Commercial" Rules, rather than the "Construction Industry" Rules of the AAA. Or perhaps the contractor wanted the broader discovery that litigation typically provides compared to arbitration.

What is clear is that one year past from the time of the filing of the contractor's complaint until the parties definitively knew how the dispute resolution process would proceed. The cause of the wasted year and attendant legal fees was an owner who drafted a contract carelessly. In fact, all signs suggest that the drafting was a modification of a previously existing dispute resolution provision.

John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm's Web site at www.cmcontractors.com.