ARBITRATION AGREEMENTS IN CONSTRUCTION CONTRACTS: THE IMPORTANCE OF UNDERSTANDING THE IMPACT OF AGREEING TO ARBITRATE

            Agreements to arbitrate construction disputes are nothing new in the realm of construction law. Often times, parties to a construction contract include a section within their contract stating the parties will agree to resolve any disputes relating to a construction contract through a private arbitration proceeding, rather than resolving disputes using state and/or federal courts. Perhaps the most well-known private arbitration organization is the American Arbitration Association (“AAA”), however, various other arbitration organizations exist from the national level, all the way down to the city and state level.

 

The reasons for choosing to arbitrate construction disputes can make sense provided that all of the parties to the contract understand the implications of agreeing to arbitrate disputes under Montana law. Arbitrating construction disputes can provide quick resolution to those disputes, sometimes providing resolution within months of disputes arising, while resolving a construction dispute in the court system can sometimes take years depending on the size and complexity of the dispute. Arbitrating a construction dispute can also allow the parties confidentiality of the dispute, whereas a construction dispute that parties resolve in the court system will be of public record absent rare circumstances.

 

While the foregoing list of advantages of agreeing to arbitrate construction disputes is not exhaustive, construction professionals often fail to consider the binding impact of agreeing to arbitrate and the potential implications agreeing to arbitrate can have on a party’s interests. Montana courts have long employed a policy of favoring parties to arbitrate disputes.[1] In M.K. Weeden Constr., Inc. v. Simbeck & Assocs., 409 Mont. 305, 309 (2022), the Supreme Court of Montana recently reaffirmed this policy favoring arbitration of disputes in the construction dispute context. In Simbeck, M.K. Weeden Construction entered into a subcontract with Simbeck & Associates to perform construction services.[2] The subcontract between Weeden and Simbeck contained an arbitration agreement, under which Weeden and Simbeck agreed to arbitrate all disputes arising from the subcontract and the work to be performed thereunder.[3] After Simbeck began performing services under the subcontract, a dispute arose between Weeden and Simbeck after Weeden fired Simbeck from the job and terminated the subcontract.[4] Simbeck issued Weeden a demand to arbitrate the issue of whether Weeden breached the subcontract by firing Simbeck from the job.[5]

 

After the arbitration proceeding in Simbeck, the arbitrator issued an Interim Award to Simbeck in the amount of $337,431.40.[6] The arbitrator thereafter issued a Final Award to Simbeck in the amount of $260,346.83 for Simbeck’s attorney fees and costs, for a total award amount to Simbeck of $597,778.23.[7]

 

Disagreeing with the arbitrator’s awards to Simbeck, Weeden thereafter sought to challenge the award amount to Simbeck in Gallatin County District Court, arguing to the district court, among other reasons, that the arbitrator exceeded his authority in making an Interim Award to Simbeck because the Interim Award did not constitute a “reasoned opinion” for failing to adequately make findings of fact and law.[8] The essence of Weeden’s argument was that the arbitrator’s Interim Award did not meet the standards of what the parties agreed to as to what would constitute a “reasoned opinion.”[9] Weeden argued that the arbitrator’s Interim Award failed make findings of fact supporting the award, and also failed to provide a sufficient legal analysis supporting the Interim Award.[10]

 

The district court agreed with Weeden, and vacated the arbitrator’s award, and ordered that the parties resubmit their dispute to another arbitration proceeding.[11] Simbeck then appealed the district court’s ruling to the Supreme Court of Montana seeking to have the Court to uphold the arbitrator’s award to Simbeck.[12]

 

The Court ultimately upheld the arbitrator’s awards to Simbeck, and reversed the district court’s order vacating the arbitration awards to Simbeck.[13] In upholding the arbitration awards to Simbeck, the Court recognized that “Montana law grants to arbitrators broad authority to decide ‘all issues’ of a submitted dispute.”[14] The Court further found that the Interim Award met the parties’ agreement as to what constituted a “reasoned opinion.”[15] The Court found that the parties did not specifically define what constituted a “reasoned opinion” under the parties arbitration agreement, therefore, the Court likened the parties’ reference in their agreement to a “reasoned opinion” to actually mean a “reasoned award” as that concept is recognized under common law in various jurisdictions throughout the United States.[16] The Court held that a sufficiently “reasoned award” under Montana law is “an award that is provided with or marked by the detailed listing or mention of expressions or statements offered as a justification for the arbitrator’s decision, but less than complete findings of facts and conclusions of law.”[17] The Court held that, given this standard for a “reasoned award” in Montana, the arbitrator’s Interim Award met this standard, despite Weeden’s objections.[18]  

 

 

TAKEAWAYS

 

The main takeaway from the Simbeck opinion is that parties to an arbitration agreement or proceeding should ensure that they specifically define their expectations from an arbitrator with regard to the procedure of an arbitration and also with regard to the form and content of any award made by an arbitrator. Otherwise, courts in Montana will strongly favor upholding an arbitrator’s award made under a jointly agreed upon arbitration process absent rare circumstances. Weeden argued that the arbitrator’s Interim Award in favor of Simbeck did not meet the parties’ agreement. However, without any further elaboration by the parties in their agreement for the arbitration proceeding, the Court found the arbitrator’s Interim Award satisfied widely accepted common law standards. The Court’s opinion in Simbeck, suggests that, to the extent Weeden disagreed with the facts and law supporting the arbitrator’s Interim Award, Weeden should have contracted for the specific standards under which it desired the arbitrator to make any award.

 

The Court’s opinion in Simbeck is pertinent to construction professionals entering into construction contracts and agreements to arbitrate. Construction professionals should consult with legal counsel before entering into an arbitration agreement to ensure the provisions of the arbitration agreement meet the construction professionals’ expectations for arbitration. If a construction professional desires that an arbitrator can only make awards that meet certain factual and legal standards, the construction professional should ensure those expectations are expressly contained within an arbitration agreement itself. Otherwise, a construction professional may be bound to an arbitrator’s award that the professional finds did not meet its expectations.

 

If you or your construction business are considering whether agreeing to arbitrate for a particular construction project is right for you, or, if you are in an active dispute that may be subject to arbitration or other legal proceedings, the attorneys at Meyer Construction Law are qualified to answer any questions you may have. We will consult with you in drafting construction agreements and arbitration agreements that protect you and your company’s best interests. Our attorneys are also qualified to provide legal representation for your company in any arbitration or legal proceedings arising from a construction contract. Contact us now to begin developing a plan to protect your and your construction company’s interests in construction disputes.