Questions To Ask When Changing Your Arbitration Clause

Jay Ramsey and Abby Meyer | Class Action Defense Strategy Blog

In a prior post (here), we highlighted some questions that companies may want to ask when evaluating whether their arbitration clauses are enforceable.  If changes need to be made to those clauses, then companies should consider how to implement those changes so as to ensure those are enforceable too.  The following is what you should be thinking about and asking.

If an agreement needs to be amended to add or modify an arbitration clause, you should strongly consider having customers re-agree to a contract or set of terms and conditions with the new arbitration clause.  This could be done a number of ways, including by having customers agree to an entirely new contract or having them agree to just a replacement arbitration clause.  For companies who engage their customers online or through mobile applications, this may be as simple as requiring customers to re-register or log-on in a way that confirms their assent to the new agreement.

In some cases, the original agreement may have a provision that permits the company to amend or modify the agreement unilaterally.  These provisions generally require that the company post the amended terms to its website or in some other location and indicate that a customer’s continued use of the company’s services constitutes agreement to the amended terms.  The provision may also require that the company provide its customers with some type of notice of the amended terms.

The law permitting unilateral amendments in accordance with these types of modification provisions is still developing.  Some courts have permitted unilateral amendments if the company follows the terms of the modification provision, even if notice of the amended terms is not separately provided.  See Miracle-Pond v. Shutterfly, Inc., No. 19 cv 04722 (N.D. Ill. May 15, 2020).  Other courts have rejected modifications if notice was not provided. See, e.g.Douglas v. U.S. District Court, 495 F.3d 1062 (9th Cir. 2007).  What constitutes adequate notice is often up for debate.

In light of this mixed law, if you are considering modifying a set of terms without requiring a new agreement from your customers, you should consider at least the following:

  1. Does the original agreement permit modifications?  If so, are you complying with the modification provision?
  2. Does the modification provision require that a particular notice be sent to the customer regarding the amended terms?  Should you provide that notice even if the provision does not require it?
  3. Does any notice that you are sending out clearly indicate that changes are being made to the terms?  What does the subject line of the email notification say?  If changes are mailed, do the documents make clear that your company’s terms are changing?  Is there anything on the envelope indicating that changes to the terms are included inside?
  4. Does any notice that you are sending not only provide the amended terms or access to them, but also describe any material changes to the terms?  Does the notice clearly indicate that the customer agrees to the amended terms by continuing to use the company’s services?
  5. Is the notice being sent to the best, most up-to-date contact information for the customer?

As we noted in our last post (here), the above questions may not cover everything that you and your company should consider when updating your agreements or terms and conditions, particularly when adding or modifying an arbitration provision.  Crafting a solution for each company, while satisfying the concerns and desires of the legal department, the marketing department, and the business teams can sometimes be challenging, but it should be done.  There is no reason to risk unnecessary exposure to consumer class actions.

Does Your Construction Contract Involve Interstate Commerce? If So, Expect Your Arbitration Agreement to Be Enforced

Jim Archibald, Ryan L. Beaver & Amandeep S. Kahlon | Buildsmart

Whether an arbitration agreement is enforceable is a frequently litigated matter in construction disputes. Federal policy strongly favors arbitration. Typically, the Federal Arbitration Act (FAA) will preempt any contrary state law that might otherwise void an arbitration provision. On June 10, 2020, the South Carolina Court of Appeals reaffirmed this view when it overturned a trial court’s decision denying a motion to compel arbitration.

In Patricia Damico, et al. v. Lennar Carolinas, LLC, et al., a group of homeowners sued the developer, general contractor, and subcontractors of a development in Berkeley County, South Carolina, alleging construction defects in their homes. The general contractor, Lennar Carolinas, sought to compel arbitration. The trial court denied the motion to compel ruling that (1) the South Carolina Uniform Arbitration Act (SCUAA) applied to the parties’ agreement instead of the FAA, (2) the general contractor failed to comply with the SCUAA’s conspicuous notice requirement, and (3) the arbitration agreement included a provision from the parties’ sales agreement, as well as terms from a separate warranty agreement, and was unconscionable. The general contractor appealed.

The Court of Appeals overturned the trial court and ruled that the FAA applied to the parties’ contract. The court explained that the FAA applies to transactions involving interstate commerce, and the parties specifically agreed in their sales agreement that the transaction involved interstate commerce. The court applied basic rules of contract interpretation to enforce this provision, as written, like any other contract term. Moreover, because construction of the homes required use of out-of-state subcontractors and material and equipment suppliers, the court concluded the transaction in fact involved interstate commerce.[1] Therefore, the FAA applied.

The court next determined the trial court improperly voided the sales agreement’s arbitration agreement as unconscionable. The trial court should have considered the validity of the arbitration provision in isolation without reference to separate arbitration language in the warranty agreements or the arbitrability of certain disputes thereunder. Questions of arbitrability of a particular dispute are to be decided by the arbitrator, and the trial court should have addressed only whether the arbitration agreement was enforceable. Once the Court of Appeals concluded the agreement was valid, the FAA required it to be enforced, and the court reversed the trial court’s order denying the motion to compel.

Closing Thoughts

If you agree to arbitrate disputes in your construction contract, think carefully before pursuing litigation and trying to contest a motion to compel. While there are instances where an arbitration agreement may be void or inapplicable to a particular dispute, more often than not the trial court will enforce the arbitration provision and grant the motion to compel. And, even if you succeed at the trial level, this is one of the few circumstances when appellate courts routinely reverse lower court decisions. Absent unique contract language or a novel set of facts, this particular fight may not be worth the time or expense.

In contrast to the above circumstances, if you want your arbitration agreement enforced and would rather avoid the cost of appealing an incorrect ruling from a state trial court, consider reviewing, prior to execution, the form arbitration language in your contract for compliance with state law. Here, had the sales agreement complied with the conspicuous notice requirements of the SCUAA, the general contractor might have, at least partially, avoided the bad result from the trial court.

Agreement to Arbitrate Assignable, but Subject to Statute of Limitations

Stanley A. Martin | Commonsense Construction Law

Construction of an apartment building was completed in 2005, under a contract with an arbitration clause. The building was sold in 2015, and the seller assigned its rights under the construction contract to the buyer.

In 2018, one or more balconies on the building collapsed. Subsequent investigation showed that waterproofing and flashing for some of the framing members had never been installed.

The buyer started arbitration with the original contractor, and the contractor sought a court injunction against the arbitration. The contractor argued that the right to arbitration could not be assigned absent its consent, and the claim was too late, anyway. The buyer argued, on the other hand, that the right to remedies under the completed construction contract could be assigned without consent, and that the contractor’s “fraudulent” failure to properly perform the work, discovered only recently, resulted in a different statute of limitations analysis.

The trial court held that the right to pursue contract remedies after completion of the project could be assigned. And since that right was subject to an arbitration clause, the buyer/new owner could pursue any timely claim in arbitration.

But the real issue was timeliness of the claim. First, the court held that the allegations concerning the original construction were allegations of breach of contract. Efforts to dress the claim up as one for “fraudulent construction” would not extend the statute of limitations. Second, the statute of limitations for a contract claim (six years) had long since passed. Further, there was some evidence that the original owner knew about water damage to the framing before the property had been sold, and any investigation by the buyer should have uncovered that condition, unless the original owner had already repaired it.

Since the statute of limitations had passed, the court granted a permanent stay against any arbitration between buyer and contractor. The case is Matter of Turner Constr. Co. v Mount Auburn LLC, 2020 N.Y. Misc. LEXIS 25 (Jan. 2, 2020) (subscription required).

Arbitration Clauses Will Continue to Dominate in Reinsurance Contracts

Michael Knoerzer | Clyde & Co

Insurers to consider arbitration as an effective strategy in 2020.

Insurers and insurance attorneys have a love-hate relationship with arbitration in insurance and reinsurance contracts. Generally, they love arbitration about as much as they love the last result in the last arbitration they had.

Having said that, arbitration is favored over court litigation in reinsurance contracts and we will continue to see this in 2020. One reason for this is arbitration clauses also are more likely than not to be found in insurance contracts where the parties are companies from different countries. Arbitration under a neutral arbitration framework, perhaps with special rules about the neutrality of the arbitration panel, provides comfort to both parties that there will not be a “home court advantage” for either party.

Robust debates often ensue about the pros and cons of arbitration versus court litigation. Those favoring court litigation note that there is no meaningful right to appeal from arbitration awards and that sometimes arbitration panels get it wrong. Those favoring arbitration respond that if you won at arbitration, you are glad that there is no right to appeal, and that courts too “sometimes get it wrong.”

The debates will continue, but it is clear that reinsurers benefit from a well-crafted arbitration clause in its policies, especially a clause which contains language to the effect that no rules of construction will be applied against the insurer, and also provides that the arbitrators have no authority to award punitive or exemplary damages. Looking ahead to 2020, insurers should look to level the playing field and consider arbitration as an effective strategy.

Why Builders Should Reconsider Arbitration Clauses in Construction Contracts

David M. McLain | Colorado Construction Litigation | September 23, 2019

My advice to home builders has long been to arbitrate construction defect claims instead of litigating them in front of juries.  Based on my experience and watching others litigate claims, I have learned that home builders usually fare better in arbitration than in jury trials, both in terms of what they have to pay the homeowners or HOAs and also in what they recover from subcontractors and design professionals.  Because of these dynamics, conventional wisdom has been that builders should arbitrate construction defect claims.  For several reasons, I am now questioning whether the time is right to consider a third option.

First, plaintiffs’ attorneys dislike arbitration and will continue their attempts to do away with arbitration for construction defect claims.  In 2018, the Colorado Legislature considered HB 18-1261 and HB 18-1262.  While both bills were ultimately killed, they showed the plaintiffs’ attorneys disdain for arbitration, and serve as a warning that attempts to prevent arbitration legislatively will continue.  If the legislature does away with the ability to arbitrate construction defect claims, and that is the only means of dispute resolution contained in a builder’s contracts, that builder may find itself in front of a jury.

Second, in rare instances, builders may disagree with an arbitration order to the extent that they want to appeal the decision.  Under the American Arbitration Association rules, once an arbitrator issues an award on the merits, it can only correct clerical, typographical, technical, or computational errors and has no ability to reconsider the merits.  Pursuant to Colorado’s Uniform Arbitration Act, a dissatisfied builder can only challenge an arbitration award in extreme circumstances, for example, if it was procured by corruption, fraud, or other undue means or because of evident partiality, corruption, or misconduct on the part of the arbitrator.  For better or worse, binding arbitration is just that – it is binding, and builders may regret that they have no appellate rights if they find themselves holding the short end of the stick. 

For these reasons, I believe that builders should start looking beyond arbitration clauses in their purchase and sale and subcontract agreements.  At the very least, builders should add language to protect against the legislature making arbitration clauses void as against public policy or otherwise impeding arbitration rights.  This language would say something to the effect that should the arbitration clause be unenforceable, the parties agree to waive a jury trial and to have their case decided by a judge after a bench trial.  A builder could also simply remove references to arbitration and require a bench trial from the outset.

Regardless of the language used, builders should ensure that the language in the purchase and sale agreement and the subcontracts call for the same dispute resolution forum, either arbitration or a bench trial.  In no case do you want to litigate the same issue twice, in two different forums.