Specify "Arbitration" with Clarity

Ian Clarke
April 1, 2009 — 1,139 views  

The principal concept of every contract or agreement is to achieve the intent of the parties. The courts will examine the language of a contract to determine if the terms are clear and unambiguous. It is not the responsibility of the court to rephrase the language or to add any missing terms. Reasonably clear contract construction must take place when forming the contract.

In a fairly recent Louisiana decision, the Louisiana Court of Appeals held that if parties wish to include an arbitration clause, the word ‘arbitration’ must appear clearly in the agreement. Ganier v. Inglewood Homes, Inc., 944 So. 2d 753 (La. Ct. App. 2006). Use of alternative words such as ‘final determination’ did not bind the parties to arbitration. A failure to clearly stipulate an intent or agreement for a binding arbitration may render the clause null and void.

In the Ganier case, the dispute arose in the context of the construction of a residence. The homeowners initiated a suit against the builder on a breach of warranty claim. The claim stemmed from unresolved damages due to faulty workmanship and a failure to remedy by the builder. The builder took the position that the homeowners did not adhere to a provision of the contract that required disputes to be determined by a third party and sought to stay the litigation based on the contractual language. The language that the builder relied upon stated that “any dispute relating to the contract be referenced for final determination by the Orleans Parish Inspection Department, or another expert mutually agreed on by the parties.”

The homeowners opposed the motion on the grounds that the contract did not contain a valid and enforceable arbitration clause. They argued that the clause was vague and ambiguous and did not contain the words “binding arbitration.” In addition, they asserted that the “Orleans Parish Inspection Department” did not exist.

The court ruled that the burden of proving the existence of a valid arbitration clause was on the builder because it requested the motion to stay the litigation. To succeed, the builder had to show that a valid agreement to arbitrate existed between it and the homebuilders. It further had to show that the disputed claim was within the scope of the arbitration agreement.

In reaching a determination on this case, the court relied upon both state law and the Federal Arbitration Act. The court noted that although state and federal laws favor arbitration, an arbitration clause is not enforceable unless its meaning is “reasonably clear and ascertainable.” Moreover, the law requires that an interpretation of a contract is determined by the common intent of the parties. Where a contract does not contain language that is “a clear, unequivocal written expression that the parties agreed to arbitrate” their disputes, the court will not enforce the clause.

Noting that the clause did not contain the word “arbitration,” the court emphasized that the contractor did not cite to any case law that supported the premise that arbitration can be forced upon parties when the contract did not contain the word “arbitrate.” The contractor also failed to prove the existence of the referenced “Orleans Parish Inspection Department.” Consequently, there was no enforceable agreement to arbitrate.

Practical Application/Comments
Although the courts favor arbitration in lieu of formal litigation, if the contract does not specifically state “arbitration” a court may not impose it. The language of the contract must be “reasonably clear and ascertainable” that it is the intent of the parties to arbitrate their disputes.

To enforce an arbitration clause the court will determine (1) whether a valid agreement to arbitrate between the parties exists; and (2) whether the disputed claim is within the scope of the arbitration agreement. It is advisable to use words such as “arbitrate” or “arbitration” in the actual clause. Relying upon synonyms or ambiguous forms of expressions, such as “final determination,” may render the clause unenforceable. It is also important to ensure that if arbitrators are referred to in the arbitration agreement that they actually exist, and will continue to exist, at the time enforcement of the agreement is sought.

Ian C. Clarke
[email protected]
Member of the State Bar of Georgia

Ian Clarke

Smith, Currie, & Hancock LLP