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October 01, 2017

Are Arbitration Provisions in Unsigned Contracts Enforceable in Construction Disputes?

Isabella C. Demougeot

There are growing instances in construction law, where one party does not sign the contract, but is bound by the terms of the contract such as an arbitration clause.  Therefore, it is important when discussing issues with clients to remind them that the terms of contracts are at times binding despite the contract not being signed by all parties.

Recent Cases

An example of this is Jatsek Constr. Co. v. Burton Scot Contrs., LLC, where the Court of Appeals enforced the arbitration provision of a contract that was signed by only one party, demonstrating that a valid contract may form even if all parties have not signed the document. Jatsek Constr. Co. v. Burton Scot Contrs., LLC, 2012 Ohio App. LEXIS 3489.  In Jatsek, a subcontractor on a public improvement project alleged that it had performed work pursuant to a subcontract agreement with a general contractor.  The subcontractor claimed that it had not been paid for the work it had performed for the general contractor. “The company argued that Burton Scot never executed the agreement, but even if a contract was formed, Jatsek was entitled to judgment because there was no dispute that it performed the work agreed to under the contract, but had not been paid.”  Id. at *2.  The general contractor agreed with the subcontractor’s allegation that it had performed the work and had not been paid for its performance.  However, the general contractor contended that the subcontract agreement required for any disputes to be handled through arbitration and not in court. The subcontract agreement contained handwritten alterations that the subcontractor sought to have included, but none of these comments and alterations referred to the arbitration clause, which thereafter remained unaltered. The subcontract agreement had been signed and dated by the subcontractor.  However, the general contractor did not sign the subcontract. The trial court held that no contract existed and the defendant general contractor appealed.  “[…] the trial court ruled that no contract existed for the Greenway project; that is, that the parties did not agree to submit to arbitration any disputes relative to the project.”

The Court of Appeals stated, “The issue to be decided in our review is whether a contract existed between Jatsek and Burton Scot for the Greenway project. We find that it did.”  Id. at *3.  The subcontractor contended that a contract was never formed because the general contractor never signed the agreement and, thus, arbitration was not contractually obligated.  The subcontractor alternatively argued that if the court found that a contract had been formed, it was against public policy to enforce the arbitration clause because litigation had commenced.

The Court stated:

In so finding, we follow this court's precedent as set forth in G. Herschman Architects, Inc. v. Ringco Mfg. Co., Inc., 8th Dist. No. 67758, 1995 Ohio App. LEXIS 1940, 1995 WL 277101 (May 11, 1995).  In Herschman, Herschman and Ringco entered into discussions in an attempt to reach an agreement through which Herschman would provide Ringco with architectural services in the design of department store display stands. Pursuant to their discussions, Herschman faxed to Ringco a proposal, dated June 23, 1992, in which it outlined the scope of, as well as fees for, the project. On appeal, Ringco argued that the parties never agreed to Herschman’s June 29 proposal and, therefore, no written contract between the parties existed. This court disagreed and found that the “terms of the final agreement were reflected in the June 29, 1992 proposal.”  In so finding, this court reasoned that “conduct sufficient to show agreement, including performance, is a reasonable mode of acceptance” of an offer.

Id.   The Court held, “Similarly, in this case, it is undisputed that Jatsek performed work on the Greenway project. On the authority of Herschman, upon the start of the work by Jatsek, an actual implied contract was formed to which the parties acquiesced.”  Id.  The Court stated that enforcing the arbitration provision was not against public policy, even though the lawsuit had already begun because the general contractor had always maintained that there was an enforceable arbitration clause in the subcontract.  The Court further explained that the law favored having such disputes resolved through the use of arbitration.  The Court concluded that the parties must arbitrate the dispute as the subcontract provides.

The Court in Villas Di Tuscany Condo. Assn., Inc. v. Villas Di Tuscany, similarly found that a “developer’s principal could invoke the arbitration provision of contracts for the sale of condominium units so as to seek to compel arbitration of condominium association’s claims against developer and principal, even though principal was not a signatory to the contracts, where principal was acting as developer’s agent, and developer was a signatory to the contracts.” Villas Di Tuscany Condo. Assn., Inc. v. Villas Di Tuscany, 2014 WL 860156.  In Villas, a condominium association filed a lawsuit against a developer and its principal arising out of their alleged promise to convey additional property to condominium after an existing life estate ended and their failure to complete certain work.  The Court of Common Pleas granted the developer’s and principal’s motion to stay the proceedings and refer the case to arbitration. The condominium association appealed.  The Court of Appeals stated:

Appellant argues the arbitration provision in the purchase agreements fails to comply with R.C. 2711.01(A). It contends the arbitration provision must comply with the formal requirements for all contracts including that it must be definite, certain, and constitute a “meeting of the minds.” Appellant argues the purchase agreements containing the arbitration provision also contain a contradictory provision requiring that any “claim, action, or lawsuit” arising out of the agreement shall be filed and adjudicated in state and federal courts located in Mahoning County, Ohio. Appellant claims that it complied with this provision when it filed the instant lawsuit in Mahoning County Common Pleas Court. It argues that the fact that the purchase agreements contained both the arbitration provision and the provision requiring all lawsuits to be filed in Mahoning County are contradictory and, therefore, renders the arbitration provision unenforceable.

Id. at *4.  The Court stated, “[f]inally, appellant contends that its complaint raises specific claims against Marchionda. It points out that Marchionda was not a signatory to the unit purchase contracts upon which appellees rely. Because neither appellant nor Marchionda were parties to the purchase contracts, appellant argues the trial court erred in ordering them to arbitration.”  Id. at *7.  The Court ultimately found that the argument did not have merit and affirmed the trial court’s order.

Recommendations for Advising Clients

When advising clients during contract negotiations, it is important to stress that the Court has found that arbitration clauses can be enforced even if both parties to the contract have not signed the agreement.  If your client foresees potential issues arising that would require litigation, it is important that they make comments pertaining to arbitration clauses.  Lawyers and clients must be cautious and vigilant.

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Isabella C. Demougeot

Peckar & Abramson, P.C., Washington, D.C.