Is Your Arbitration Clause Leaving You Exposed?: 3 Ways to Protect Yourself

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Arbitration clauses are included in many commercial contracts, particularly in government subcontracts. We often see arbitration clauses as tools to limit the parties’ exposure to protracted litigation if a dispute arises under the contract.

Maryland, among many other state and federal courts, has an extremely strong public policy of favoring the enforcement of arbitration agreements.  The Maryland Court of Appeals has explained that the “public policy favoring such agreements is understandable, as arbitration agreements are generally a less expensive and more expeditious means of [resolving legal disputes]. The favorable status in which arbitration agreements are afforded in Maryland has been made explicitly evident by the Legislature in the enactment of the [Maryland Uniform Arbitration Act].[i]    A recent decision from a Maryland appellate court, Gannett Fleming, Inc. v. Corman Construction, 243 Md. App. 376, 424 (2019), extended this deference to arbitration agreements in a way that contracting parties may not anticipate when they enter their contracts.

Typically, a breach of contract action in Maryland would be time-barred after three years. Despite this civil statute of limitations, the court in Gannett Fleming allowed a party to proceed to arbitration when they had waited eight years to bring their action. The parties’ arbitration clause was very broad:  “any disputes not resolved by mediation shall be decided by arbitration under the Construction Industry Arbitration Rules of the American Arbitration Association.” Gannett Fleming, 243 Md. at 417.

The court held that without an express reference in the arbitration agreement to the parties being subject to a time requirement or civil statute of limitations, then arbitration could proceed over objections as to timeliness.  So for Gannett Fleming, the parties’ agreement was too broad and exposed the parties to potential liability long after the time for filing suit in civil court expired. Under this holding, if there is a broad arbitration agreement that does not explicitly impute the civil statutes of limitations or other time constraints, a party can make a claim and proceed to arbitration indefinitely. This is also true in Minnesota, Massachusetts, North Carolina, and the state of Washington.

Most companies, at the time they sign contracts, do not intend to leave themselves open to liability for a potential claim arising under a contract forever, but there may be instances where a company’s best interests are served by enforcing a broad arbitration provision that does not include statute of limitations.  On a case-by-case basis, government contractors and commercial businesses may want to consider revising their arbitration agreements to:

  1. state that any dispute arising under the contract must be raised and filed, within the same timeframe for an equivalent civil claim under the governing jurisdiction’s statutes of limitations;
  2. set a discrete timeframe for a party to pursue a claim, such as within 180 days of the close of the contract period; and/or
  3. set a limit for when the parties are relieved from any claims or disputes under the contract, such as within two years.

In addition, companies may wish to review their existing teaming agreement, subcontract, and other commercial agreements to determine whether they adequately protect against the advancement of stale claims.

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[i] Walther v. Sovereign Bank, 386 Md. 412, 425, 872 A.2d 735, 743 (2005).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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