Originally from Dispute Resolution Journal

CONSTRUCTION

Referee Clause Not an Agreement to Arbitrate

The Supreme Court of Delaware held that a referee clause in a construction contract did not clearly and unambiguously reflect the parties’ intent to arbitrate disputes arising out of the project.

The Diamond State Port Corp. (DSPC), the owner/operator of the Port of Delaware, solicited bids to reconstruct a wharf at the port. The bid documents contained a referee clause stating: “The Director or his designee, shall act as referee in all questions arising under the terms of the Contract … and the Decision of the Director shall be final and binding. On all questions concerning the interpretation of Plans and Specifications, the acceptability, quality and quantity of materials or machinery and work performed, the classification of material, the execution of work and the determination of payment due or to become due, the decision of the Director, or his designee, shall be final and binding.” It also contained a consent-to-suit clause. The document originally contained the AIA 201 standard form with an arbitration clause, but DSPC struck the clause from the bid documents.

Kuhn Construction submitted the lowest bid, which DSPC accepted. Kuhn began construction. When various problems arose, Kuhn allegedly requested assistance from DSPC. When the problems were not resolved, Kuhn began to invoice DSPC for additional work. DSPC rejected these bills and sought to have its executive director initiate a multiparty hearing under the referee clause. Kuhn refused to participate, claiming that the director did not have authority to arbitrate claims, and that the referee clause was intended to deal with day-to-day problems. DSPC sent Kuhn a notice of intent to arbitrate. Kuhn responded with a lawsuit in Delaware’s Chancery Court seeking to enjoin the arbitration. DSPC moved to compel Kuhn to arbitrate and to dismiss the complaint. The vice chancellor held that the referee clause was governed by prior court precedent, which required it to grant the motion to compel arbitration and dismiss the complaint.