Subcontractors are often asked to sign a subcontract giving the general contractor the right to, in its sole discretion, choose arbitration or litigation to resolve subcontract disputes. Many view these clauses as unfair, and whether such clauses are even enforceable is not settled, which means that state and federal courts across the country have come to different conclusions when resolving disputes about whether such “sole discretion” clauses are enforceable or not.
In a recently decided case called Ohio Plumbing, Ltd. v. Fiorilli Construction, Inc., 2018-Ohio-1748, the Court of Appeals of Ohio for the Eighth Appellate District (Cuyahoga County) enforced a “sole discretion” clause, and held that the parties had to arbitrate their dispute, as the general contractor wanted that.
With this decision, the Court of Appeals reversed the trial court, which had come to the opposite conclusion (and refused to enforce the clause) and also created a “split” in the Ohio Appellate Courts given that only last year the Second District Court of Appeals refused to enforce a “sole discretion” clause in PS Commercial Play, LLC v. Harp Contractors, Inc., 2017-Ohio-4011 (2nd Dist., Montgomery County). In PS Commercial, the Second District Court of Appeals rejected the general contractor’s motion to stay the case to allow arbitration (which it was attempting to choose in its “sole discretion”) after finding that the general contractor waived the clause.
In Ohio Plumbing, the plumbing subcontractor entered into a subcontract agreement with Fiorilli Construction (the general contractor) for work on a SteinMart department store in Bainbridge, Ohio. The subcontract provided that disputes were to be decided “by either arbitration or litigation … at Fiorilli Construction, Inc.’s sole discretion.“
After a payment dispute at the end of the project, the subcontractor sued the general contractor for allegedly unpaid plumbing work. Fiorilli responded to the lawsuit by invoking the “sole discretion” clause, and asked the trial court to stay the case while the parties arbitrated their dispute. The subcontractor opposed Fiorelli’s motion, arguing, among other things, that Fiorilli was in default and waived the right to arbitrate by failing to file an arbitration demand, before or at the same time, as it filed its motion to stay.
The trial court agreed with the subcontractor and denied Fiorilli’s motion to stay. The Appeals Court, however, reversed, citing the “strong public policy” of Ohio favoring arbitration, and noting the broad scope of what it called the subcontract agreement to arbitrate, in which the subcontractor agreed that it would arbitrate “disputes under the Agreement,” if the general contractor chose to do so. The Appeals Court stated that because all claims in the lawsuit arose out of the subcontract, the subcontractor’s claims were subject to an agreement to arbitrate, and the subcontractor waived the right to litigate by agreeing to arbitrate disputes at Fiorelli’s election.
Thus, the parties are now heading back to the trial court, which has been instructed to stay the lawsuit pending arbitration of the dispute. Given the conflicting Ohio Appellate Court decisions, until the Ohio Supreme Court gives the final word on the enforceability of “sole discretion” clauses in Ohio, there is no definitive law to guide Ohio construction contractors and subcontractors whether such a clause is enforceable.
The lesson is that if you are asked to give the other party to the contract the sole right to do anything, such as whether to choose arbitration or litigation, you should carefully consider the impact before signing the contract. Anything that is unacceptable or unclear must be negotiated or clarified before the contract is signed. Otherwise, it can be frustrating, expensive, and unproductive to suddenly find yourself spending time and money to argue (in court, and possibly through an appeal) whether a judge, jury, arbitrator, or arbitration panel will be hearing and resolving your dispute.