Maryland Court of Special Appeals Addresses Two Important Arbitration Issues

While arbitration is fairly standard in the construction world, it is becoming increasingly common in business litigation due to its perceived lower costs and quicker resolutions.  However, with its increased popularity comes increased litigation over enforcement and application of arbitration provisions - especially when the arbitration provision is unclear or a party delays in asserting arbitration rights.

The Maryland Court of Special Appeals extensively addressed these issues and more in two cases decided in late 2019. The first case, Gannett Fleming Inc. v. Corman Construction Inc., found here, addressed whether a party waives its right to arbitrate by failing to demand arbitration within the general civil statute of limitations.  The Court also addressed who – the court or the arbitrator – initially determines whether a dispute is arbitrable.

Gannett is a civil engineering firm that formed a teaming agreement with Corman, under which Gannett would provide estimating services and Corman would act as the general contractor. The teaming agreement did not contain an arbitration provision. After Corman was awarded a contract to replace bridges and culverts in North Carolina, Gannett and Corman entered into a design subcontract that did contain an arbitration provision.  However, the provision did not provide any timeframe or deadline by which a party needed to demand arbitration.

Disputes arose between the parties.  After informal discussions proved unsuccessful, Corman filed a demand for arbitration with the American Arbitration Association. In response, Gannett argued in the circuit court that Corman waived its right to arbitrate because the arbitration demand was made after the expiration of Maryland’s general three-year statute of limitations. Gannett also argued that Corman’s claim was not arbitrable because it did not arise out of the performance or breach of the design subcontract.

Noting that Maryland public policy favored arbitration and the limited role of the courts in arbitrable disputes, the Court of Special Appeals reiterated the two reasons a court will not enforce arbitration.  The first is when no arbitration agreement covering the dispute existed as a matter of fact. This defense is based on generally accepted contractual defenses, i.e. no meeting of the minds, no consideration, fraud in the inducement, etc.  The second is when a party waives its right to arbitrate, which may be done by failing to timely demand arbitration or by engaging and litigating in the judicial forum.

Addressing Gannett’s timeliness argument, the Court ruled that the expiration of the statute of limitations did not act as a waiver of Corman’s right to arbitrate because the text of the statue limits its application to civil actions at law.  Arbitration is not a civil action at law.  The Court also relied on the fact that the parties’ arbitration provision did not impose any time limitation or deadline to demand arbitration.  (Had Corman missed a deadline in the arbitration provision itself, the result may very well have been different.)

Next, the Court examined whether a circuit court or an arbitrator makes the initial determination of whether a dispute falls within an arbitration provision.  Only if the dispute “clearly lies beyond the scope of the arbitration clause” will a court not require arbitration.  If not, “the dispute – including the threshold–arbitrability determination – should be handed over to the arbitrator.”  Put another way, if it is “reasonably debatable” that the dispute falls under the arbitration provision, then the initial arbitrability determination is left to the arbitrator.  In its ruling, the Court rejected the “significant relationship” test, which is based on the Federal Arbitration Act. See Griggs v. Evans, 205 Md. App. 64, (2012).

Because Corman’s claim “at least arguably falls within the broad scope of the arbitration clause” and was not waived, the arbitrator decides whether arbitration should proceed.