By: WBG, LLP Published: March 2011

KUHN Construction, Inc. v. Diamond State Port Corp.

In March 2010, the Supreme Court of Delaware determined that a construction contract referee clause, similar to that found in Westinghouse and its progeny, did not clearly and unambiguously reflect the parties’ intention to arbitrate disputes arising out of the project. 

Defendant, Diamond State Port Corp.(“DSPC”) is an instrumentality and a corporate entity of the State of Dela- ware which owns and operates the Port of Wilmington.  DSPC solicited fixed price bids to reconstruct a wharf at the Port of Wilmington.  Plaintiff and responsible bidder, Kuhn  Construction, Inc. (“KUHN”) submitted the lowest, responsive bid and was awarded the contract.   

The referee clause in question stated: “The Director, or his designee, shall act as referee in all questions arising under the terms of the Contract between the parties hereto, 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 furnished and work performed, the classification of material, the execution of the work and the determination of payment due or to become due, a decision of the Director, or his designee, shall be final and binding.” 

The contract did not define “questions”, as used in the referee clause; but did define “claims”.  The contract con- tained a number of standardized forms one of which included a provision setting out the rights of parties in arbitration.  While DSPC included the form, it struck the arbitration provision along with any other substantive arbitration provisions. 

Disputes arose.  KUHN requested assistance from DSPC.  The disputes were not resolved and KUHN began to invoice DSPC, which rejected the invoices.  DSPC then attempted to initiate a multiparty hearing under the ref- eree clause.  KUHN objected claiming that DSPC did not have authority to arbitrate claims under the applicable statutes or under the referee clause which only governed day-to-day dispute resolution issues.  It was the position of KUHN that neither party intended the referee clause to act as an arbitration provision. 

Note the procedural development: DSPC then sent KUHN a Notice of Intent to Arbitrate. KUHN filed a com- plaint for injunctive relief.  DSPC filed motions to compel arbitration and to dismiss the complaint.  After oral argument on the motions, DSPC agreed to withdraw the multiparty proceeding and to proceed with arbitration solely with KUHN.  The lower court granted the motions to compel arbitration and to dismiss. 

On appeal to the Supreme Court of Delaware, the lower court is reversed.  The Supreme Court held that the policy of the State will allow the State’s agent to act as arbiter in connection with during the performance of the contract.  “This inherent conflict of interest creates the perception - if not the reality - of unfairness and injustice.”  However, the Court notes that: “[w]hen sophisticated parties enter into agreements, we grant them the power to bargain away their right to an impartial arbiter.  However, the contract must reflect that the parties clearly and intentionally bargained for whether and how to arbitrate.”

 The Court noted that it would not enforce a contract that unclearly or unambiguously reflected an intention to arbitrate.  The Court adheres to the “objective” theory of contracts; i.e., a contract’s construction should be that which would be understood by an objective, reasonable third-party. 
The Supreme Court found that the contract did not clearly and unambiguously reflect the parties’ intent to arbi- trate. 

If you would like more information regarding this topic, please contact Welby, Brady & Greenblatt, LLP at (914) 428-2100 ***** This Legal Alert is supplied for informational purposes only and is not intended to constitute legal advice. You should consult competent legal counsel depending on the specific issues of your matter.

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