Arbitration is often the most prompt and just means for dispute resolution. However, this leads to the questions: when can you arbitrate? and: what arbitration remedies might a contractor choose to exercise?
In BML Properties Ltd. v. China Construction America, Inc., et al., an appellate court reminded us that arbitration is a consensual process. BML involved a series of agreements in connection with the development of the multi-billion Baha Mar resort complex in the Bahamas. BML was the direct parent of Baha Mar Ltd. In 2009, Baha Mar Ltd. and one of the China Construction defendants memorialized their agreement in a Main Construction Contract, which provided that any suit, action, or proceedings shall be brought in the courts of the State of New York, or the United States District Court, located in the Borough of Manhattan in the City of New York. A subsequent Bahamian receivership proceeding (think: bankruptcy) resulted in the sale of the assets of Baha Mar Ltd. to Perfect Luck Assets Ltd, (“Perfect Luck”). Consequently, BML lost its entire investment in in Baha Mar Ltd., or approximately $845 million, as well as its expected profits from the resort.
In 2016, Perfect Luck and one of the China Construction defendants amended the Main Construction Contract, deleting the New York forum selection clause and inserting a new provision requiring that any disputes be referred to and finally resolved by arbitration under the Rules of the International Chamber of Commerce. On December 26, 2017, BML filed a lawsuit in New York State Supreme Court in Manhattan alleging a multi-year scheme to fraudulently delay the Baha Mar resort project and increase construction costs. China Construction moved pursuant to NY CPLR 7503 and to the Federal Arbitration Act to compel arbitration. BML countered, arguing that BML had not consented to arbitration and, accordingly, could not be compelled to participate. Correctly, the Court determined that its threshold question was whether the parties made a valid agreement to arbitrate, noting that the proponent of arbitration has the burden of demonstrating that the parties agreed to arbitrate. The appellate court affirmed, noting that while the Federal Arbitration Act favors arbitration, it is limited by the principle that arbitration is always a matter of consent, not coercion. Defendants, while moving to compel arbitration, argued that the Main Construction Contract, as amended by Amendment No. 9, required BML to arbitrate the dispute. However, BML was a non-signatory to Amendment No. 9, which post-dates the disputes at issue.
While in certain limited circumstances New York courts can impute the intent to arbitrate to a non-signatory, such as where the non-signatory may evince an intent to be bound or where the non-signatory received a direct benefit from a contract containing an arbitration clause, such as payment under the contract, or enforcement of the contract against others. However, neither the lower nor the appellate courts found those triggering circumstances here. Accordingly, it found the arbitration clause inapplicable and, therefore, denied the motion to compel.
To understand the lower court’s ruling, it is important to remember the basic premise of arbitration: that arbitration is a consensual method of dispute resolution. Parties contemplating arbitration can enter into an arbitration agreement either before or after a dispute arises; but enter into an agreement they must. The situation in BML fatally departed from this basic requirement and, accordingly, the case was relegated to ordinary litigation.
It is clear that Courts are more inclined to sustain the right to arbitrate when supported by signed documentation, rather than surrounding factual circumstances. Should you believe you have a right to arbitrate, it is best to have the documents or circumstances on which you rely reviewed by your attorneys.