In Massachusetts Highway Dept. v. Perini Corp., the Appeals Court vacated a $56 million arbitration award in favor of Perini-Kiewit-Cashman Joint Venture (“PKC”), one of the general contractors for portions of the Central Artery/Tunnel Project (“Project”).  The Court held that the arbitrating body incorrectly determined the threshold issue of whether the parties agreed to arbitrate arbitrability, i.e., whether a panel of arbitrators should determine what disputes are subject to arbitration.

The 1995 contract between PKC and the public agencies overseeing the Project (“CA/T”) provided that disputes were to be presented to a three-member disputes review board (“DRB”) which would issue findings and nonbinding recommendations to the project director.  In turn, the project director could accept, revise, or reject the DRB’s recommendations.  The parties could then appeal the project director’s decision to the appropriate State agency or to the Superior Court.

As the Project progressed, hundreds of disputes arose involving claims by PKC for delay and additional costs.  As a result, in 1999, the parties entered into a subsequent agreement mandating that existing claims would be subject to binding arbitration with the DRB.  Those claims were identified in an exhibit to the 1999 agreement.

When the dispute resolution process commenced, PKC and CA/T disagreed as to which claims were subject to binding arbitration and which were not.  The DRB issued a decision on arbitrability – which it declared binding – and proceeded to award PKC $56 million, of which $44 million was designated as binding under the terms of both the 1995 contract and the 1999 agreement.   CA/T appealed, arguing it never agreed to binding arbitration on the issue of arbitrability.

The Court noted that the law requires clear and unmistakable evidence in resolving whether the parties agreed on who should decide arbitrability.  In this vein, unlike deciding whether a particular merits-based dispute is arbitrable, a party’s silence or ambiguity does not create a presumption in favor of arbitration.  Here, the 1999 agreement did not contain any language indicating that the DRB should act as a binding arbitrator on disputes over arbitrability.  Therefore, the Court held that the DRB was authorized only to make nonbinding recommendations as to arbitrability to the project director who could then, at his discretion, accept, revise, or reject the recommendation.  The Court rejected PKC’s arguments that CA/T’s course of conduct evidenced its intent to submit the issue of arbitrability to the DRB in binding fashion, or that CA/T implicitly waived its right to judicial review of that issue.

Although the Court acknowledged that some of the claims comprising the $56 million award were subject to binding arbitration under the parties’ agreement, it vacated the entire award because the claims were so inextricably connected that splitting them would have produced an unworkable result.

The lesson here is that parties to a contract who want an arbitrator to determine not only the substantive dispute between them, but also whether the dispute itself is subject to arbitration, must explicitly state as much in their agreement.  A simple agreement that provides that all disputes will be resolved by binding arbitration will not suffice.  In that instance, the court, and not the arbitrator, will determine the question of arbitrability.