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In reversing a trial court's order which ruled that a construction arbitration agreement was unenforceable due to lack of mutuality, the Michigan Court of Appeals held that the enforceability of an arbitration agreement depends on consideration and not mutuality of obligation.
In Schreier v. Solomon, No. 277687, 2008 WL 4330192 (Mich. Ct. App. Sept. 23, 2008), Schreier entered into a construction contract with Southwick Builders to make an addition and renovations to Schreier's home. The contract contained an arbitration agreement providing that the owner, Schreier, was required to bring any claims against Southwick in binding arbitration. It did not require Southwick to arbitrate its claims against Schreier.
After a dispute arose between the parties, Southwick demanded arbitration, and Schreier filed a counter-demand for arbitration. Less than one month later, Schreier sued Southwick in court, and also sought a declaration that the arbitration agreement was unenforceable due to lack of mutuality because it required Schreier, but not Southwick, to arbitrate his claims.
Southwick moved for summary judgment, arguing that Schreier's claims were subject to binding arbitration. The trial court denied Southwick's motion and declared the arbitration agreement unenforceable due to lack of mutuality. Southwick appealed.
On appeal, the Court held that under Michigan law, the enforceability of a contract depends on consideration and not mutuality of obligation. Accordingly, "the trial court erred in ruling that the arbitration provision was unenforceable due to the lack of mutuality of obligation to arbitrate. Rather, the trial court should have focused its analysis on whether the construction agreement was supported by consideration."
The Court went on to hold that "the basic rule of contract law is that whatever consideration is paid for all of the promises is consideration for each one." Such reasoning applies equally to arbitration agreements within contracts, so the consideration paid for all the promises in the contract is also consideration for the promise to arbitrate.
In this case, the Court held that there was adequate consideration for the entire contract because Schreier agreed to pay $308,540 in exchange for Southwick's promise to renovate Schreier's home. Such consideration supported the arbitration agreement, as well, so no separate consideration was required for the arbitration agreement.
The Court also clarified that "mutuality of assent" is distinct and different from "mutuality of obligation:" both parties must assent to the contract or agreement in order for it to be valid, but both parties do not need to have the same obligations. Thus, the Court granted Southwick's motion for summary judgment and enforced the arbitration agreement.
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