Recent Developments in Arbitration
Construction Litigation Law Update 02/07/11 Leonard S. Shifflett, David P. Muth
Arbitration is a widely-used means of dispute resolution in the construction industry. Both the AIA and the AGC forms of contract contain extensive provisions dealing with arbitration. But as with any provision that is placed in a contract, great thought needs to be given to the inclusion of an arbitration provision. This is particularly true because each state has its own arbitration act, and many states follow in large part the Uniform Arbitration Act. Moreover, the Federal Arbitration Act (the "FAA") applies to contracts containing arbitration clauses that involve interstate commerce.
The application of the FAA is somewhat peculiar because even though it is a federal law, a party cannot sue on it in federal court unless the party can independently establish jurisdiction in the federal court. State courts have not always ruled consistently on the FAA and pre-emption; so, it is important to stay current on whether or not, and in what circumstances, the location of the construction site impacts the enforcement of the arbitration provisions.
Recently, the Illinois Appellate Court had to answer the question of whether the FAA applied in a construction dispute to pre-empt (take precedence over) state law on the issue of where the arbitration would take place. The answer to that question turned on whether the construction contract involved interstate commerce. The Illinois Appellate Court looked to the U.S. Supreme Court's decision in Allied-Bruce Terminix Cos. v. Dobson, 513 U.S.2d 65, 281 (1995), where the Court adopted a "commerce in fact" analysis. In this case, the Court found that the transaction did, in fact, involve interstate commerce, or, at the least, had a slight nexus to interstate commerce. In reaching that conclusion, the Court relied on the fact that the party to the contract purchased more than $80,000 worth of materials from another state for use in the construction contract even though total cost of construction was many millions of dollars. In addition to the purchase of these goods from a vendor in another state, the Appellate Court also noted the multistate nature of one of the parties to the contract (Weis Builders).
Having found that the FAA applied, the Illinois Appellate Court had to face two remaining issues: (1) whether the FAA allowed for consideration of forum non convenience; and (2) whether the Illinois Building and Construction Contract Act prohibited enforcement of the arbitration clause in question because the contract required arbitration in Minnesota and not in Illinois, the location of the construction.
The forum non convenience is an equitable doctrine that presupposes the existence of one or more forum with jurisdiction over the parties and the subject matter. Forum non convenience is not a contract defense, but merely a procedural mechanism employed to transfer a case to a forum in which adjudication "can be done more conveniently." The Court affirmed the trial court's rejection of the forum non convenience defense. It held that Section 2 of the FAA allows for pleading contract defenses "as exist at law or in equity for the revocation of any contract." Because forum non convenience relates to where the dispute should be decided and not to revocation of the contract, it had no application to the arbitration clause.
The Illinois Building and Construction Contract Act declares that any "provision contained in or executed in connection with a building and construction contract to be performed in Illinois that makes the contract subject to the laws of another state or that requires any litigation, arbitration or dispute resolution to take place in another state is against public policy. Such a provision is void and unenforceable." 815 ILCS 665/10. Because this provision is not applicable to all contracts generally, but only to contracts involving building and construction, the Court held that the FAA pre-empts this provision, and it cannot be used to avoid arbitration. R.A. Bright Construction v. Weis Builders, _____ Ill. App.3d _____ (3d Dist. 3-09-0910 (June 9, 2010)). Thus, the party relying on the state law prohibiting the arbitration provision outside the state realized too late that federal law superseded the prohibition and was forced to arbitrate outside the state.
Lessons learned: Although the Illinois Appellate Court found the FAA pre-empted Illinois law in this case, disputes continue to arise over the scope and enforceability of arbitration clauses in construction contracts throughout the country. If you are relying and negotiating specific arbitration provisions in your construction contracts, be sure to consider potential disputes in the state where the construction is taking place as to their enforceability and whether the FAA may pre-empt those state protections, rendering them null and void.