Avoiding Arbitration in Complex Construction Litigation
| Publication year | 1986 |
| Pages | 1808 |
1986, October, Pg. 1808. Avoiding Arbitration in Complex Construction Litigation
Modern construction contracts routinely include provisions for the resolution of disputes by arbitration. However, after a dispute arises, one of the parties may seek to avoid arbitration. This occurs particularly in complex, multi-party construction disputes where one party believes litigation would provide a less expensive and more expeditious disposition of the disputes.
Arbitration is a favored method of settling contract disputes under the Uniform Arbitration Act ("UAA"),(fn1) which has now been adopted by half the states and the District of Columbia. Arbitration is also strongly favored under the Federal Arbitration Act ("FAA").(fn2)
The UAA and FAA contain similar provisions for enforcing arbitration agreements.(fn3) Both acts recognize that a contract for arbitration can be invalidated "upon such grounds as exist at law or in equity for the revocation of any contract."(fn4) Barring a legal or equitable basis for denying arbitration, if a party to an arbitrable dispute fails, neglects or refuses to arbitrate, the opposing party can obtain a court order directing the parties to arbitrate their disputes in the manner provided in the arbitration agreement.(fn5)
If suit has already been commenced on the arbitrable issues, the party seeking arbitration can apply to the court in which the action is pending for an order staying the litigation and compelling the parties to arbitrate.(fn6) Conversely, arbitration proceedings can be terminated by court order if it is shown that there is no agreement to arbitrate or that the dispute is not within the scope of the arbitration provision.(fn7)
Although states that have adopted the UAA favor resolution of disputes by arbitration, some state courts have refused to enforce otherwise mandatory arbitration provisions in construction contracts and have allowed litigation in complex construction disputes. Those courts that apply the FAA compel arbitration of all disputes subject to a binding arbitration clause in a construction contract.(fn8) Therefore, it is important to determine whether the UAA or FAA applies to a particular construction dispute.
The FAA sets forth substantive federal law that is applicable in both state and federal courts.(fn9) In determining whether the UAA or FAA provides the substantive law for the enforceability of an arbitration agreement, the focus should be on the applicability of the FAA, since state substantive law will apply in all cases where the FAA is not applicable. Congress enacted the FAA in 1925 under the Commerce Clause of the U.S. Constitution, thereby declaring a national policy favoring arbitration.(fn10) A written provision in any maritime contract or contract evidencing a transaction involving commerce(fn11) to settle by arbitration a dispute arising (1) out of such contract or transaction, (2) from the failure to perform such a contract, or (3) from such a contract or transaction which the parties have agreed in writing to submit to arbitration "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."(fn12)
The FAA applies only to an arbitration agreement relating to a maritime transaction or a contract evidencing the transaction of commerce. Whether or not a contract evidences a transaction involving commerce is governed by federal substantive law.(fn13) Recent court decisions have applied the FAA to nearly all construction contracts or projects having even minimal contacts with commerce. The mere fact that a construction project is confined to one state does not preclude the FAA from applying to construction disputes.(fn14) In determining whether a contract evidences a transaction in commerce, courts will examine whether the parties contemplated substantial interstate activity at the time of entering into the contract.(fn15) How the parties expected the contract to be performed and how it was actually performed, such as crossing state lines in carrying out the terms of the contract, are relevant to the determination of whether commerce was contemplated.(fn16)
In American Home Assurance Co. v. Vecco Concrete Construction Co., Inc. of Virginia,(fn17) the U.S. Court of Appeals for the Fourth Circuit found that a construction project involved interstate commerce where the contractor was a Delaware corporation with its principal place of business in Alabama and its subcontractor was a Virginia corporation. The subcontract that contained the arbitration clause and formed the basis of the dispute between the contractor and the subcontractor included subcontracts and purchase orders for products and equipment shipped to Virginia from Maryland, Alabama, Utah, Missouri and California. Additional factors relied on by the Court of Appeals included the fact that non-resident employees were employed on the project and the fact that a New York bonding company guaranteed the subcontractor's performance.
R. J. Palmer Construction Co. Inc. v. Wichita Band Instrument Co., Inc.(fn18) considered whether the Kansas version of the UAA or the FAA applied in determining the enforceability of an arbitration provision. The evidence showed that the use of redwood siding, which had to be purchased out of the state, was contemplated by the parties since the owner specified this siding in the construction contract. The court also found that the building under construction was to be used to house and sell musical instruments and related items that would necessarily move in interstate commerce, and this fact would have been known when the parties entered into the contract. Based on these factors, and...
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