Enforcing Construction Arbitration Is Not Always as Simple as it Seems Thumbnail

Enforcing Construction Arbitration Is Not Always as Simple as it Seems

Reposted from the On the Level Newsletter - Click Here to Subscribe

Parties to a construction contract requiring arbitration of disputes frequently disagree about whether a particular dispute is covered by the arbitration clause.  Add to this questions of who decides which issues, what law applies, what laws are preempted, and injunctive relief, and it becomes clear that enforcing arbitration agreements is not always as simple as it seems.

Who Decides the “Gateway” Issue of Arbitrability?
Challenges to the enforceability of a contract as a whole (that also contains an arbitration clause) is for the arbitrator to decide, while challenges to the enforceability of the arbitration clause itself is for the courts to decide. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). This rule applies whether the challenge is brought in federal or state court. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006).

This is because the question of whether a dispute is arbitrable, e.g. substantive arbitrability, is decided by the courts. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). Once the court determines arbitration is the proper forum, the arbitrator decides issues of procedural arbitrability, such as waiver, timeliness, and whether the parties have satisfied conditions precedent to arbitration.
Where the parties “clearly and unmistakably” provide otherwise, however, an arbitrator will decide in the first instance whether a dispute is arbitrable. See AT&T Techs. v. Communs. Workers of Am., 475 U.S. 643 (1986); First Options, supra. Where the parties to a contract agree that an arbitrator shall decide not only the merits but also “gateway” questions of arbitrability, a court may not override the contract – even if it thinks the arbitrability question is “wholly groundless” or the merits of the underlying claim appear to the court to be frivolous. Schein v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019). A court cannot decide neither arbitrability questions, nor merits questions that the parties have delegated to an arbitrator. Id.
The threshold question of arbitrability can be delegated to an arbitrator in one of three ways – (i) An express provision empowering an arbitrator to decide questions of arbitrability; (ii) broad language requiring arbitration of “any and all disputes arising out of or relating to” the contract; or (iii) incorporation of arbitral forum rules empowering the arbitrator to rule on his or her own jurisdiction.
With respect to the incorporation of arbitral rules, many construction contracts mandate that the dispute be administered by the American Arbitration Association (“AAA”) under the Construction Industry Rules.  AAA Rule 9 provides: “R-9 Jurisdiction. (a) The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.”
Court have found that incorporation of the AAA rules (or similar rules governing the arbitration process) demonstrates “clear and unmistakable” evidence of the parties’ agreement that questions of arbitrability should be submitted to the arbitrators. Courts, including the Sixth Circuit Court of Appeals, have held that incorporation of the AAA rules empowers the arbitrator, not a court, to rule on the threshold issue of arbitrability: “Finally, consider that every one of our sister circuits to address the question—eleven out of twelve by our count—has found that the incorporation of the AAA Rules (or similarly worded arbitral rules) provides “clear and unmistakable” evidence that the parties agreed to arbitrate “arbitrability. [Citations omitted.]” Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842 (6th Cir. 2020).

What Law Applies?
Naturally, most practitioners will look to the choice-of-law provision in the construction contract to answer this question. The inquiry, however, does not stop there.

The Federal Arbitration Act (“FAA”), 9 USC § 1, et. seq. preempts any inconsistent state laws that would otherwise render arbitration agreements unenforceable. This is true even if the parties selected that state’s law in the contract’s choice-of-law provision. The scope of the FAA’s applicability and preemptive effect is set forth in 9 USC § 2, which broadly covers: “A written provision in any … contract evidencing a transaction involving commerce….” This has been interpreted to mean any contract “affecting commerce” or “within the flow of interstate commerce.” Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995). Further, the contract does not need to mention the FAA for it to be applicable and preempt the selected state law. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995).
That being said, the United States Supreme Court has held that the contracting parties may add portions of a state’s arbitration law to the FAA’s provisions or opt out of the FAA’s provisions entirely. Volt Information Sciences, Inc. v. Bd of Trustees of Leland Stanford Junior Univ., 489 U.S. 468 (1989); First Options, supra.

It must be noted, however, that this election must be specific, as a contract’s
general choice-of-law clause selecting a particular state law is an insufficient expression of the intent required to get out of the FAA, or to add portions of a state’s law to the FAA. As discussed below, this FAA preemption can have an unexpected and significant impact on construction arbitrations.

“Home Court” Statutes and FAA Preemption
Like many states (31 at last count), Ohio has enacted a statute to level the playing field between owners and general contractors, on the one hand, and subcontractors, on the other. Ohio’s Fairness in Contracting Act, Ohio Revised Code (“ORC”) § 4113.62, makes a number of common provisions of construction contracts and subcontracts void and unenforceable. Relevant here is the statute’s nullification, on its face, of construction contract clauses: (i) making the contract subject to the law of another state, where the project is in Ohio; and (ii) requiring litigation or arbitration in another state, where the project is in Ohio. ORC § 4113.62 (D)(1) and (2). Typically, this statute overrides any choice-of-law and venue provision calling for the contract to be governed by another state’s law or requiring that any litigation or arbitration take place outside the Ohio county where the project is located.

As noted above, unless the contracting parties expressly agree otherwise, the FAA may apply to the construction contract at issue and preempt all otherwise applicable inconsistent state laws, including any inconsistent provisions in the Ohio Fairness in Contracting Act, under the Supremacy Clause of the United States Constitution. Courts have found, on multiple occasions, that these “Home Court” statutes serve as an “obstacle to the accomplishment of the FAA’s objectives” – the enforcement of the arbitration agreement in accordance with its terms.
ORC § 4113.62 (D)(1) and (2) condition the enforceability of construction arbitration agreements on the selection of Ohio law and the selection of an Ohio forum. Applying this statute could prevent the enforcement of two terms in a construction contract where the parties have agreed – choice of law and venue. Accordingly, the FAA could very well preempt Ohio’s Fairness in Contracting Act resulting in the choice-of-law and venue provisions being enforced as written by the parties.
That being said, no Ohio court has squarely addressed this issue and exceptions to the FAA’s blanket preemption do exist. More importantly, if neither party objects to the application of the statute, it will most likely be enforced by the arbitrator.

The Chicken or the Egg – TRO’s and Arbitration
Consider the example where a plaintiff files a complaint for declaratory relief and a motion for temporary restraining order. The parties’ contract contains an arbitration provision, so the defendant files a motion to compel arbitration. Does the arbitration provision in the contract divest the trial judge of authority to hear the motion for temporary restraining order? Doesn’t the motion “arise out of or relate” to the contract at issue?

In State ex rel. CNG Fin. Corp. v. Nadel, 2006-Ohio-5344, the Ohio Supreme Court held that the trial judge had basic statutory jurisdiction over actions for an injunction and declaratory judgment, under ORC § 2727.03 and 2721.02. The Court further held that precedent supported the judge’s decision to hear the preliminary injunction motion before ruling on the defendant’s motion to compel arbitration. The trial judge did not lack jurisdiction to hear the motion for temporary restraining order.

Further, Ohio courts have found that they are empowered to issue equitable or other preliminary relief in a case which will ultimately be resolved through arbitration. Nationwide Mut. Ins. Co. v. Universal Fid. Corp., 2002 U.S. Dist. LEXIS 21509. This power, however, appears limited to preserving the status quo and will not be used to moot the future arbitration. In addition, it should be noted that Ohio law does not permit courts to stay arbitration proceedings. Rather, it may only enjoin parties from seeking arbitration under Civ. R. 65. See Bd. of Park Comm’rs v. E.B. Katz Co., 1995 Ohio App. LEXIS 772 (8th Dist. 1995).

Like construction projects generally, arbitration is never as simple as it seems. As demonstrated above, ambiguity and doubt regarding a dispute’s venue, choice-of-law, and the “gateway” decision-maker regarding arbitrability can cause enormous delays in resolving cases, not to mention enormous legal bills as these critical issues get sorted out. Careful review of and drafting of a construction contract’s alternative dispute resolution clause is critical to avoiding uncertainty. 

Related professionals

Related practices