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Construction Law - May 2008

Clause on Out-of-State Venue for Arbitration Survives Statute

By John S. Mrowiec

If a party agrees in a contract to arbitrate outside the state where the project is located, will a state statute override the contract?

A new Indiana case addresses a recent Indiana statute voiding construction contract provisions that required arbitration in a state other than Indiana, LaSalle Group Inc. v. Electromation of Delaware County, Inc., 880 N.E.2d 330, 2008 Ind. App. LEXIS 189 (Feb. 8, 2008). You might be surprised by the result.

LaSalle Group Inc. was the general contractor for construction of a Wal-Mart store in Muncie. Electromation of Delaware County Inc. was a subcontractor.

The subcontractor sued the contractor alleging that the contractor breached the subcontract. The subcontract contained a provision that the contractor had “sole discretion” to decide whether a dispute would be resolved by litigation or arbitration and, if the contractor chose arbitration, the location for the arbitration was to be Southfield, Mich., the contractor’s home office.

The subcontractor sued the contractor in Indiana Circuit Court. The contractor moved to stay the litigation and to enforce the arbitration provision.

The subcontractor argued and the Indiana state trial court agreed that the arbitration provision was void pursuant to an Indiana statute, Ind. Code 32-28-3-17. The Indiana statute provides:

“A provision in a contract for the improvement of real estate in Indiana is void if the provision:

  • Makes the contact subject to the laws of another state.
  • Requires litigation, arbitration, or other dispute resolution process on the contract occur in another state.”

Contractor Appealed

After quoting the Indiana statute, the LaSalle Group appellate court recognized that “[t]he Federal Arbitration Act applies to written arbitration provisions in contracts involving interstate commerce” LaSalle Group, 2008 Ind. App. LEXIS 189 at *3 citing MPACT Construction Group, LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d 901, 904 (Ind. 2004). While acknowledging that the Federal Arbitration Act contained “no express pre-emptive provision, nor any congressional intent to occupy the entire field of arbitration, state law could be pre-empted by that federal statute” LaSalle Group, 2008 Ind. App. LEXIS 189 at *4.

LaSalle Group recognized that the United States Supreme Court has held that states may invalidate an arbitration clause only “upon such grounds as exist at law or in equity for the revocation of any contract” LaSalle Group, 2008 Ind. App. LEXIS 189 at *4 quoting Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265, 281 (1995) (quoting 9 U.S.C. § 2) (emphasis added by the Supreme Court).

For example, the United States Supreme Court held that the Federal Arbitration Act preempted a Montana law that declared arbitration clauses unenforceable unless the clause was typed in underlined capital letters on the first page of the contract, LaSalle Group, 2008 Ind. App. LEXIS 189 at *5 citing Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681, 683 (1996).

The LaSalle Group court reasoned that, under the Federal Arbitration Act, a court must order the parties to arbitrate in accordance with the terms of the arbitration agreement, and one term is the parties’ arbitration location clause. A state statute purporting to override that arbitration location clause is preempted by the Federal Arbitration Act if the state statute applies to a particular type of contract and not just to any contract, LaSalle Group, 2008 Ind. App. LEXIS 189 at *6-7 citing KKW Enterprises Inc. v. Gloria Jean’s Gourmet Coffees Franchising Corp., 184 F.3d 42, 50 (1st Cir. 1999) (state statute prohibiting foreign arbitration forum regarding franchise agreements preempted by Federal Arbitration Act).

State Statute Preempted

Reasoning that the Indiana statute did not apply to “any” contract, but only to dispute resolution forum selection clauses in “a contract for the improvement of real estate in Indiana”, the Indiana statute voiding contract provisions that required out-of-state arbitrations was preempted by the Federal Arbitration Act, LaSalle Group, 2008 Ind. App. LEXIS 189 at *7. Accordingly, the LaSalle Group appellate court reversed the denial of LaSalle Group’s motion to enforce the arbitration agreement. The subcontractor was required to arbitrate in Michigan, LaSalle Group, 2008 Ind. App. LEXIS 189 at *9.

At least three other courts have held that the Federal Arbitration Act preempted state statutes voiding contract provisions for an out-of-state arbitration location regarding construction contracts. See, e.g., M.A. Mortenson/The Meyne Co. v. Edward E. Gillen Co., 2003 U.S. Dist. LEXIS 23175 (D. Minn. 2003) (granting contactor’s petition to compel arbitration in Minnesota and to stay a subcontractor’s Illinois state court suit because Federal Arbitration Act preempted Illinois statute, 815 ILCS 665/10 voiding contract provisions requiring arbitrations in another state); OPE International LP v. Chet Morrison Contractors, Inc., 258 F.3d 443 (5th Cir. 2001) (affirming order compelling subcontractor to arbitrate in Texas because Federal Arbitration Act preempted Louisiana statute voiding construction subcontract provisions requiring arbitrations outside Louisiana on Louisiana projects); and M.C. Construction Corp. v. Grey Co., 17 F. Supp. 2d 541 (W.D. Va. 1998) (Federal Arbitration Act preempts Virginia statute invaliding arbitration agreements designating out-of-state forums in construction contracts).

One court has determined that the location of the arbitration is a procedural question for the arbitrator and not a question of arbitrability for a court to decide, Richard C. Young & Co. v. Leventhal, 389 F.3d 1 (1st Cir. 2004). But Leventhal was not a construction case and did not involve a state statute prohibiting out-of-state arbitrations.

One author contends that state statutes prohibiting out-of-state arbitration location provisions in particular kinds of contracts should not be preempted by the Federal Arbitration Act because arbitration itself still could proceed, D. Schwartz, New Federalism, State Judges as Guardians of Federalism, 16 Wash. U.J.L. & Pol’y 129, 146 (2004).

So far, though, courts seem to be more inclined to favor federal preemption thereby permitting out-of-state arbitration provisions to trump state statutes voiding them.

 

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