Including
an arbitration clause in your construction contract may not mean that your
dispute will be confined to arbitration. Instead, parties often find themselves
in court litigating threshold issues related to the existence and/or
enforceability of an arbitration clause. Common issues include whether the underlying
contract containing the arbitration clause is valid, whether the dispute falls
within the scope of the clause, whether the parties complied with contractual
prerequisites to arbitration, whether issues related to arbitrability are
decided by the court or arbitrator, and whether one of the parties has waived
their right to arbitrate. This blog post highlights two recent construction
cases addressing threshold issues that a party seeking to enforce—or oppose enforcing—an
arbitration clause might face.
Seifert v. United Built Homes, LLC:
Delegating Issues of Arbitrability to the Arbitrator
In Seifert,
an owner sued a homebuilder in Texas federal court for breach of contract and
sought damages and declaratory relief. No. 3:22-CV-1360-E, 2023 WL 4826206
(N.D. Tex. July 27, 2023). The builder moved to compel arbitration. The owner opposed
and argued that: (1) there was no agreement to arbitrate because the underlying
contract was null and void, and (2) its claim for declaratory relief fell
outside the scope of the arbitration clause. The court did not address the
merits of either argument. Instead, it determined that these were issues for
the arbitrator to decide.
The
court reasoned that the parties had delegated issues of arbitrability to the
arbitrator by agreeing to arbitrate under the AAA Home Construction Arbitration
Rules. Rule 11(a) of these rules provides that “[t]he arbitrator shall have the
power to rule on his or her jurisdiction, including any objections with respect
to the existence, scope, or validity of the arbitration agreement or to the
arbitrability of any claim or counterclaim.” The court explained that, under Fifth
Circuit precedent, the “express incorporation of the AAA rules providing that
the arbitrator will determine questions of arbitrability constitutes clear and
unmistakable evidence of intent to delegate gateway arbitration questions.” Thus,
the court granted the builder’s motion to compel arbitration.
Professional Construction, Inc. v. Historic Walnut
Square, LLC: Waiver by Litigation Conduct
The
court in Professional Construction addressed whether, under Indiana law,
a contractor waived its right to compel arbitration by initiating a lawsuit for
breach of contract against the owner. 224 N.E.3d 352 (Ind. Ct. App. 2023). By
way of background, the contractor sent a letter demanding that the owner
participate in mediation and arbitration per the parties’ agreement. The owner declined.
The contractor then sued the owner in Wisconsin state court asserting claims
for breach of contract and seeking relief that included “an order compelling
Owner to comply with the Construction Contract’s mediation and arbitration
clauses.”
Thereafter,
the owner commenced a separate lawsuit against the contractor—in
Indiana—asserting claims for breach of contract. The contractor moved to compel
arbitration in the Indiana court. The owner opposed, arguing that the
contractor had waived its right to arbitration by commencing the lawsuit for
breach of contract in Wisconsin. The Indiana trial court denied the motion to
compel arbitration and the contractor appealed.
The
Indiana Court of Appeals explained that commencing a lawsuit for breach of
contract before a court “is a presumptive waiver of the right to arbitrate.”
This presumption could be rebutted, however, if invoking the judicial process “does
not signify an intention to proceed in a court to the exclusion of
arbitration.” The court determined that, under the circumstances, the
contractor did not act inconsistently with its right to arbitrate by commencing
the lawsuit in Wisconsin. It reasoned that there were no attempts to litigate
the merits of the dispute and that the contractor’s complaint had specifically requested
an order requiring the owner to comply with the agreement’s arbitration clause.
As such, the Indiana court compelled the owner to arbitration.
Lessons From These Two Recent Cases
Seifert
and Professional Construction underscore the importance of anticipating
threshold issues to arbitration—both when drafting an arbitration clause and
preparing for a dispute. Consistent with Seifert, most state and federal
courts hold that incorporation of AAA Construction Arbitration Rules and Mediation
Procedures or JAMS Construction Arbitration Rules & Procedures, which each
provide that arbitrators are to decide arbitrability issues, effectively
delegates to arbitrators authority to decide most gateway issues. However, some
courts have decided otherwise. Construction arbitration clauses can expressly include
in the body of the agreement a delegation clause providing that the
arbitrators, not the court, decide questions of arbitrability—something parties
might consider doing as a matter of “belts and suspenders” where that is what
is intended.
As to
the question of waiver, the court in Professional Construction reached a
common-sense conclusion—filing a lawsuit and requesting that a party be
compelled to arbitrate should not by itself give rise to waiver of the right to
arbitrate. This is especially so since the U.S. Supreme Court ruled in Morgan
v. Sundance that prejudice is not a necessary element to establish
waiver of the right to arbitrate under the Federal Arbitration Act, making it easier
for a court to find that there has been waiver. 596 U.S. 411 (2022). While
state arbitration law may have a different standard for waiver, the Supreme
Court’s decision in Morgan is likely to be considered by state courts as
they assess the standard for waiver of the right to arbitrate under state law.
Indeed, the California Supreme Court is poised to decide in Quach v.
California Commerce Club, Inc., whether to continue to apply a prejudice requirement
to waiver of the right to arbitrate under California law. 78 Cal. App. 5th 470 (2022),
review granted August 24, 2022, S275121; see also Daniel D. McMillan, et
al., Goodbye Saint Agnes?, Daily
Journal (Nov. 10, 2022), https://www.dailyjournal.com/articles/369872.
Arbitration
continues to be a frequently specified alternative to the courthouse for
resolving construction disputes. The recent cases of Seifert and Professional
Services illustrate that issues of arbitrability and waiver of the right to
arbitrate continue to be raised. Paying close attention to the language of the
arbitration agreement, the parties’ conduct, and the applicable arbitration
rules and law may minimize unexpected procedural outcomes and make it more
likely that you can avoid the courthouse.
Author
Daniel D. McMillan is a partner with Jones Day in Los Angeles. Dan’s practice
focuses on complex commercial, business, and construction litigation. As co-chair
of Jones Day’s global construction practice, Dan represents owners, design
professionals, and contractors in large construction disputes and in
negotiating and drafting the full panoply of contracts for large projects.
Author
TJ Auner is an associate with Jones Day in Los Angeles. TJ represents clients
in complex commercial, construction, and energy disputes, with a focus on
domestic and international arbitration.
Editor Marcus Quintanilla is an experienced arbitrator and mediator with over 20 years of experience in international arbitration and cross-border litigation. Marcus maintains arbitration chambers in San Francisco, Houston, and Miami.
The
views and opinions set forth in this article are the personal views or opinions
of the authors and do not necessarily reflect the views or opinions of the law
firm with which they are associated.
