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The purchase and use of construction materials manufactured outside the state substantially affects interstate commerce and, thus triggers the application of the Federal Arbitration Act (FAA) as to the arbitration agreement in the construction contract, according to the Tennessee Court of Appeals.
In State Farm Fire and Casualty Co. v. Easyheat, Inc., No. M2006-02363-COA-R3-CV, 2007 WL 3306765 (Tenn. Ct. App. Nov. 7, 2007), Heritage and Newell entered into a construction contract containing an agreement to arbitrate disputes. When an insurance dispute arose, Heritage, the builder, sought to compel arbitration with State Farm, Newell's insurance company. The trial court denied the motion, ruling that, since the parties to the construction contract were not diverse and any effect of the contract on interstate commerce was indirect, arbitration of the related dispute could not be compelled under the FAA.
On appeal, the Court reversed, finding that the contract in fact evidenced interstate commerce for purposes of the FAA. The Court observed that a significant amount of the materials used in the construction project were made outside of the state, and the use of such materials affected interstate commerce. The Court rejected State Farm's argument that interstate commerce was not affected by Heritage's purchase of out-of-state materials in-state, noting that the FAA "clearly reaches beyond the 'flow' of commerce and is applicable even where interstate commerce was not contemplated by the parties at the time the contract was executed."
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