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The Seventh Circuit Court of Appeals held that section 3 of the Federal Arbitration Act (FAA) does not require a court to stay an entire case when only some of the issues are subject to arbitration. Instead, courts may exercise discretion in deciding whether to stay the entire case.
In Volkswagen of America, Inc. v. Süd’s of Peoria, Inc., No. 05-3276, 2007 WL 209983 (7th Cir. Jan. 29, 2007), Süds contracted with Volkswagen to open a Volkswagen dealership.
In connection with the dealership agreement, Volkswagen and Süds signed three additional agreements: (1) a construction agreement, whereby Süds agreed to construct a new facility for the dealership; (2) a loan agreement, whereby Volkswagen loaned $500,000 to Süds to construct the new facility; and (3) an incentive agreement, whereby Süds could earn incentive payments by complying with the construction agreement and dealership agreement. Only the construction agreement contained an arbitration clause.
When Volkswagen sued Süds for breach of contract, both of the construction agreement and the loan agreement, Süds filed a motion for a stay pursuant to the arbitration clause in the construction agreement and section 3 of the FAA.
The district court stayed further proceedings on issues subject to arbitration but declined to stay further proceedings on issues not subject to arbitration. Specifically, the district court found that Volkswagen’s claim for breach of the construction agreement was subject to arbitration, but found that Volkswagen’s claim for breach of the loan agreement was not subject to arbitration because that agreement did not contain an arbitration clause.
On appeal, Süds argued that section 3 of the FAA required the district court to stay the entire case once it determined that some of the issues were subject to arbitration.
The Court rejected Süds’ interpretation of section 3. As construed by the Court, section 3 gives courts discretion to decide whether to stay an entire case when only some issues are subject to arbitration. The Court thus proceeded to consider whether the district court abused its discretion in declining to stay the entire case.
Süds argued that the entire case should have been stayed because all of the issues were interconnected. According to Süds, the issues were interconnected because compliance with the construction agreement would have allowed Süds to earn incentive payments, which in turn would have enabled Süds to meet its obligations under the loan agreement.
In rejecting this argument, the Court noted that Süds’ receipt of incentive payments also depended on compliance with the dealership agreement, which was one of the issues not subject to arbitration. Since Süds’ obligations under the loan agreement were independent of its obligations under the construction agreement, the Court held that the district court did not abuse its discretion in declining to stay the entire case.
As the Court indicated, the desire for efficiency will often lead courts to stay an entire case even if some issues are not subject to arbitration. Specifically, the Court noted: “In many instances...district courts actually may prefer to stay the balance of the case in the hope that the arbitration might help resolve, or at least shed some light on, the issue remaining in federal court.”
Section 7(g) of the Revised Uniform Arbitration Act expressly authorizes a court to limit its stay to issues that are subject to arbitration.
Of course, the parties could have avoided all this litigation by including an arbitration clause in the loan agreement as well. Next time.
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