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In ordering parties to a construction dispute to arbitrate in Alabama, a Pennsylvania federal court held that the Federal Arbitration Act (FAA) preempted the application of a Pennsylvania law that precludes the enforcement of an arbitration agreement requiring a subcontractor to arbitrate out of state.
In S & G Electric, Inc. v. Normant Security Group, Inc., No. 06-3759, 2007 WL 210517 (E.D. Pa. Jan. 24, 2007), Normant subcontracted the electrical work on a Pennsylvania construction project to S&G Electric. The subcontract contained an arbitration clause which provided that all disputes would be resolved through arbitration in Montgomery, Alabama.
Three years after its work was completed, S&G Electric sued Normant for breach of contract. Normant filed a motion to compel arbitration. In opposing the motion, S&G Electric relied on a Pennsylvania law that precludes the enforcement of a contract requiring a subcontractor to arbitrate outside of Pennsylvania. Normant countered by arguing that the FAA preempted the Pennsylvania law.
In examining the preemption issue, the Court first addressed whether the FAA applied to the parties' arbitration agreement. As the Court explained, the FAA is construed as a full exercise of Congress' Commerce Clause power and thus reaches any contract involving or affecting interstate commerce. See The Citizens Bank v. Alafabco, Inc., 539 U.S. 52 (2003); Allied-Bruce Terminix Co. v. Dobson, 513 U.S. 265 (1995).
Applying that standard, the Court held that the FAA applied to the parties' arbitration agreement. Specifically, the Court reasoned that the subcontract involved interstate commerce because representatives of Normant, an Alabama corporation, regularly communicated about the project with their colleagues in Alabama.
Having determined the FAA's applicability, the Court turned to the question of whether the FAA preempted application of the Pennsylvania law. Under the doctrine of conflict preemption, the FAA preempts state laws that undermine the FAA's primary purpose of "ensuring that private agreements to arbitrate are enforced according to their terms." Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468 (1989).
Since the Pennsylvania law would have precluded the Court from ordering the parties to arbitrate in Alabama, thus undermining the FAA's purpose of enforcing arbitration agreements according to their terms, the Court held that the FAA preempted its application. Accordingly, the Court ordered the parties to arbitrate in Alabama in accordance with their agreement.
A largely uncharted area of the law is the degree to which the FAA preempts state laws that dictate the course of arbitration and impose the complexities and formalities of litigation on parties who have agreed to resolve their disputes using arbitration’s streamlined procedures. The question for a future day is whether the FAA leaves room for such laws when they conflict with the FAA’s purpose of enforcing arbitration agreements according to their terms?
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