Justice Kavanaugh Addresses Mandatory Arbitration
The United States Supreme Court issued a unanimous decision on January 8, 2019 in Henry Schein, Inc. v. Archer & White Sales, Inc., 2019 U.S. LEXIS 566 (2019). Justice Kavanaugh wrote for the unanimous Court in his first opinion as a Supreme Court justice.
Based on the Federal Arbitration Act and the contract provision, the Supreme Court rejected Fifth Circuit precedent, which allowed the court to deny a motion to compel arbitration if the court found the claim of arbitrability to be “wholly groundless.” Where a contractual arbitration provision gives the arbitrator the power to determine whether the claim is arbitrable, the arbitrator and not the court must make that determination. Justice Kavanaugh wrote, “We must interpret the (Federal Arbitration) Act as written, and the Act in turn requires that we interpret the contract as written. When the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract.”
What This Means For Contractors
Prime contractors and project owners may want to review their contract forms with counsel in light of this new Supreme Court decision.
Sureties sometimes have little control over arbitration provisions. California law holds a surety bound by the arbitration clause in the bonded contract when the bond covers performance of the entire contract, which is in the case of Boys Club of San Fernando Valley, Inc. v. Fidelity & Deposit Co., 6 Cal.App.4th 1266, 1273 (1992). If a surety does not want an arbitrator deciding those issues, the surety may consider asking the bond principal to revise its form.
Subcontractors have some control over subcontract arbitration provisions through conditional bids. Therefore, they may want to discuss options with counsel. Among those options, subcontractors can request a copy of a prime contractor’s standard subcontract form and negotiate unacceptable provisions before the bid date, for instance.
Also, if they would not want an arbitrator to decide arbitrability, they may condition their bids by stating in the bid that they will not accept an arbitration clause other than a standard form clause of a mutually acceptable provider such as AAA or JAMS. In other words, under its construction industry arbitration rules, the bid can be modified to have the court and not the arbitrator determine arbitrability of the dispute. In addition, if such revisions are not obtainable, the parties may want to consider whether arbitration is the right forum for disputes under the contract at issue.
To review your contact forms with our law office or for more information regarding this topic, speak to one of our expert attorneys today at (949) 537-3800.