Ban on out-of-state arbitration preempted, judge rules

A subcontractor must arbitrate its dispute with a construction company in Ohio despite a Rhode Island statute barring out-of-state arbitration, a federal judge has held.

The Cleveland-based construction company argued that the Federal Arbitration Act preempts R.I.G.L. §6-34.1-1, which renders void any contractual clause requiring “arbitration in another state.”

U.S. District Court Judge John J. McConnell Jr. found that the arbitration provision in the subcontract, requiring any controversy to be arbitrated in Ohio, must be enforced.

“[B]ecause §4 of the FAA requires arbitration to take place as stated in the Agreement, in this case Ohio, and § 6-34.1-1 would allow [the subcontractor] to void those terms and choose to arbitrate in Rhode Island, the Court finds that

§6-34.1-1 interferes with and is contrary to §4 of the FAA as it relates to where the parties are required to arbitrate their dispute,” the judge wrote.

The six-page decision is GEM Mechanical Services, Inc. v. DV II, LLC, et al.

Providence attorneys Patricia A. Buckley, Joseph P. Quinn and Todd J. Romano represented the plaintiff subcontractor. Defending Cleveland Construction Inc. were Michael J. Daly and James A. Hall, both of Providence.

Arbitration clause

Defendant Cleveland Construction Inc. — or CCI — was hired to construct a Wal-Mart Supercenter in North Smithfield. R.I. CCI hired plaintiff GEM Mechanical Services to do mechanical, plumbing and other work as set forth in a written subcontract agreement.

The agreement provided that CCI would pay the plaintiff $477,700. The plaintiff, however, claimed to have performed additional work valued at $146,625.01, bringing the total amount owed to $624,325.01. The plaintiff alleged that CCI paid only $503,911.54, leaving due the amount of $120,413.47, plus interest and costs.

When the plaintiff filed its complaint in federal court, CCI moved to compel arbitration and stay proceedings. The motion was based on Article 30.3 of the agreement, which contains an arbitration clause providing that “[a]ny controversy or claim of CCI against [GEM] or [GEM] against CCI shall, at the option of CCI, be resolved by arbitration … held in Lake County, Ohio.”

But the plaintiff contended that the arbitration clause was invalid and unenforceable. Alternatively, the plaintiff maintained that any arbitration should take place in Rhode Island.

Preemption

CCI urged the court to enforce the agreement’s arbitration clause and, pursuant to §4 of the FAA, order the plaintiff to arbitrate its claims against CCI in Lake County, Ohio.

The plaintiff countered that the arbitration clause was unenforceable under general contract principles because it was unilateral and ambiguous and that it should be struck from the agreement.

“Because the FAA makes arbitration agreements valid and enforceable, ‘save upon grounds as exist at law or in equity for the revocation of any contract,’ Article 30.3 of the agreement shall be enforced unless there are any general contract principles demanding otherwise,” McConnell said. “GEM contends the arbitration clause is invalid first as a unilateral and illusory promise, and second as ambiguous.”

The judge found those arguments lacking in merit.

“GEM presents no proper authority for its proposition that Article 30.3 is void under Rhode Island law because it is unilateral,” he stated.

“The Court agrees [with CCI] that Article 30.3 is clear on its face and that nothing in any of the other provisions cited by GEM confuse or undermine CCI’s power to opt for arbitration set forth in Article 30.3,” McConnell said. “The Court finds that the Agreement’s arbitration clause is not ambiguous.”

McConnell then addressed whether the arbitration should take place in Ohio, as stated in the agreement, or in Rhode Island, as advocated by the plaintiff.

The judge made note that the 1st U.S. Circuit Court of Appeals, in its 1999 decision in KKW Enters., Inc. v. Gloria Jean’s Gourmet Coffees Franchising Corp., instructed that “[a]ny analysis of a party’s challenge to the enforcement of an arbitration agreement must begin by recognizing the FAA’s strong policy in favor of rigorously enforcing arbitration agreements.”

In KKW, the 1st Circuit held that the FAA preempted the section of the Rhode Island Franchise Investment Act prohibiting provisions in franchise agreements designating arbitration venues outside of Rhode Island.

The 1st Circuit found that prohibition “an obstacle to the achievement of the full purposes and ends which Congress set out to accomplish in enacting the FAA” and that “[a]ny state law, however clearly within a State’s acknowledged power, which interferes with or is contrary to federal law, must yield.”

McConnell said that the “venue” where arbitration is to take place is a “term” of the parties’ arbitration agreement.

“The Court is satisfied that the arbitration agreement between GEM and CCI is valid, and so, because §4 of the FAA requires arbitration to take place as stated in the Agreement, in this case Ohio, and §6-34.1-1 would allow GEM to void those terms and choose to arbitrate in Rhode Island, the Court finds that § 6-34.1-1 interferes with and is contrary to § 4 of the FAA as it relates to where the parties are required to arbitrate their dispute,” he concluded. “Therefore, as per the terms of the Agreement, arbitration will take place in Lake County, Ohio.”