• Is Your Contract Making You an Accidental Tourist?
  • May 19, 2011 | Author: Edward Seglias
  • Law Firm: Cohen, Seglias, Pallas, Greenhall & Furman, P.C. - Philadelphia Office
  • One of the most important provisions of the Pennsylvania Contractor and Subcontractor Payment Act prohibits contracting parties from making a contract subject to another state's law or requiring any litigation or arbitration to occur outside of Pennsylvania. The provision, of course, prevents contractors working on projects in Pennsylvania from being dragged to far off places to collect monies owed to them or defend against claims involving their workmanship. A number of other states have similar statutes, which similarly are designed to protect in-state contractors not only from unfamiliar and potentially hostile jurisdictions, but also from the substantial, additional cost that such distant litigation or arbitration typically generates.

    Two recent cases, however, chip away at this protective measure, at least as it relates to arbitration actions. While both of these cases were decided outside of Pennsylvania, they portend a very real problem even for projects in Pennsylvania.

    In a case decided in Illinois, Weis Builders (Weis), a general contractor from Minnesota, entered into two subcontracts with R.A. Bright Construction, Inc. (R.A. Bright) for concrete and underground utilities work on a Wal-Mart Stores, Inc. project in Illinois. Both subcontracts contained provisions requiring the parties to arbitrate all disputes in Hennepin County, Minnesota. At the conclusion of the project, R.A. Bright brought a claim against Weis in Illinois state court seeking more than $750,000. Weis sought dismissal of the action based on the parties' agreement to arbitrate disputes in Minnesota. To support the lawsuit in Illinois state court rather than through arbitration in Minnesota, R.A. Bright cited the Illinois Building and Construction Contract Act, which, like the Pennsylvania Act, states that any "provision contained in or executed in connection with a building and construction contract to be performed in Illinois that makes the contract subject to the laws of another state or that requires any litigation, arbitration, or dispute resolution to take place in another state is against public policy [and]...is void and unenforceable." R.A. Bright argued that the Illinois statute creates a contractual defense to the enforceability of the arbitration provision of the subcontract and, therefore, rendered it inapplicable.

    In rejecting the argument, the Court determined that the Federal Arbitration Act (FAA) was applicable to R.A. Bright's claims because the parties' business relationship had at least a "slight nexus to interstate commerce." Weis is a Minnesota company and R.A. Bright is an Illinois company, which procured materials for the project from a supplier in Wisconsin. These interstate connections invoke the FAA, which requires courts to strictly enforce arbitration agreements.

    The Court's decision relies heavily on the case of OPE International, LP v. Chet Morrison Contractors, Inc., which was decided by the United States Circuit Court of Appeals for the 5th Circuit. In the OPE case, the Circuit Court held that when forum-selection provisions in state statutes are in conflict with federal law, the FAA preempts the state law and renders such provisions unenforceable. Based on this federal court decision, the Illinois state court ordered the dispute to be arbitrated in Minnesota in accordance with the terms of the subcontract.

    Taken together, these rulings create a problem for contractors who have signed contracts that require arbitration outside of Pennsylvania. While you may have believed that Pennsylvania law protects you against such forum selection clauses, the two cases discussed above throw that thinking into serious doubt. For contracts you already have signed, the die is cast. But for new contracts not yet signed that contain a clause requiring arbitration outside of Pennsylvania, the dispute resolution provisions must be carefully considered so that you know whether you may have to travel hundreds or even thousands of miles to have your case heard. From there, you can negotiate it, accept it or reject it. But the failure to do anything may cause you to be in Alaska in the wintertime to collect your money.