In MA Mortenson Co v Saunders Concrete Co(1) the US Court of Appeals for the Eighth Circuit recently compelled arbitration where a party challenged a contractual provision containing an arbitration clause, but not the conscionability of the arbitration clause itself. While Mortenson concerned a domestic arbitration, the decision is nevertheless significant for international arbitration practitioners because it reaffirms the rule announced by the Supreme Court in Rent-A-Center West Inc v Jackson(2) that parties cannot avoid arbitration through claims of unconscionability unless those claims are specifically directed at the arbitration clause itself. Mortenson is also significant because it expressly reaffirms the doctrine of severability and tacitly acknowledges the concept of competence-competence.
In Mortenson a general contractor named MA Mortenson Company was awarded a contract to construct a wind turbine in New York state. In order to construct the wind turbine, MA Mortenson entered into a contract with a subcontractor, Saunders Concrete Company Inc, to supply concrete for the wind turbine. The subcontract between MA Mortenson and Saunders contained an arbitration agreement, which in relevant part provided that "any dispute arising between…[MA Mortenson and Saunders] under the agreement…shall be decided by arbitration in accordance with [the rules of the American Arbitration Association]". New York law governed the subcontract and the arbitration was seated in Minnesota.
After the wind turbine was completed, MA Mortenson claimed that Saunders had provided defective concrete in breach of the subcontract, and that the defective concrete had caused MA Mortenson to incur remediation costs. After MA Mortenson unsuccessfully sought reimbursement for its remediation costs, it filed a demand for arbitration against Saunders with the American Arbitration Association.
Saunders declined to respond to MA Mortenson's demand for arbitration and instead initiated a court action against MA Mortenson in a New York state court alleging affirmative claims against MA Mortenson. Saunders also moved before the New York state court to stay the arbitration proceedings that MA Mortenson had commenced.
Before the New York court could rule on Saunders's motion to stay the arbitration, MA Mortenson commenced an action in a Minnesota federal district court to compel arbitration under Section 4 of the Federal Arbitration Act.(3) MA Mortenson also removed the New York state court action to a federal court in New York.(4)
The federal court in New York subsequently denied Saunders's motion to stay the arbitration and instead stayed the New York federal court action pending resolution of the Minnesota federal court action in which MA Mortenson sought to compel arbitration.
After the New York federal court action was stayed, Saunders filed its opposition to the motion to compel arbitration in the Minnesota federal court action and claimed that it could not be compelled to arbitrate its dispute with MA Mortenson because a sub-provision of the clause containing the arbitration agreement was illegal under New York law, which supposedly rendered the arbitration agreement (which was contained in a separate sub-provision of the same article) unconscionable and unenforceable.
The federal district court in Minnesota rejected Saunder's unconscionability argument and specifically held that it could compel arbitration without addressing that argument because Saunders had failed to allege that the specific sub-provision which contained the arbitration agreement was unconscionable. In short, the Minnesota federal district court relied on the 2010 Supreme Court decision in Rent-A-Center West Inc v Jackson, holding that an arbitration clause is severable from the larger agreement in which it is contained, and that the court should not assess the fairness of the arbitration clause where Saunders had failed to allege that the specific sub-provision containing the arbitration agreement was unconscionable.
After the federal district court in Minnesota compelled arbitration, Saunders appealed to the Eighth Circuit. The Eighth Circuit upheld the district court decision compelling arbitration.
Mortenson is significant for international arbitration practitioners because it strongly reaffirms the rule set forth in Rent-A-Center that courts will not interfere with valid arbitration agreements unless parties specifically allege that the actual arbitration agreement itself is unconscionable. By refusing to entertain an unconscionability challenge to a different sub-provision of the same contractual article that contained the arbitration agreement, Mortensen made clear that uncontested arbitration agreements should be strictly enforced.
Mortenson is also significant for international arbitration practitioners because it reaffirms the doctrines of severability and competence-competence. By refusing to entertain an unconscionability challenge, the Eighth Circuit expressly recognised the notion that an arbitration clause is severable from the larger agreement in which it is found and tacitly accepted the notion that arbitrators are free to determine their own jurisdiction where the parties have assigned jurisdictional question to the arbitrators (which the parties did in Mortenson by agreeing to the American Arbitration Association rules).
International arbitration practitioners should follow Mortenson's subsequent treatment to determine whether other federal circuits adopt its strict construction of the Rent-A-Center rule.
For further information on this topic please contact JP Duffy or Joshua Kane at DLA Piper by telephone (+1 212 335 4500), fax (+1 212 335 4501) or email ([email protected] or [email protected]).
(1) No 11-2749, 2012 WL 1510308 (8th Cir, April 30 2012).
(2) 130 S Ct 2772 (2010). For a discussion of Rent-A-Center, see James P Duffy IV, "US Supreme Court Decision Confirms Arbitrators' Jurisdiction to Decide Questions of Arbitrability", International Arbitration Newsletter, August 18 2010.
(3) 9 USC § 4 (providing that US district courts must enforce arbitration agreements contained in contracts affecting interstate commerce).
(4) US federal court procedures permit parties to remove actions commenced in state court to a federal court if certain jurisdictional requirements are satisfied.