Construction professionals across the country should be aware that courts will go to great lengths to enforce arbitration provisions whenever possible. This trend is due in part to the fact that the dockets of many courts are now more crowded than ever and judges seek for ways to avoid having to decide matters which can be resolved by alternative means, such as mediation or arbitration. This is especially true in situations where sophisticated contracting parties have agreed to mediate or arbitrate their disputes rather than having a judge or jury decide the outcome. Courts have even gone as far as enforcing arbitration provisions in subcontracts when the prime contract “controlling” the project explicitly prohibits arbitration. A recent example of this is found in a Louisiana case, Sturdy Built Homes, L.L.C. v. Carl E. Woodward, L.L.C., 82 So.3d 473, 2011-0881 (La.App. 4 Cir. 12/14/11).
Facts of Sturdy Built
Sturdy Built involved the construction of an apartment complex in New Orleans, Louisiana. The owner and developer of the project was McCormack which retained CEW to serve as the general contractor. The prime contract entered into between McCormack and CEW contained a provision prohibiting any claims related to the project from being arbitrated. “No claim, dispute, or other matter in question between the parties to this agreement arising out of the Construction contract, or the breach thereof, shall be submitted to arbitration.” CEW in turn, entered into a subcontract agreement with Sturdy Built for the fabrication and installation of wall panels, beams, and floor trusses for the project. The CEW/Sturdy Built subcontract contained a “Disputes” provision which provided that any claims stemming from the project would first be mediated and then arbitrated if necessary.
After the project began, CEW notified Sturdy Built that it was terminating a portion of the subcontract for cause. As provided for by the subcontract, the parties attempted to mediate their dispute without success. Thereafter, CEW filed an arbitration demand seeking damages against Sturdy Built for failure to properly perform its work. In response, Sturdy Built filed a separate lawsuit against CEW (and other defendants) for breach of the subcontract, bad faith, unjust enrichment and other claims despite the subcontract’s mandate that all disputes be arbitrated. CEW (and the other defendants) then asked the court to stay the lawsuit until the arbitration was concluded given that the subcontract specifically required that all disputes be arbitrated. Sturdy Built, not wanting to arbitrate its dispute with CEW (and the other defendants), argued that despite the language of the subcontract that the court needed to consider the “overall project construction contract” and that since the prime contract prohibited arbitration its pending court action should continue.
The trial court stayed Sturdy Built’s action pending arbitration. The court noted that both the prime and subcontract agreements contained provisions requiring mediation in an attempt to avoid court involvement. Further, Louisiana courts attempt whenever possible to read separate agreements involving the same project together as to be in harmony with each other. However, the trial court ruled that since Sturdy Built was not a party or third-party beneficiary to the prime contract prohibiting arbitration, Sturdy Built could not take advantage of its provision prohibiting arbitration. The trial court noted that Sturdy Built had requested changes to the subcontract during its negotiations with CEW and that if Sturdy Built had a problem arbitrating any disputes arising from the project it should have raised this objection before execution.
As a result, the trial court held that the arbitration provision was valid and enforceable with all claims at issue being covered by the provision. The trial court noted that “Louisiana courts have recognized a strong presumption in favor of arbitration and any doubt as to whether a controversy is arbitrable should be resolved in favor of arbitration.” In fact, all of the defendants involved in the dispute between CEW and Sturdy Built could invoke the subcontract’s arbitration clause, regardless if they were signatories to the agreement.
Sturdy Built, still contending that it should not be required to arbitrate its dispute with CEW (and the other defendants), appealed the trial court’s ruling. The court of appeals adopted the trial court’s reasoning in upholding the stay of arbitration. The court affirmed that Sturdy Built was neither a party to the prime contract nor an intended third-party beneficiary. Therefore, Sturdy Built had no grounds to take advantage of the prime contract’s prohibition of arbitration. Instead, the court held that the plain language of the subcontract and applicable Louisiana law required Sturdy Built to arbitrate its dispute with CEW (and the other defendants) as agreed to by the parties. The court also affirmed that the claims being asserted by the parties were covered by the subcontract’s arbitration provision.
The main point to take away from Sturdy Built is that arbitration provisions contained in contracts will be enforced. In fact, applying the doctrine of equitable estoppel, parties which are not even signatories to a contract may be subject to its arbitration provisions if their interest is intertwined with the contract. Sturdy Built’s reliance on the prime contract forbidding arbitration was misplaced given that Sturdy Built was not a party to, or third-party beneficiary of the contract. Neither the trial or the appellate court agreed that all of the project contracts and documents “must be read together” to determine what the parties agreed to, nor was it assumed that the subcontract incorporated the prime contract by reference.
The outcome of Sturdy Built may have been different if there were evidence that the subcontract expressly stated that the prime contract was incorporated by reference. Here, however, both the trial court and the appellate court went to great lengths to point out that the prime contract and the subcontract were separate and independent contracts and that Sturdy Built lacked the ability to rely on the prime contract’s dispute resolution provision. In such a situation, the court of appeals may have determined that the order of precedence allowed for the prime contract to trump the subcontract, and that Sturdy Built could have taken advantage of the provision prohibiting arbitration even though Sturdy Built was not a party or beneficiary to the prime contract. However, given that Louisiana law (and the law of most states) highly favors arbitration, the court of appeals may have still required Sturdy Built to arbitrate its dispute based on the language in the subcontract Sturdy Built actually signed and agreed to. An important take away from Sturdy Built is to check the language of both the prime and subcontract to see what is provided for in way of alternative dispute resolution. Do not assume that just because the contract you are signing does or does not provide for arbitration that this requirement will be excused or enforced. Remember, courts will find a way to submit claims to arbitration whenever possible.