I am back.  It feels like an entirety since I last posted. But a hellacious trial schedule got me off the blogosphere for some time.  Plus, there was nothing to write about.

But I am back with a bang thanks to a decision from the Eastern District of Pennsylvania concerning the interplay of a forum selection clause appearing in an arbitration clause in a construction contract and the Pennsylvania Contractor and Subcontractor Payment Act.  In Bauguess Electrical Services, Inc. v. Hospitality Builders, Inc., the federal court (Judge Joyner) ruled that the federal arbitration act preempted the Payment Act’s prohibition on forum selection clauses and held that an arbitration must proceed in South Dakota even though the construction project were the work was performed was located in Pennsylvania.

The Payment Act applies to all commercial construction projects performed in Pennsylvania. As some you might know, Section 514 of the Payment Act, 73 P.S. 514, prohibits choice of law and forum selection clauses.  It states “[m]aking a contract subject to the laws of another state or requiring that any litigation, arbitration or other dispute resolution process on the contract occur in another state, shall be unenforceable.” Therefore, if a construction contract is for a project located in Pennsylvania, Pennsylvania law must apply and all disputes must be adjudicated in Pennsylvania.

The case involved a typical construction project payment dispute between a subcontractor and general contractor. Bauguess Electrical was an electrical subcontract that entered into a contract with Hospitality Builders for work on Hotel project in Delaware County Pennsylvania. Bauguess claimed it performed all of its work required under the subcontract but was still owed $80,000. Bauguess filed a petition to compel arbitration. Hospitality Builders responded to the petition claiming that under the subcontract, arbitration was required to take place in South Dakota.  Bauguess replied by stating that Section 514 of the Payment Act prohibited arbitration in South Dakota and required arbitration to occur in Pennsylvania. Defendant countered by stating that the Federal Arbitration Act preempted the Payment Act.  The federal court resolved the dispute by agreeing with the defendant that the FAA preempted the Payment Act and ordered that arbitration occur in South Dakota.

The federal court began its discussion by reiterating the federal courts’ liberal policy towards arbitration under the FAA.  The court then turned to whether the FAA preempted the Payment Act. The court found that the FAA preempted the Payment Act under a “conflict preemption” theory of preemption. Conflict preemption occurs when there is an actual conflict between the application of federal and state law.  The court held that one of the primary purposes of the FAA is “to ensure ‘that private agreements to arbitrate are enforced according to their terms.” If the parties reach an agreement to arbitrate in a forum other than Pennsylvania, there is a conflict between the purpose of the FAA and the Payment Act which would prohibit such an agreement.  The federal court concluded that under a conflict preemption, the FAA acts to preempts the Payment Act.  So it ordered the parties to resolve there dispute through arbitration in South Dakota.

The All Important Take Away

1.   As it applies to arbitration, Section 514 is essentially invalid.  Section 514 specifically applies to arbitration. But, if the parties reach an agreement to arbitrate a dispute involving a Pennsylvania construction contract in a place other than Pennsylvania, the Payment Act will not prevent that from happening.

2.   With this in mind, when reviewing a construction contract for a Pennsylvania project, if the matter is to be arbitrated, the location of the arbitration should be addressed. If you represent a smaller subcontractor, you should not agree to arbitrate in some far flung forum.