Summary
declining to apply retroactively Illinois statute invalidating arbitration provisions in building and construction contracts because this statute "substantively affects a contract term that the parties expressly agreed to" and "thus directly impairs the parties' substantive right to contract."
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Civil No. 03-5135 (PAM/RLE)
December 17, 2003
MEMORANDUM AND ORDER
This matter is before the Court on Petitioner's Motion to Compel Arbitration and Stay Illinois state court proceedings. For the following reasons, Petitioner's Motion is granted.
BACKGROUND
Petitioner M.A. Mortenson/The Meyne Company ("Mortenson"), a joint venture, contracted with the University of Chicago Hospitals to construct the Comer Children's Hospital. Mortenson entered into a Subcontract Agreement ("Subcontract") with Respondent Edward E. Gillen Company ("Gillen"). This dispute stems from Gillen's alleged failure to perform in accordance with the terms of the Subcontract. Mortenson and Gillen attempted to resolve this dispute, but before reaching an agreement, Gillen filed a declaratory judgment action in Illinois state court.
Under the terms of the Subcontract, the parties are bound to arbitrate "any dispute" in Minneapolis, Minnesota. In relevant part, the arbitration provision provides:
If the Contract Documents do not provide for Arbitration and if Mortenson/Meyne, in its sole discretion, elects to demand Arbitration with Subcontractor Individually, or as part of joint proceedings with Owner or others, any dispute arising between Mortenson/Meyne and Subcontractor under this Agreement, including breach thereof, shall be decided by Arbitration in accordance with the then current Construction Industry Arbitration Rules of the American Arbitration Association, unless the parties mutually agree otherwise. Arbitration proceedings shall be held in Minneapolis, Minnesota, or such other place as Mortenson/Meyne may designate. The award rendered by the arbitrator shall be final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof.
(Werner Aff. Ex. A § 21.2.) In the Illinois state court proceeding, Gillen seeks to litigate issues related to the enforceability of the arbitration clause and the alleged limitations on Gillen's liability. Gillen contends that the arbitration clause of the Subcontract is void and unenforceable because it violates the Illinois Building and Construction Contract Act.
On August 20, 2003, Mortenson filed a demand for arbitration with the American Arbitration Association ("AAA"). Gillen then informed the AAA of its pending state-court action and requested that the arbitration proceedings be stayed pending judicial determination of the enforceability of the arbitration provision of the contract. On August 27, 2003, Mortenson filed this Petition to compel arbitration and stay the Illinois state court proceedings pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et seq.
DISCUSSION
Mortenson seeks to compel arbitration on all of its breach of contract claims against Gillen and on all of Gillen's claim against Mortenson, with the exception of the enforceability of the arbitration provision. Mortenson maintains that this arbitration provision is valid and enforceable, subjecting the parties to this Court's jurisdiction. Alternatively, Mortenson argues that even if the Illinois Building and Construction Contract Act applies to this arbitration provision, it is preempted by the FAA.
To the contrary, Gillen contends that the Subcontract's arbitration provision is rendered void and unenforceable by the Illinois Building and Construction Contract Act ("Act"). Gillen argues that Even if this Act does not apply, Gillen argues that the District of Minnesota does not have personal jurisdiction over Gillen to force the parties to arbitrate the dispute in Minneapolis.
As a threshold matter, the Court notes that the FAA establishes that any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay or like defense to arbitrability. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S.1, 24-25 (1982). There is a strong federal policy favoring arbitration, and the FAA clearly requires that parties arbitrate disputes between them so long as their contracts so provide. 9 U.S.C. § 4; Moses H. Cone. 460 U.S. at 24-25. It is not disputed that the arbitration clause of the Subcontract is subject to the FAA.
The FAA applies to any arbitration clause in a contract involving interstate commerce. 9 U.S.C. § 2. The subcontractors working on the Children's hospital are from states other than Illinois, materials for the project have traveled across state borders, and the parties to this contract have conducted administrative operations across state lines. (Pet. Mem. at 8.) Therefore, the Subcontract involves interstate commerce.
A. Jurisdiction
The Subcontract clearly provides that "arbitration proceedings shall be held in Minneapolis, Minnesota or such other place as Mortenson/Meyne may designate." (Werner Aff. Ex. A § 21.2.) Gillen asserts that this Court does not have jurisdiction to compel arbitration, claiming that Gillen has not consented to jurisdiction in Minnesota, nor does Gillen have sufficient minimum contacts with Minnesota for personal jurisdiction.
Gillen asserts that since Minnesota is not exclusively designated as the arbitration forum in the Subcontract, it cannot be construed as an agreement by the parties to arbitrate in Minnesota. This argument is contrary to logic. Although the arbitration provision broadly asserts "or such other place" as Mortenson desires, the provision explicitly provides that Minnesota shall always be an appropriate forum. By agreeing to the terms of the Subcontract in August 2001, Gillen impliedly consented to be sued in Minnesota to compel arbitration of disputes arising out of the Subcontract. Dominium Austin Partners, L.L.C. v. Emerson. 248 F.3d 720, 726 (8th Cir. 2001) ("Due process is satisfied when a defendant consents to personal jurisdiction by entering into a contract that contains a valid forum selection clause"). Gillen has failed to present any evidence to suggest that the arbitration forum-selection clause is invalid, and therefore it has consented to the jurisdiction of Minnesota courts. See M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972) (forum-selection clause enforced unless it is shown that enforcement would be unreasonable and unjust, or that the clause is invalid for reasons such as fraud or overreaching).
B. The Illinois Building and Construction Contract Act
1. Retroactive Application
Gillen alternatively argues that the arbitration provision is rendered void and unenforceable by virtue of Illinois state law. In relevant part, the Act provides:
A 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. Such a provision is void and unenforceable.
815 Ill. Comp. Stat. 665/10 (2002). This Act was enacted on July 16, 2002, and expressly provides that it is effective "upon becoming law." 815 Ill. Comp. Stat. 665/99. Mortenson contends that because it and Gillen entered into the Subcontract on August 15, 2001, this Act cannot apply to the arbitration agreement. Gillen disagrees, and asserts that because the Act is procedural in nature, it can be applied retroactively, invalidating the arbitration provision.
At oral argument, Defendant argued that retroactive application of the Act was not necessary, as the dispute at issue did not arise until after the Act was in effect. This argument is without merit.
Illinois has not determined whether the Act applies retroactively, and the legislature's declaration that the Act "takes effect upon becoming law" is not determinative of retroactivity. Illinois has adopted the approach in Landgraf v. USI Film Products. Incorporated. 511 U.S. 244 (1994), to determine whether a statute is to apply retroactively:
Under the Landgraf test, if the legislature has clearly indicated what the temporal reach of an intended statute should be, then absent a constitutional prohibition, that expression of legislative intent must be given effect. However, when the legislature has not indicated what the reach of a statute should be, then the court must determine whether applying the statute would have a retroactive impact, i.e., `whether it would impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to transactions already completed.' If there would be no retroactive impact, as that term is defined by the court, then the amended law may be applied. If, however, applying the amended version of the law would have a retroactive impact, then the court must presume that the legislature did not intend that it be so applied.Commonwealth Edison Co. v. Will County Collector. 749 N.E.2d 964, 971 (HI. 2001) (citations omitted). The Court should decline to retroactively apply a statute which diminishes substantive rights or remedies, unless the legislature has made clear that that is its wish.See Landgraf 511 U.S. at 270-71.
In the Act, there is no express legislative intent that the Act apply retroactively. Public Act 92-657 states that "[t]his Act takes effect upon becoming law." Pub. Act 92-657, sec. 20, eff. July 16, 2002. Because there is no indication of the intended temporal reach of the statute, the Court must determine if applying the new Act to this Subcontract would have a retroactive impact. Although Gillen's argument that the Act is merely procedural in nature is persuasive, it fails to acknowledge the effect of the Act on the parties' contract. The Act clearly limits the parties' rights to enforce the arbitration provision, because it renders the entire provision void and unenforceable. This substantively affects a contract term that the parties expressly agreed to. The Act thus directly impairs the parties' substantive right to contract. Therefore, underLandgraf the Act cannot apply retroactively. See also LSP-Kendall Energy. L.L.C. v. Dick Corp., No. 03-2751, slip op. (S.D.N.Y. July 23, 2003) (declining to retroactively apply the Act to governing law clause in contract; rights contemplated by the parties and expressly bargained for the in the contract, and thus substantive in nature).
2. Preemption
The Supremacy Clause requires that federal law supercede state law that either directly or by implication conflicts with federal law. The FAA mandates that an agreement to arbitrate is enforceable except when "grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. This language refers to general contract defenses such as fraud, coercion, lack of consideration, and lack of meeting of the minds. See Doctor's Assocs. Inc., v. Casarotto. 517 U.S. 681, 686-87 (1996). Moreover, the Supreme Court has declared that the principle of enforceability, enumerated in section 2 of the FAA, is not subject to any additional state law limitations. Southland Corp. v. Keating. 465 U.S. 1, 11 (1984). In this instance, the Act prohibits a party from even presenting an arbitration agreement suggesting a non-Illinois forum. This prohibition runs afoul to the FAA's broad policy of allowing for the enforceability of arbitration disputes agreed to by the parties.
Although this Court declines to conclusively determine that the Act conflicts with the FAA, it notes that state laws, which attempt to "rewrite the parties' agreements and compel arbitration of their dispute in a forum which is not one of those enumerated in an arbitration agreement's forum-selection clause," are presumably preempted by the FAA See generally Bradley v. Harris Research. Inc., 275 F.3d 884, 892 (9th Cir. 2001) (state law prohibiting out-of-state venue for franchise contract preempted by FAA); OPE Int'l L.P. v. Chet Morrison Contractors. Inc., 258 F.3d 443, 447-48 (5th Cir. 2001) (Louisiana statute which conditions enforceability of arbitration agreements in construction contracts on selection of Louisiana forum preempted by FAA); KKW Enter., Inc. v. Gloria Jean's Gourmet Coffees Franchising Corp., 184 F.3d 42, 52 (1st Cir. 1999) (FAA preempted Rhode Island Franchise Investment Act because Franchise Investment Act invalidated arbitration agreements that designated out-state forums); Doctor's Assocs., Inc. v. Hamilton 150 F.3d 157, 163 (2d Cir. 1998) (FAA preempted New Jersey law which held that franchise agreements designating out-of-state forums were presumptively invalid); Mgmt. Recruiters Int'l Inc. v. Bloor, 129 F.3d 851, 856 (6th Cir. 1997) (refusing to conclusively determine FAA preemption, but suggesting that state laws which require in-state forums for arbitration agreement enforceability preempted by FAA); M.C. Constr. Corp. v. Gray Co., 17 F. Supp.2d 541, 547-48 (W.D. Va. 1998) (determining that state statute invalidating arbitration agreements designating out-of-state forums in construction contracts preempted by FAA).
This determination applies strictly to agreements governed by the FAA.
"The choice of forum was made in an arms-length negotiation by experienced and sophisticated businessmen, and absent some compelling and countervailing reason it should be honored by the parties and enforced by the courts." Bremen, 407 U.S. at 12. The arbitration provision in the Subcontract is valid and enforceable, and Gillen clearly consented to the jurisdiction of Minnesota. Moreover, this Court has the authority to compel arbitration and stay the Illinois state court proceedings.See 9 U.S.C. § 4; 28 U.S.C. § 2283; Dominium, 248 F.3d at 728 (affirming district court's order compelling arbitration and staying California state proceedings, pursuant to arbitration provision designating Minnesota as forum); Merrill Lynch. Pierce. Fenner Smith, Inc. v. Lauer, 49 F.3d 323 (7th Cir. 1995) (determining that when arbitration agreement contains forum selection clause, only the district court in that forum can issue an order pursuant to the FAA compelling arbitration). Therefore, the Court will stay the Illinois state court proceedings and compel Gillen to arbitrate according to the terms of the Subcontract.
CONCLUSION
Accordingly, based on the all files, records and proceedings herein, IT IS HEREBY ORDERED that Petitioner M.A. Mortenson/The Meyne Company's Petition to Compel Arbitration and Stay the Illinois state court proceedings (Clerk Doc. No. 1) is GRANTED.