Roy Paul | Miles Mediation & Arbitration
Arbitration has long been used as an alternative to litigation in construction disputes. Many construction contracts contain arbitration clauses, many of which reference specific rules established by specific arbitration providers. It is important for the parties to construction disputes as well as arbitrators themselves to understand the scope of the arbitrator’s role in each case and the role of the courts.
While it is generally in the best interest of efficient dispute resolution to have all relevant parties participate in an arbitration, the degree to which non-signatories to any arbitration agreement can be compelled to participate can become a critical issue. It is also important to anticipate how non-arbitrable issues are to be addressed in situations where all issues cannot be included in the arbitration of a Georgia construction case. In this regard, potential collateral estoppel implications need to be considered. This article will address some of the key procedural concerns that impact the scope and success of construction arbitrations in Georgia.
DOES THE FAA OR GEORGIA ARBITRATION CODE APPLY?
A threshold issue in a Georgia construction arbitration is whether the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1–16, or the Georgia Arbitration Code, O.C.G.A. § 9-9-1 et.seq. applies to the interpretation and application of the disputed arbitration clause. 9 U.S.C. § 2 provides:
A written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. . . .
Where a transaction involves “commerce” within the meaning of the FAA, state law and policy may be superseded by federal law. Construction generally involves interstate commerce because most building materials pass via interstate commerce. At the same time, even when interstate commerce is involved, state arbitration law may apply where parties agree to be bound by state arbitration law, so long as that law does not conflict with the FAA. North Augusta Associates Ltd. P’ship v. 1815 Exch., Inc., 220 Ga. App. 790, 791-92, 469 S.E.2d 759, 762 (1996).
Roy Pau
The distinctions between the FAA and Georgia Arbitration Code can have very practical consequences. Under O.C.G.A. § 9-9-9 arbitrators may issue subpoenas to produce books, records, documents, and other evidence in the same manner provided by law for the service and enforcement of subpoenas in a civil action.
The United States Court of Appeals for the Eleventh Circuit, however, has construed 9 U.S.C. § 7 to mean that arbitrators do not have the authority to order non-parties to provide documents prior to an arbitration hearing. The Eleventh Circuit has concluded that 9 U.S.C. § 7 does not permit pre-hearing depositions and discovery from non-parties, stating “non-parties to an arbitration agreement have not subjected themselves to the authority of an arbitrator and, therefore, have not limited their rights beyond the FAA.” Managed Care Advisory Group, LLC v. CIGNA Healthcare, Inc., 939 F.3d 1145, 1159 (11th Cir. 2019).
The decision of contracting parties to choose between the FAA and state arbitration law can also impact the ability to consolidate different arbitrations. Under O.C.G.A. § 9-9-6(e), unless otherwise provided in the arbitration agreement, a party to an arbitration agreement may petition the court to consolidate separate arbitration proceedings if:
(1) Separate arbitration agreements or proceedings exist between the same parties, or one party is a party to a separate arbitration agreement or proceeding with a third party;
(2) The disputes arise from the same transactions or series of related transactions; and
(3) There is a common issue or issues of law or fact creating the possibility of conflicting rulings by more than one arbitrator or panel of arbitrators.
Under the FAA, courts may not order consolidation unless the contracts involved provide for it. See Georgia Cas. & Sur. Co. v. Excalibur Reinsurance Corp., 4 F.Supp.3d 1362, 1367-68 (N.D. Ga. 2014).
WHAT HAPPENS IF THERE ARE BOTH ARBITRABLE AND NON-ARBITRABLE CLAIMS?
The Georgia Supreme Court has applied the FAA’s mandatory stay provision, 9 U.S.C. § 3, to actions brought in a Georgia court. DiMambro–Northend Associates v. Blanck–Alvarez, Inc., 251 Ga. 704, 707, 309 S.E.2d 364, 367 (1983). 9 U.S.C. § 3 provides in applicable part, that:
. . . the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement. . . .
When faced with an action containing both arbitrable and non-arbitrable issues, both Georgia Courts and federal courts have generally allowed both to continue in bifurcated proceedings. The FAA “requires district courts to compel arbitration of pendent arbitrable claims when one of the parties files a motion to compel, even where the result would be the possibly inefficient maintenance of separate proceedings in different forums.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 217, 105 S. Ct. 1238, 1241 (1985). Georgia courts have followed the lead of the federal courts in applying the FAA. Krut v. Whitecap Housing Group, LLC, 268 Ga. App. 436, 443, 602 S.E.2d 201, 208 (2004). O.C.G.A. § 9-9-6(a) states that “[i]f an issue claimed to be arbitrable is involved in an action pending in a court having jurisdiction to hear a motion to compel arbitration, the application shall be made in that action. If the application is granted, the order shall operate to stay a pending or subsequent action, or so much of it as is referable to arbitration.”
Courts generally refuse to stay non-arbitrable claims “when it is feasible to proceed with the litigation.” Klay v. All Defendants, 389 F.3d 1191, 1204 (11th Cir. 2004). Courts may, however, order a stay of pending litigation if the arbitrable claims are “inextricable from the non-arbitrable claims” and there is a risk of inconsistent factual and liability determinations. See Harper v. Santander Consumer USA, Inc., No. 1:22-cv-3703-TWT-JKL, 2023 WL 2178394 at *4 (N.D. Ga. Jan. 4, 2023).
WHO DECIDES WHETHER A CLAIM IS ARBITRABLE?
“[T]he parties may agree to arbitrate gateway questions of arbitrability including the enforceability, scope, applicability, and interpretation of the arbitration agreement.” Jones v. Waffle House, Inc., 866 F.3d 1257, 1264 (11th Cir. 2017). The starting point for determining who has the power to decide issues of arbitrability is to look to the language of the parties’ agreement. When “an arbitration agreement contains a delegation provision — committing to the arbitrator the threshold determination of whether the agreement to arbitrate is enforceable — the courts only retain jurisdiction to review a challenge to that specific provision.” Parnell v. CashCall, Inc., 804 F.3d 1142, 1144 (11th Cir. 2015).
In assessing the scope of the arbitrator’s role, reference must also be made to any rules that are incorporated by reference into the relevant arbitration clause. The Eleventh Circuit has made it clear that when the parties incorporate the rules of the American Arbitration Association into their agreement, those rules may be dispositive as to the power of the arbitrator to determine threshold issues of arbitrability. U.S. Nutraceuticals, LLC v. Cyanotech Corp., 769 F.3d 1308, 1311 (11th Cir. 2014).
The current Miles Mediation & Arbitration Construction Arbitration Rules & Procedures contain the following provisions:
Rule 10: Jurisdictional Challenges
(i) The arbitral tribunal shall have the sole discretion and power to rule on its own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or the contractual arrangement.
(ii) For the purposes of ruling on its own jurisdiction, the arbitral tribunal shall treat an arbitration clause which forms part of an underlying contract as an agreement independent of the other terms of the contract. Any decision by the arbitral tribunal that the underlying contract is null and void shall not by itself render the arbitration clause invalid.
(iii) Any objections by the parties to the proceedings that the arbitral tribunal lacks the jurisdiction to preside over the arbitration shall be raised no later than the filing of the Response or counterclaims, if any.
(iv) The arbitral tribunal may rule on such raised objections either as a preliminary issue and in the form of an interim award, or as part of the final award, unless otherwise agreed upon by the parties.
These provisions, if incorporated by reference into the parties’ agreement, should make the role of the arbitrator clear.
In Web IV, LLC v. Samples Construction, LLC, 349 Ga. App. 607, 824 S.E.2d 107 (2019), the court was confronted with a situation where the construction contract referred to the role of the architect in resolving disputes. The Court in Web IV compared the arbitration clause at issue there to the language at issue in North Augusta Associates Ltd. P’ship v. 1815 Exch., Inc. 220 Ga. App. 790, 792, 469 S.E.2d 759, 762 (1996) and Tillman Park, LLC v. Dabbs-Williams Gen. Contractors, LLC, 298 Ga. App. 27, 679 S.E.2d 67 (2009).
The Court in Web IV noted that the arbitration clause in North Augusta was similar to the one at issue in Web IV in that it provided that “[a]ny controversy or claim arising out of or related to the contract, or the breach thereof, shall be settled by arbitration[.]” 220 Ga. App. at 792, 469 S.E.2d at 762. Unlike the contract in Web IV, however, the agreement in North Augusta contained other provisions which clearly and unambiguously limited the scope of the arbitration clause.
Specifically, there was language in the North Augusta agreement that a decision by the architect was required as a condition precedent to arbitration. The agreement in Web IV did not contain any similarly unambiguous limitations on the scope of the parties’ agreement to arbitrate. Although it was argued that the dispute resolution provisions in the parties’ contract should be interpreted as imposing conditions precedent on their ability to compel arbitration, the Court in Web IV concluded that the contract did not explicitly refer to those procedures as a condition precedent.
Under the facts presented, the Court in Web IV ruled that the question of whether the contract’s dispute resolution provisions imposed a condition precedent to arbitration was a threshold issue of procedural arbitrability that arose out of and related to the agreement itself. Accordingly, the court concluded that it should be resolved by the arbitrator rather than by the trial court. 349 Ga. App. at 612-14, 824 S.E.2d at 112.
The Web IV court went on to discuss the Tillman Park decision. The court noted that the agreement in that case, like in North Augusta, provided that claims must be submitted first to an architect, and then, after that condition precedent was satisfied, the architect’s decision could be reviewed through arbitration or litigation. 298 Ga. App. at 28, 679 S.E.2d at 69. When the parties failed to name an architect and were, therefore, arguably unable to comply with the first step of the claims-resolution process, the question of arbitrability fell to the court rather than to the arbitrator. Again, the Web IV Court concluded that the agreement in Web IV did not contain any similarly unambiguous limitations on the scope of the parties’ agreement to arbitrate.
The Web IV court, therefore, found that the case before it was squarely distinguishable from both North Augusta and Tillman Park. 349 Ga. App. at 614, 824 S.E.2d at 113. (It should be noted that Web IV was subsequently distinguished in Epps v. Rockmo Entertainment, LLC., 357 Ga. App. 774, 780 n.6, 849 S.E.2d 510, 515 n.6 (2020), a case involving whether a party had waived their right to arbitrate by failing to pay arbitrator fees or to otherwise follow arbitration rules. The Court in Epps emphasized the distinction between procedural questions arising out of the parties’ agreement itself that could be decided by an arbitrator and issues of conduct-based waiver that were for the Court to address.)
CAN A NON-SIGNATORY TO THE ARBITRATION CLAUSE BE COMPELLED TO ARBITRATE?
Finally, let us consider whether a non-signatory can be forced to arbitrate. Generally, the right to enforce a contract’s terms is reserved to the contracting parties. Traditional principles of state contract law, however, may allow a contract to be enforced by or against non-parties using concepts such as piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, and/or waiver and estoppel. See Lawson v. Life of the South Ins. Co., 648 F.3d 1166, 1170 (11th Cir. 2011).
Georgia’s doctrine of equitable estoppel provides an important mechanism under which non-signatories can be forced to arbitrate under certain circumstances. See Autonation Financial Services Corp. v. Arain, 264 Ga. App. 755 (2003). By extending enforcement rights to certain non-signatories, equitable estoppel ensures that arbitration proceedings between the two signatories are not rendered meaningless and the policy in favor of arbitration is given effect. See Carson v. Home Depot, Inc., No. 1:21-CV-4715-TWT, 2022 WL 2954327 (N.D. Ga. July 26, 2022).
Under Georgia law, as a matter of contract law, incorporation by reference is generally effective to accomplish its intended purpose where the provision to which reference is made has a reasonably clear and ascertainable meaning. See Town Center Associates v. Workman, 227 Ga. App. 55, 57, 487 S.E.2d 624, 625 (1997). If an agreement with an arbitration clause is referred to as an exhibit in a separate agreement or incorporated by reference, the arbitration clause may be given effect if the intention to require arbitration is clear. For example, subcontracts without arbitration clauses may incorporate general contracts with arbitration clauses. Just because a party is not an actual signatory to the arbitration clause does not end the analysis. Contract theories including equitable estoppel should be fully explored as means of including additional parties in the arbitration.
WHEN DOES ISSUE PRECLUSION ARISE?
The parties who participate in any arbitration and whether non-arbitrable claims are stayed impact whether issues determined in arbitration will be conclusive in further proceedings. When an arbitration proceeding affords basic elements of adjudicatory procedure, such as an opportunity for presentation of evidence, the determination of issues in an arbitration proceeding should generally be treated as conclusive in subsequent proceedings. Under Georgia law, preclusion doctrines apply to arbitration proceedings. See e.g., Bennett v. Cotton, 244 Ga. App. 784, 536 S.E.2d 802 (2000); Centex–Rodgers Constr. Co. v. City of Roswell, 215 Ga. App. 30, 32, 449 S.E.2d 631, 633 (1994).
Res judicata generally requires that the parties be identical in both causes of action. Collateral estoppel is broader. Under Georgia law, a party may assert the doctrine of collateral estoppel if the issue was (1) raised in a prior proceeding; (2) actually litigated and decided; and (3) necessary to final judgment.
Federal law has similar factors: (1) the issue at stake must be identical to the one involved in the prior litigation; (2) the issue must have been actually litigated in the prior suit; (3) the determination of the issue in the prior litigation must have been a critical and necessary part of the judgment in that action; and (4) the party against whom the earlier decision is asserted must have had a full and fair opportunity to litigate the issue in the earlier proceeding. See In re Clark, 411 B.R. 507, 514-15 (S.D. Ga. 2009).
Issues decided by an arbitrator that are necessary to the arbitration award generally will not be relitigated. Likewise, related issues that are litigated outside the arbitration could be used to support a collateral estoppel argument in the arbitration. The bottom line is that the order in which issues are adjudicated matters so that motions to stay the consideration of non-arbitrable issues can be critical.
CONCLUSION
As can be seen by the discussion above, careful consideration needs to be given to the language of any construction contract containing an arbitration clause. There should be a conscious decision made as to whether the FAA or Georgia Arbitration Code is to apply. The scope of the issues to be arbitrated as well as the determination of who will make the decision as to what is arbitrable depends on the language utilized in the construction contract and arbitration clause. Any rules or arbitration procedures referenced in the arbitration clause need to be reviewed and understood.
If possible, all parties involved in the performance of the contract need to be signatories to the arbitration clause. If significant parties end up not being actual parties, careful consideration needs to be given to whether those non-parties, nevertheless, can be brought into the arbitration under state contract law theories. If arbitrable and non-arbitrable issues arise out of the construction contract or project, careful thought must be given as to how to stage the overall process to avoid or to take advantage of issue preclusion questions.
By focusing on these procedural issues prior to a dispute arising, the parties to Georgia construction contracts can help avoid unforeseen obstacles to efficient dispute resolution. The parties and any arbitrator/arbitrators should also have a clear understanding of these important issues.
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