Daniel Lund III | Phelps Dunbar
A New York general contractor on a Louisiana commercial construction project sought to enjoin an ongoing arbitration with the Illinois project owner (represented by Phelps). The general contractor raised its own lack of licensure as a basis for invalidating the entire construction contract at issue, including the arbitration clause contained therein.
Federal case law interpreting the Federal Arbitration Act on the point – that is, a party seeking to avoid arbitration based upon a contract alleged to be a nullity – has seen fit to refer the challenge to the contract to the arbitrator, unless there is some other unique challenge to the arbitration clause itself (for example, an argument that arbitration is truly not contemplated by the allegedly void agreement). In essence, federal courts split out the arbitration clause as enforceable irrespective of the alleged status of the contract as a whole.
Attempting to work around the foregoing rule, the contractor argued that Louisiana law on “formation” of contracts should be separately considered by the reviewing federal court, and a different result reached because “formation” of the arbitration clause was being challenged rather than just validity or invalidity of the clause.
The federal court refused the contractor’s argument. Relying on Supreme Court decisions in Buckeye Check Cashing (546 U.S. 440 (2006)) and its predecessor, Prima Paint (388 U.S. 395 (1967)), the court held:
“Plaintiff’s argument fails for at least two reasons. First, Plaintiff cannot avoid Prima Paint’s severability doctrine by merely re-framing a legality challenge to the Construction Contract as a formation question under Louisiana law. The present case presents almost the same issue addressed by the Supreme Court in Buckeye. Specifically, Plaintiff argues that the ‘container contract’ here is an illegal contract and therefore void under state law. Like Buckeye, however, Plaintiff does not argue that the Arbitration Provision, standing alone, is an illegal contract or that the parties did not agree to arbitrate their disputes. Under the severability doctrine, the validity of the Construction Contract is a question for the arbitrator. Nothing in the language of the Civil Code provisions cited by Plaintiff obviates the severability doctrine—nor could it. The severability doctrine is a federal doctrine rooted in the ‘strong federal policy in favor of compelling arbitration over litigation.’ … As explained by the Court in Buckeye, state law or public policy cannot overcome the severability doctrine with respect to the enforceability of an arbitration agreement. Similarly, for the same reasons, state law cannot overcome the federal severability doctrine merely by characterizing an illegality defense as a question of contract formation.”
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