Amandeep S. Kahlon | Buildsmart | September 20, 2017
An issue that repeatedly comes up in construction disputes is the scope of an arbitration agreement. Courts generally interpret agreements to arbitrate broadly, and, where the arbitrability of a specific claim has been at issue, courts often defer, allowing such questions to be answered by the arbitrator. One recent opinion from the Ninth Circuit followed this general approach.
In Portland General Electric Co. v. Liberty Mutual Insur. Co., an owner contracted with a general contractor to construct a power plant in Oregon. The work started in 2013. In the contract, the parties consented to the exclusive jurisdiction of any federal court in Oregon. The contract also required a performance bond, and the bond agreement included a statement that “any proceeding, legal or equitable, under this bond may be instituted in any court of competent jurisdiction in the location in which the work or part of the work is located.”
In addition to the bonding requirement, the owner also required the contractor to obtain a written guaranty of performance from its parent company. In the guaranty, the owner and parent company consented to submit any disputes in connection with the guaranty to binding arbitration under the International Chamber of Commerce (ICC) Rules. The guaranty also specified that, once the arbitration proceeding was commenced, either party could implead any other entity (with its consent) in, and/or raise any claim against, any other entity provided such claim arose out of or in connection with an agreement with a subcontractor or the guaranty.
On December 18, 2015, the owner terminated the general contractor. In response, the contractor’s parent company filed a demand for arbitration. The contractor claimed it had not defaulted, that the termination was wrongful, and that the owner was due nothing under the guaranty agreement. Shortly thereafter, the parent company impleaded the surety under the performance bond invoking the impleader provision of the guaranty agreement and Article 7 of the ICC Rules. The surety consented and sought relief similar to that of the parent company.
The owner objected to the inclusion of the surety and sought a preliminary injunction in federal district court to prohibit joinder of the surety into the arbitration. The owner claimed that the contractor’s parent company had improperly impleaded the surety as part of a collusive effort to arbitrate claims that the owner and surety had agreed to litigate in Oregon courts. The district court granted the injunction, and the surety appealed.
On appeal, the surety argued that the owner’s election to arbitrate in the guaranty agreement and the ICC Rules left the issue of arbitrability of a particular claim up to the arbitrator and not the district court. The Ninth Circuit agreed with the surety, reversed the district court’s decision, and remanded the question of whether the surety’s claims could be arbitrated to the ICC arbitrator. The Ninth Circuit noted that “parties may delegate the adjudication of gateway issues such as arbitrability of claims to the arbitrator if they clearly and unmistakably agree to do so.” The court then determined that the incorporation of the ICC Rules into the guaranty accomplished just such a delegation, where the rules expressly set forth in Article 6(3) that the arbitral tribunal had the power and authority to determine its own jurisdiction over a particular claim or question. The court reached this conclusion even though neither the performance bond nor the construction contract provided for any agreement to arbitrate disputes between the surety and the owner.
The Ninth Circuit showed deference to the parties’ agreement to arbitrate, and the court’s decision highlights the importance of dispute provisions in contracts, even when found in exhibits or addenda incorporated by reference (e.g., bond or guaranty agreements). Here, the owner likely did not anticipate addressing any claims under the bonds in arbitration, but, because of the guaranty’s broad impleader language and its incorporation of the ICC Rules, the owner ended up in a disfavored forum. And, although the arbitrator may later determine he or she lacks jurisdiction over the surety’s claims, when give the opportunity, arbitrators often reach the opposite conclusion and find a claim arbitrable. Given that reality, the Portland General Electric case demonstrates that all construction industry participants should be mindful of the deference courts will give to arbitrators when determining the arbitrability of claims.