Relevant Facts: A construction contract between parties included an arbitration clause containing a choice-of-law provision that required the contract to be governed by the law of “the place where the Project is located.” A dispute arose in relation to a California-based project and the appellant made a formal demand for arbitration. In response, the appellee filed an action in California state court seeking indemnity from two other parties involved in the dispute who were not subject to the contract. The state court denied the motion to compel arbitration, citing a state law that permitted a stay pending resolution of related litigation between a party bound to an arbitration clause and third parties who are not bound by it.
Question Before The Court: Whether the state law at issue was preempted by the Federal Arbitration Act (FAA), and whether, given this nation’s policy favoring arbitration, the application of the choice-of-law provision in this case was properly applied.
The Opinion: The U.S. Supreme Court focused on the terms of the arbitration clause in rendering its decision. The Court observed that the FAA confers a right to obtain an order directing that “arbitration proceed in the manner provided for in [the parties] agreement, and that “parties are free to structure their arbitration agreements as they see fit.” Thus, an arbitration clause’s terms can include the rules by which the claim is arbitrated, such as those found in a choice-of-law provision. The Court reasoned that when parties, as here, agree to arbitrate according to a particular state’s laws, and that state’s laws require a stay of arbitral proceedings, then staying those proceedings is giving the arbitration clause effect, as required by the FAA.
On the matter of preemption, the Court re-affirmed its position that states “cannot pass laws that require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.” To determine whether a state law conflicts with the FAA to the point of being preempted, one must ask whether the state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress in passing the FAA. The Court then identified three purposes and objectives of the FAA: to place arbitration agreements on the same footing as other contracts, but not more so; to enforce agreements into which parties had entered; and to encourage the expeditious resolution of disputes.
Although not germane to its central decision here, in a footnote the Court addressed the problem of contradictory judgments arising from forced arbitration, which remains an inevitable biproduct of enforcing class, collective and joint action bans in forced arbitration: “[T]he FAA itself contains no provision designed to deal with the special practical problems that arise in multiparty contractual disputes when some or all of the contracts at issue include agreements to arbitrate. California has taken the lead in fashioning a legislative response to this problem, by giving courts authority to consolidate or stay arbitral proceedings in these situations in order to minimize the potential for contradictory judgments.”
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