The Law Company, Inc. v. The United Drywall Group, LLC, Case No. 10-1241-JTM, 2011 U.S. Dist. LEXIS 1344 (D. Kan., Jan. 6, 2011).
An insured contractor entered into a construction contract with a project owner. The parties’ contract included an arbitration agreement. The insurer issued payment and performance bonds on the project but had no arbitration agreement with the project owner. The owner filed suit in federal court against the contractor and its insurer, then sought a stay of the proceeding to compel arbitration with the contractor. The insurer opposed the motion, arguing the Federal Arbitration Act (“FAA”) did not apply because the dispute did not “involve commerce,” it was not a party to the arbitration agreement, and the owner waived its right to arbitration by filing the lawsuit.
The District of Kansas flatly rejected the insurer’s argument that the contract for construction services did not “involve commerce.” The FAA’s “involving commerce” language is construed broadly to mean “affecting commerce” and signals the broadest permissive exercise of Congress’ Commerce Clause power. The parties’ construction contract fell within the ambit of the FAA.
The Court also held that the insurer was not entitled to a stay of the proceeding even though it was not a party to the arbitration agreement between its insured contractor and the project owner. Federal policy favoring arbitration is sufficiently strong that it may be invoked to stay a proceeding even where all parties to the proceeding are not party to the arbitration agreement.
Finally, the Court concluded the owner did not waive its right to arbitration by filing first filing the lawsuit. The Court reviewed federal law which allows a party to initiate a legal proceeding in order to preserve a statute of limitations and then demand arbitration shortly thereafter. In instances where a party files a lawsuit, litigates for a length of time, then attempts to invoke arbitration “on the eve of trial”, it might be precluded from invoking an arbitration agreement. But here, the owner filed suit and immediately demanded arbitration. The insurer’s request to oppose arbitration was denied.
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