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Contract’s Arbitration Provision Not Undone by Validity Claims

A recent impression from the Courtroom of Appeals of Georgia illustrates that contracts entered into with an unlicensed contractor, which are generally unenforceable by an unlicensed contractor underneath quite a few states’ legal guidelines, likely will not defeat the Federal Arbitration Act’s (FAA) deference to arbitration as the discussion board for deciding no matter whether a contract is legitimate and enforceable.

In Jhun v. Consider Castle, LLC, the Jhuns employed defendant Think about Castle to accomplish reworking perform at their property.  The agreement in between the functions contained a broad arbitration arrangement ruled by the FAA that used to any declare or dispute among them and specified that “[a]ny issues about the interpretation of this arbitration provision or about the arbitrability of a dispute . . . shall be decided by the arbitrator.”  While Visualize Castle represented that it was adequately accredited when the deal was executed, the Jhuns later on discovered that it was not.  The Jhuns also found that Picture Castle’s operate on the task was incomplete and deficient in many methods and they refused to make even further payments.  Envision Castle stopped function and the Jhuns employed an additional contractor to full the venture.

The Jhuns submitted suit from Consider Castle and its two principals in Ga state court.  The defendants moved to compel arbitration and continue to be the proceedings, and the demo courtroom granted the motions.  The Georgia Court of Appeals affirmed the lower court’s get and stayed the demo courtroom proceedings from the other get-togethers who were not signatories to the agreement. 

On appeal, the Jhuns argued that the arbitration arrangement was unenforceable simply because Think about Castle was not effectively licensed and, less than O.C.G.A. § 43-41-17(b), as a issue of public policy, contracts involving an unlicensed contractor and an operator are unenforceable in legislation or equity by the unlicensed contractor. 

The appellate court docket observed this argument unavailing and relied, in component, on the U.S. Supreme Court’s holding in Buckeye Test Cashing v. Cardegna.  In Buckeye, the Supreme Courtroom turned down the argument that “enforcement of an or else legitimate arbitration arrangement contained in just an unenforceable deal[] could switch on an particular person state’s law or community plan.”  Although genuine that this “rule permits a court to enforce an arbitration arrangement in a agreement that the arbitrator afterwards finds to be void,” “it is equally correct that [the Jhuns’] technique permits a court docket to deny outcome to an arbitration provision in a contract that the court docket later finds to be properly enforceable.”

Additionally, the Jhun Court discussed that under the FAA, when ‘“there is a certain obstacle attacking the validity of an arbitration agreement, the court docket and not the arbitrator should come to a decision whether the arbitration provision is enforceable.’ Nonetheless, ‘a problem to the validity of the deal as a entire, and not precisely to the arbitration clause, have to go to the arbitrator.”’ 

The Court identified that the Jhuns unsuccessful to “raise any challenge that is particular to the arbitration provision in the contract” and that “their obstacle to the arbitration arrangement [wa]s portion and parcel of their argument that the entire agreement [wa]s unenforceable owing to the defendants’ unlicensed standing.” So, the Court affirmed the trial court’s buy persuasive arbitration.  The Court docket also affirmed the purchase staying proceedings towards the other defendants since the promises versus all the defendants were “intimately related” and “[t]he electric power to stay proceedings is incidental to the power inherent in every single courtroom to control the disposition of the will cause on its docket. . . .”

Functions to a agreement must carefully read through the dispute resolution provisions prior to executing any agreement to make certain they are aware of how disputes will finally be fixed.  When an settlement to arbitrate is knowingly and voluntarily built (which will be assumed as a simple fact by courts), most jurisdictions will defer to the parties’ agreement, and overcoming the provision will need a meritorious attack on the validity of the arbitration provision, not simply the contract as a entire.  In all situations, functions are very well-suggested to seek advice from with counsel to totally realize the scope of the arbitration provision and the affect arbitration may perhaps have on resolution of a potential dispute.

© 2021 Bradley Arant Boult Cummings LLP
National Legislation Critique, Quantity XI, Quantity 355