Arbitration: Oregon Supreme Court Decides Arbitrator Should Decide Construction Contract Claim (Web)

In Industra/Matrix Joint Venture v. Pope & Talbot Inc., SC S52674, 2006 WL 2578365 (Ore. Sept. 8, 2006)(available at www.publications.ojd.state.or.us/S52674.htm), the Oregon Supreme Court held that breach-of-contract claims should be resolved through arbitration as agreed upon in the general conditions of the parties' construction contracts. The Court reasoned that pursuant to the Federal Arbitration Act, an ambiguity in a possible contractual exception to arbitration should be resolved in favor of arbitration.

The plaintiff was a joint venture between Oklahoma corporation Matrix Service Inc., and Washington corporation Industra Service Corp.. The two companies signed the joint-venture agreement for the limited purpose of entering into construction contracts with the defendant, Pope & Talbot Inc., a Portland, Ore.-based lumber products company.

In December 2001, the plaintiff filed an action for breach of contract and quantum meruit, claiming that the defendant's failure to timely perform under the contracts resulted in "major delays and inefficiencies" that led to additional expenses.

The plaintiff sought to compel arbitration in accordance with the contracts’ General Condition 27. GC 27 stated that parties were to address claims based on delays to the engineer, who would issue a work order if compensation was deemed to be warranted. If a party disputed the engineer’s opinion, “the validity of the claim will be determined by arbitration.”

The discovery process was initiated, and on Jan. 3, 2003, the plaintiff filed a second amended complaint in which it sought $2.6 million in damages. Two weeks later, defendant Pope & Talbot filed a summary judgment motion.

The construction contracts provided for six exceptions for which disputes could not be resolved through arbitration. The defendant cited GC 35.5.6, which excluded disputes relating to “[t]he damages to which either [party] may be entitled at law on account of a breach of the Contract by the other of them.” The defendant argued that the plaintiff's claim fell under this exception.

According to an Oregon statute revised in 2003, a compensation claim could not be brought by a contractor unless the contractor had a valid Oregon Construction Contractors' Board license.

The defendant asserted that 1) the plaintiff had not initiated dispute proceedings by properly issuing a written complaint with the engineer as provided by GC 27, 2) the plaintiff was not able to bring such a claim because it lacked the requisite license under the 2003 statute, and 3) the plaintiff had waived its right to compel arbitration by waiting until more than a year after filing a civil action against the defendant, and by taking advantage of judicial discovery procedures that were not available in arbitration.

The trial court denied the plaintiff's petition to compel arbitration. It granted the defendant's summary judgment motion on the basis of the plaintiff's lack of a valid license and failure to issue a written complaint with the engineer.

The Court of Appeals reversed the trial court's decision. It held that the parties had only agreed to apply Oregon law to the arbitration hearing, not prearbitration issues. Thus, it concluded that these issues should be decided under the FAA. According to the FAA, the arbitrator should determine whether the plaintiff met the statutory and contractual preconditions to arbitration. The defendant petitioned the Court for review.

The Supreme Court affirmed the appeals court's determination that the contract only provided for Oregon law to be applied to arbitration hearings without specifying the law to govern issues arising beforehand. In addition, the Court held that the FAA applied since the claim involved an interstate transaction.

The defendant had argued that GC 35.5.6 constituted an exception not just to determinations of the damages in a breach-of-contract claim, but also to disputes relating to the existence of a breach. The Court noted that it felt that the defendant was probably conflating the separate issues of 1) breach and 2) the amount of damages flowing from that breach.

Moreover, it reasoned that if it were to accept the defendant's interpretation of the exception as reasonable, it would have to conclude that the exception provision had been ambiguous. Under the FAA, an ambiguity is to be resolved in favor of arbitration.

The Supreme Court agreed with the Court of Appeals that the issue of the plaintiff's license was a question of procedural arbitrability, and therefore to be determined by an arbitrator, not the courts. It did not serve as a "gateway dispute" in determining whether the parties were bound by the arbitration provision. The Court noted that it was not expressing any opinion on the merits of the defendant's argument.

The Court affirmed the appellate court determination that the district court should not have denied the plaintiff's petition to compel arbitration. The Court agreed in reversing the district court’s judgment, and it remanded the case for further proceedings.

--Kimberly Finneran, CPR Intern