|
(A revised version of this article appears in The
Construction Lawyer,
Volume 24, No. 4, Fall 2003, published by the American Bar Association's
Forum on the Construction Industry.)
By John W. Ralls
An Alabama bank extended a line of credit to an Alabama general contractor
and its partners. The relationship between the bank and the contractor soured
when, after encouraging the contractor to bid on a large project, the bank
refused to provide the necessary capital to complete the project. In an attempt
to settle the dispute, the parties entered into several debt-restructuring
agreements. The agreements provided for arbitration of disputes and specified
that the Federal Arbitration Act (FAA) would apply.
The contractor brought suit in state court against the bank and its officers.
It alleged breach of implied contract, arguing that it had incurred massive
debt when the bank reneged on its agreement to provide sufficient capital to
complete the project. The bank moved to compel arbitration.
The primary issue was whether
the contract sufficiently involved interstate commerce to implicate the FAA.
If so, the contract was subject to the FAA and
the arbitration clause was enforceable. Otherwise, the arbitration clause was
subject to Alabama Code §8-1-41, which provides that “[a]n agreement
to submit a controversy to arbitration” “cannot be specifically
enforced.”
The trial court ordered the parties to submit to arbitration. The Alabama
Supreme Court reversed on the basis that the contract did not sufficiently
affect interstate commerce. Certiorari was granted to the U.S. Supreme Court,
which reversed the Alabama Supreme Court. It held that the FAA was applicable
and that the arbitration provision was enforceable. Citizens Bank v. Alafabco,
Inc., 123 S. Ct. 2037 (2003).
The Alabama Supreme Court applied
its “fact-intensive” five-part
test to determine whether the transactions between the bank and contractor,
by themselves, had a “substantial effect on interstate commerce.” This
test examined: (1) the citizenship of the parties, (2) the origin of any tools
and equipment actually used in the transaction, (3) the allocation of cost
of services and materials, (4) the subsequent movement across state lines of
the “object of the services” and (5) the degree of separability
from other contracts.
Finding that the restructured debt did not originate out of state and was
not inseparable from out-of-state projects, the Alabama Supreme Court found
an insufficient nexus with interstate commerce to apply the FAA. It refused
to compel arbitration.
The U.S. Supreme Court disapproved
the five-part test. The court relied on 9 USC §2, which provides that an arbitration clause in a contract “evidencing
a transaction involving commerce” shall be valid, irrevocable and enforceable.
The court held that the phrase “involving commerce” in the FAA
is equivalent to the more familiar term “affecting commerce” and
invokes the broadest permissible exercise of Congress’ Commerce Clause
power. As a result, agreements need only involve a general practice that bears
on interstate commerce in a substantial way to come under the FAA.
The court found that the debt-restructuring
agreements satisfied the “involving
commerce” test in at least three ways. First, the loans the contractor
was renegotiating were being used to do business throughout the Southeastern
United States. Second, the debt was secured by all of the contractor’s
business assets, which included an inventory of goods assembled from out-of-state
parts and raw materials. Third, the general practice of debt restructuring
has a broad impact on the national economy. The arbitration clause was, therefore,
enforceable under the FAA.
If you would like to receive legal reports and updates more quickly, by e-mail,
click here and fill out the mailing list form. If you would like to subscribe to our RSS feeds or learn more about RSS, click here.
©2004 ConstructionWebLinks, Inc.
| 
