How the Federal Arbitration Act preempted the Pennsylvania Contractor & Subcontractor Payment Act in a recent industry dispute

Pennsylvania contractors may believe they can rely on the terms of the Pennsylvania Contractor and Subcontractor Payment Act (CASPA) to ensure a Pennsylvania forum for any disputes arising out of construction occurring in Pennsylvania. However, in light of recent precedent, this reliance may be misplaced.

In Bauguess Elec. Servs. v. Hosp. Builders, Inc., Civ. A. No. 20-214, 2020 U.S. Dist. LEXIS 31619 (E.D. Pa. Feb. 25, 2020), the court held that an arbitration provision in a subcontract between Bauguess, as subcontractor, and Hospital Builders Inc. (HBI), as general contractor, controlled the location of the parties’ arbitration and preempted the CASPA (which provides that a contract requiring that any arbitration on the contract “occur in another state shall be unenforceable”).

The dispute arose out of the construction of a Candlewood Suites Hotel in Chester, Delaware County, Pennsylvania. HBI subcontracted a portion of the electrical work to Bauguess. When HBI failed to pay Bauguess all the monies that Bauguess claimed were due, Bauguess filed a mechanic’s lien against the property, as well as a demand for arbitration with the American Arbitration Association (AAA). When Bauguess later filed a state court motion to compel arbitration in Delaware County (the site of the hotel), HBI removed the case to federal court.

HBI disputed Bauguess’s contention that Delaware County was the proper forum for the arbitration, arguing instead that the terms of its subcontract with Bauguess required that the arbitration take place in South Dakota. Specifically, the Bauguess subcontract required that: (i) any arbitration be subject to the same terms of HBI’s contract with the owner, VB Hospitality (VBH) or (ii) if not specified in the owner/HBI contract, in Aberdeen, South Dakota.

Notably, while these proceedings were ongoing, HBI was also in the middle of an arbitration with VBH pending in South Dakota, which HBI claimed included some of the funds that Bauguess was seeking in its suit against HBI.

The court sided with HBI, noting first that the Federal Arbitration Act (FAA) preempted the CASPA because CASPA’s provision conflicted with the FAA’s primary purpose: to ensure that private agreements to arbitrate are enforced according to their terms.

The court observed that the terms of the arbitration provision in the Bauguess/HBI subcontract clearly required arbitration in South Dakota and, additionally, required a joint arbitration with the owner if any disputes between HBI and VBH involved any dispute between Bauguess and HBI, as was the case. The court enforced the clear terms of the arbitration agreement and required that the arbitration occur in South Dakota.

This decision emphasizes, yet again, the importance of consulting with experienced counsel prior to signing a construction contract. The significance of where a dispute is litigated or arbitrated should not be underestimated—disputes are stressful and costly enough without the added aggravation and business interruptions caused by traveling to distant or unfamiliar forums.