Arbitration Venue: Where the Parties Agreed, Despite State Law

The contract calls for arbitration in Indiana, applying the laws of Nebraska. But Nebraska has a law prohibiting parties from being compelled to arbitrate outside that state for an in-state project. In a GC/sub dust-up including lawsuits in both states, a U.S. District Court judge in Indiana has cited Supreme Court precedent in upholding the original contract venue clause. Critical portions of the arbitration clause state: “this Subcontract shall be governed by the laws of the State of Nebraska … Subcontractor and Contractor expressly agree that any arbitration proceedings related to any dispute hereunder shall be conducted solely in St. Joseph County, State of Indiana and that such county and state are the agreed venue, locale and jurisdiction for such arbitration proceedings.” Despite that language, when the (Indiana-based) contractor sought arbitration in Indiana, the (Nebraska-based) sub sought to compel venue in Nebraska, based on language in the Nebraska prompt pay law. For construction work performed within Nebraska (which included the project at issue), Neb. Rev. Stat. § 45-1209 makes “void and unenforceable” any provision that would “require that the venue for a court or arbitration hearing be held at any location outside of the state.” Thus, the sub argued that Nebraska law would invalidate the venue clause. But the District Court judge noted that the Nebraska law would make the entire arbitration clause, and not just the venue provision, void and unenforceable. More critically, the judge cited U.S. Supreme Court decisions which hold that the Federal Arbitration Act (FAA) preempts any state law that would invalidate an arbitration agreement or prohibit arbitration of a particular type of claim subject to the FAA. In sum, the Nebraska law would not hold up against the Supreme Court’s interpretation of the FAA in matters involving interstate commerce. The case is Sterling Construction Corp. v. SOS Const. and Roofing, Inc., 2015 U.S. Dist. LEXIS 60984 (N.D. Ind., May 11, 2015). This logic will apply to any state law with a restricted venue clause similar to the one in Nebraska, where the underlying contract involves interstate commerce and the dispute is to be arbitrated.