By Leslie King O’Neal
Multiple Contracts on Same Project
Parties in construction projects often have multiple contracts related to the same job. What happens when these contracts have conflicting ADR clauses? Who decides which clause takes priority—a judge or an arbitrator? Recent cases from the 4th Circuit and SCOTUS discuss this complex issue.
Subcontracts –and Other Agreements
Usually, the general contractor/subcontractor relationship is governed by a subcontract for the sub’s scope of work on a project and change orders to that subcontract[i]. Sometimes subs do additional work without a formal change order and send the GC invoices for payment. These invoices often reference the project, but don’t incorporate the subcontract terms.
Conflicting Clauses–Who Decides?
Imagine a common dispute: the GC withholds final payment under the subcontract and the invoices because of alleged improper work. The sub says its work was done properly and the GC owes the contract balance and the invoiced amounts.
Assume that: the subcontract has an arbitration clause governed by AAA Construction Industry Rules, including a delegation clause. The invoices don’t incorporate the subcontract terms but provide that the state court where the project is located will resolve all disputes.
The sub sues the GC in state court for payment under the subcontract and the invoices. The GC moves to compel arbitration of the entire dispute under the subcontract arbitration clause. Which clause takes priority? Who decides this issue—the arbitrator or the judge?
SCOTUS Decision on Conflicting Contracts & Clauses
SCOTUS dealt with this issue in Coinbase v. Suski[ii] which involved two contracts between the owner of a cryptocurrency exchange and its users. The first contract was a User Agreement, which had an arbitration clause with a delegation clause.[iii] The second contract was the “Official Rules” for a sweepstakes the claimants entered, which contained a forum selection clause requiring disputes be heard in California federal court.[iv]
Several users filed a class action against Coinbase in the U.S. District Court for the Northern District of California. Coinbase moved to compel arbitration based on the User Agreement’s delegation clause. The District Court denied the motion, holding the forum selection clause controlled. The Ninth Circuit affirmed.
Court Decides Which Contract Governs
SCOTUS, in a unanimous decision, held: “Where parties have agreed to two contracts—one sending arbitrability disputes to arbitration, and the other either explicitly or implicitly sending arbitrability disputes to the courts—a court must decide which contract governs.”[v]
Four Levels of Disputes
Coinbase stated there are four different levels of disputes regarding arbitration. First level: parties agree that an arbitrator decides the merits; second level: whether they agreed to arbitrate the merits; third level: who decides whether they agreed to arbitrate the merits.
The Coinbase court found a fourth level dispute: What if parties have multiple agreements that conflict over who decides arbitrability? That question requires determining which contract applies, which the Supreme Court said, “must be answered by a court.”[vi]
Coinbase held that allowing the arbitrator to decide contract priority “would impermissibly elevate the delegation clause over other forms of contract. Thus, a court must decide this question[vii].
Applying Coinbase to the fact pattern above would indicate the judge should determine under applicable state law the priority between the arbitration clause and the forum selection clause.
Fourth Circuit and Modern Perfection
In January, 2025, the Fourth Circuit decided Modern Perfection, LLC v. Bank of America, with a different outcome.[viii] In Modern Perfection, the plaintiffs were six small businesses which signed promissory notes and deposit agreements[ix] with Bank of America for PPP[x] loans. The deposit agreements had arbitration clauses. The promissory notes had “choice of law, jurisdiction and venue”[xi] clauses but no arbitration clauses.
The businesses sued Bank of America in federal court alleging breach of contract, fraud, and other state-law claims based on the bank’s marketing and administration of its PPP loan program. The bank moved to dismiss and to compel arbitration under the deposit agreements. The trial court granted both motions, finding there was an arbitration agreement which delegated arbitrability questions to the arbitrator.
No “Fourth Level” Dispute
The trial court’s ruling and the appeal occurred before the Coinbase decision. However, the Fourth Circuit discussed Coinbase in its opinion, finding the case didn’t involve a “fourth level” dispute about who decides the priority between conflicting dispute resolution clauses. Rather the businesses argued they never agreed to arbitrate (second level dispute) and that their claims were outside the deposit agreements’ arbitration clauses (third level dispute) not that the promissory notes’ venue clauses superseded the arbitration clauses.
The Fourth Circuit noted that at oral argument, held after Coinbase, the businesses could not identify how their arguments would change if there were no promissory notes. And they didn’t argue that the promissory notes’ venue provision superseded or narrowed the arbitration clause. So, the Fourth Circuit did not use the Coinbase fourth level dispute analysis in its decision.
Delegation Clause Means Arbitrator Decides Gateway Question
The Modern Perfection case followed established precedent by holding where there is an arbitration clause with a valid and enforceable delegation provision, the arbitrator decides gateway questions regarding arbitrability. “[P]arties can agree to arbitrate gateway questions of arbitrability,” including “whether their agreement [to arbitrate] covers a particular controversy,” citing Rent-A-Center W, Inc. v. Jackson[xii]
Takeaways
- Avoiding conflicting ADR clauses requires careful drafting and coordination when there are multiple agreements. This can be challenging on fast-paced construction projects. Incorporating subcontract arbitration clauses into other agreements may be helpful, but counsel should be cautious to avoid creating other issues.
- Delegation clauses in arbitration agreements should be clear regarding the arbitrator’s authority to decide gateway questions.
- Be aware of Coinbase’s four levels of dispute when analyzing conflicting clauses.
[i] Subcontracts may also be supplemented by payment and performance bonds and parent company guaranties.
[ii] 602 U.S. __ (2024) 23-3 Coinbase, Inc. v. Suski (05/23/2024)
[iii] The delegation clause requires an arbitrator to decide all disputes under the contract, including whether a given disagreement is arbitrable.
[iv] The forum selection clause stated California courts would have sole jurisdiction regarding all controversies related to the sweepstakes.
[v] Coinbase, supra, at pp. 4-9
[vi] Id.
[vii] Coinbase asserted that, as a matter of California state law, the 9th Circuit erroneously held the forum selection clause superseded the arbitration clause. SCOTUS found this was outside the question presented and did not address it. In the district court Coinbase argued the two contracts could be reconciled. The district court held the contracts conflicted and that the later contract superseded the first, so the forum selection clause took priority.
[viii] Fourth Circuit Court of Appeal, No. 23-1965 (January 13, 2025) MODERN PERFECTION, LLC v. Bank of America, NA, Court of Appeals, 4th Circuit 2025 – Google Scholar
[ix] The promissory notes required borrowers to maintain a deposit account at the bank until the loan was paid off.
[x] “Paycheck Protection Program”
[xi] In this clause the borrowers agreed that trial would be held in the state of their principal place of business.
[xii] 561 U.S. 63 (2010).https://supreme.justia.com/cases/federal/us/561/63/
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