Be Careful with Arbitration Clauses in Construction Contracts

The Fairfax County Circuit Court has done it again. In Comer, et. al v. Goudie, et. al., CL 2008-2110 (December 11, 2008), the Fairfax Court considered the following:

The Plaintiffs in the three suits decided by the Court entered into contracts with Timberline Design and Build, Inc. (“Timberline”) for the construction of their homes. The contract contained a standard arbitration clause that required AAA arbitration of claims “relating to” the contract.

The Defendants, the Goudies, were the principals of Timberline and Mr. Goudie signed the contracts on behalf of Timberline in his capacity as an officer of the company. Timberline was the only party to the contract with the homeowners. After receiving substantial payments, and after partial completion of the homes, Timberline filed for bankruptcy and abandoned construction.

The Plaintiffs brought claims, in three separate suits, against the Goudies individually under various theories. Timberline was not a defendant in the suits. The Goudies sought to dismiss the suit and compel arbitration because the claims related to the contract, even if the Goudies weren’t parties to that contract.

Based on these facts, the Fairfax Court dismissed the suit because the claim “related to” the contract. Citing a 4th Circuit case, Am. Bankers Ins. Group v. Long, 453 F.3d 623 (2006), the Court reasoned that but for the contract, Timberline would not have any obligation to the Plaintiffs, and by extension, none of the causes of action asserted by the Plaintiffs against the Goudies would exist. The Court further reasoned that if the Plaintiffs signed a contract, they are stuck with its terms and the full consequences of those terms.

The lesson in all of this? Carefully read your contracts. This case illustrates the extent to which the Virginia courts will literally interpret a written contract. Even in an instance like this one where the suit is against a non-party to a contract, if the arbitration clause in your contract mandates arbitration in cases “relating to” the contract, and your claim arises out of the transaction embodied by the contract, you will be required to arbitrate.

From a contract perspective, this means that if you want arbitration to be your forum of choice, make the language as broad as possible. Choice of forum (i. e. arbitration, mediation, local court, etc.) is a big deal in contracts, make sure that you choose wisely because the Virginia courts will hold you to that choice.

The best way to avoid these types of issues is to get good, solid advice from an experienced attorney when drafting or entering into a major construction contract such as those involved in the case described above.

I will keep up with the progress of any appeal of this case, and update this post should anything change. If you want to keep up with this, or any other topic, without the need for an RSS reader, please subscribe by e-mail using the form to the right.

As always, your comments and thoughts are welcome and encouraged.

UPDATE: The 4th Circuit has just weighed in on waiver of arbitration by a builder (Forrester v. Penn Lyon Homes, et. al., No. 07-2171), I should have more on this later.