Mississippi Supreme Court Rules that Daughter is Not Compelled to Arbitration with her Contracting Parents in Construction Defect Case

The Mississippi Supreme Court ruled that a homeowner’s daughter was not party to, nor an intended beneficiary of a contract with a foundation contractor such that her claims were not subject to arbitration.  The court ruled that she was not compelled to arbitrate and that her claims were ripe for adjudication in Perry County.

On June 10, 2013, Phillip Moore contracted with Olshan for repairs to the foundation
of the home he shared with his wife, Gloria Moore, and his adult daughter, Katelyn Moore.  Three years later, the entire family – Mom, Dad, and Daughter – sued Olshan for economic related damages arising from the foundation.  The lawsuit was segregated in that contract damages were sought by Phillip and Gloria only, while their daughter sought damages in tort for emotional distress.  The parties successfully moved to compel arbitration with the exception of those claims made by Katelyn, as she was not a party to the contract or third-party beneficiary.

Finding that Katelyn Moore was neither a third-party beneficiary to the foundation-repair contract, nor was she bound by direct-benefit estoppel, the Mississippi Supreme Court found that the daughter’s claims were wholly independent of the terms of the contract to which she was not a party. Therefore she was not allowed to enforce an arbitration clause respecting Katelyn Moore’s claims, which were unrelated to the contract.

In a well written dissent, Justice Chamberlin argues that Katelyn’s damages arise from her father entering into the contract with Olsham and should, therefore, be arbitrated with the remainder of the case.

 

Mississippi Arbitration Proceeding and Judicial Estoppel in a similar US District Court Suit

What happens when one party to an arbitration no longer remains solvent, yet a successor entity remains viable, although not a party to an arbitration proceeding?  Mississippi recently decided that a separate action could be brought in US District Court against the non-contracting successor entity which was not barred by judicial estoppel.

Brief Facts

In 2009, RDS contracted with S&S Construction LLC to construct a building in Ocean Springs, Miss. The occupant, RDS, alleged there were problems with the roof leaking.

In 2011, contractor S&S Construction changed its name after being purchased by Abrams Group.  It was a subject of some debate as to whether or not S&S was doing business under the new name or, alternatively, no longer in existence.

ARBITRATION ACTION AGAINST S&S

RDS, as owner of the building, brought suit against S&S Construction as well as the successor, Abrams.   The suit was dismissed in favor of an arbitration clause and Abrams refused to consent, claiming it was not obligated as the contract containing the provision was with S&S Construction.  RDS was successful in the arbitration action against S&S and subsequently awarded over $200,000 which remains to be paid.   S&S has made claims of being insolvent.

DECLARATORY RELIEF

Upon learning of S&S insolvency, RDS initiated a declaratory judgment action against Abrams and S&S seeking authority from the court that S&S and Abrams each be subject to the arbitration provision under successor liability.  Abrams sought to have the action barred under the theory of judicial estoppel, arguing that RDS had already attempted to fight the dispute in arbitration, and was now changing theories and strategy for purposes of maneuvering.

The Court found that RDS could proceed and its behavior was not inconsistent.

“RDS not only has asserted that Abrams and S&S are the same entity, but also has raised alternative arguments for liability based on successor liability, merger, and other theories, which is consistent with its assertions in the 2014 action. In short, it appears that RDS’s position has always been that S&S and Abrams are responsible for its damages. RDS’s decision to pursue S&S only in the previous action and to dismiss Abrams without prejudice in response to Abrams’ argument that it was not a signatory to the arbitration agreement at issue does not preclude it from making the claims it makes here and does not equate to asserting a legal position which is plainly inconsistent with a prior position.”

RDS Real Estate LLC v. Abrams Group Construction LLC, et al., No. 15-cv-361-LG-RHW, S.D. Miss.; 2016 U.S. Dist. LEXIS 125652

Still a Beneficial Tool, Mediation Process Is Not Perfect

     In 2001 I mediated my first case as a young lawyer with just enough knowledge to be dangerous…..to myself most likely.   Over the past 14 years I have observed the process and it’s uncanny ability to resolve the previously unresolvable.  Lately I have noticed the indirect, less tangible benefits.  That said, a review of the past 15 years leaves me with a few criticisms.

Mediation

The legal definition of mediation is as follows:

“A settlement of a dispute or controversy by setting up an independent person between two contending parties in order to aid them in the settlement of their disagreement.”

That independent person, the mediator, is typically a lawyer removed from the parties and case prior to mediation.   He or she wears many hats during the process.   One should be a capable listener who possesses other qualities such as man management, a calm demeanor, and the ability to remain neutral in both mind and exterior actions.   While it is argued that a mediator should not be an advisor, I think the two can coexist if practiced in an artful manner.

Advantage of Mediation Part 1: Cost

This should come as no surprise.   Trials are very expensive in all practice areas.  Within complex construction defect matters, the time preparing witnesses and evidence alone can anhilate a litigation budget before the trial has begun.

These trials take weeks.   Mediation can be concluded in as few as a couple of days.

Advantage of Mediation Part 2: Control

Some people refer to this principal as predictability.  I don’t know if a mediation is always a predictable endeavor, yet I find it leaves less to chance than a resolution which involves 12 strangers who have spent too much time away from life and reality.  Even the most unfavorable mediation outcome requires the parties, rather than strangers, to dictate outcomes.

Advantage of Mediation Part 3:  Venting

Lawyers are guilt of forgetting that there can be value, in the form or personal satisfaction, derived by a client who has the opportunity to air their hurt, anguish etc.  In construction defect matters this can be best illustrated by a homeowner providing specific instances of inconvenience due to the alleged defective construction.

Contractors often feel affirmed as their reputation is put on the line.  Having the ability to tell a crowded room, “Hey, I am a quality professional and human being.  I take these allegations seriously and I feel that I was kept out of the loop when problems were mentioned.”   This helps the insured contractor as he more than likely has not been in any contact with the Plaintiff since initiation of suit.

Ways We Can Improve

Suggestion 1:  Light Judicial Involvement

This might be more idealistic than realistic but medications would be aided with some judicial monitoring.  In South Carolina the court administration is pretty hands off, with the exception of requiring contested civil matters participate in some form of ADR within the first 300 days.  If there were more formal requirements to report back to court post mediation, it might allow an insurance coverage issue to be fast tracked for judicial ruling.  Having a conference call which allowed the Judge or a law clerk to document the issues impeding settlement might allow for these to be addressed sooner, rather than two years later.

Suggestion 2:  Multiple Days

This is self explanatory.   Attempting to settle a large, complex case with multiple defendants is simply too much of an endeavor and typically fails.   Further, I would argue that these one day events are viewed by lawyers as wasted efforts prior to attending mediation and thus less effort is initiated prior to the event.  If, for instance, a two day mediation is scheduled 90 days in the future there should be none of the common impediments such as securing settlement authority after fully evaluating your position and exposure.
Conclusion

Complex construction defect suits are perfectly posture for the mediation process.   Without mediation, these suits would not be resolvable due to the numerous parties and issues.  Trial judges and court administrators would be the equivalent of sheephearders without it as babysitting the parties, jury, lawyers etc would be rendered impossible.   All that said, the process can be improved and tweaked in slight ways which would only make mediation a more satisfying and successful means of resolving disputes.

South Carolina Jury Awards Monster Construction Defect Verdict

A Charleston County jury awarded condominium owners a $7.7 million dollar verdict this month which many believe to be the largest construction defect verdict in state history.  The verdict was rendered against a subcontractor that was not able to settle its portion of the suit prior to trial through alternative dispute resolution.  Amazingly, the jury award came on top of $8.0 million already received via settlement proceeds from other Defendants.  The jury was informed prior to reaching its decision so, in actuality, the 12 citizens on the panel concluded that the Plaintiff class of unit owners was entitled to $15,700,000.

Because all construction defect suits have different facts and circumstances which make them unique, it is hard to draw any hard conclusions from this result other than the fact that a jury will award a verdict of severe magnitude under some circumstances. 

Article link:  http://www.postandcourier.com/news/2011/may/21/condo-owners-awarded-77m/

DUTY TO DEFEND A POLICYHOLDER DURING STATUTORY PRE-LITIGATION FORMALITIES: WILL CLARENDON OPINION AFFECT SOUTH CAROLINA CONTRACTORS AND DEFECT LITIGATION?

Clarendon America Insurance Co. v. Star Net Insurance Co. (2010) 186 Cal. App. 4th 1397.

Similar to the Notice and Opportunity to Cure Act in South Carolina, (which provides a 90 day “cooling off’ period for the homeowner to serve written notice on the contractor before filing any action in court) California’s Calderon Act requires community associations (of projects greater than 20 units) to give notice to a builder, developer, or general contractor notice prior to filing suit. Calderon sets forth a litany of pre-litigation steps aimed toward settlement. (See Civil Code section 1375 subd. (a) – (s).) Per the language of the act, litigation might only initiated once these steps to avoid litigation have been deemed compliant.

In the Clarendon America case (“CAI v. StarNet”), Centex homes developed a residential development covered by Calderon. As Calderon requires, the homeowners association served a notice of commencement of legal proceedings prior to filing suit against Centex. There are no inferences or allegations which insinuate that the act was not complied with.

Centex enjoyed additional insured status on a Star Net Insurance Company. As is typical, the policy’s defense agreement stated that StarNet had the “duty to defend the insured against any ‘suit’ seeking [ ] damages.” The term “suit” was further defined as “a civil proceeding in which damages . . . to which this insurance applies are alleged.” Centex sued carrier Clarendon, which cross-complained against Star Net, seeking a declaration that Star Net was obligated to defend Centex.

Star Net moved for summary judgment on the grounds that the Calderon process did not constitute a “suit” within the meaning of its CGL policies. The trial court rejected that argument and held that the Calderon pre-litigation proceedings fall within the meaning of suit.

The Court found that any civil proceeding qualified as a suit, and coverage was found. StarNet was forced to indemnify Centex under the insuring agreement even prior to a suit being filed.

This decision is applicable to South Carolina due to our Opportunity to Cure Act for all the reasons stated in this opinion. Although not always followed, the Opportunity to Cure Act is a requirement in South Carolina and it is typically a pre-text to litigation. The real question becomes whether or not insurers in this state will seek to limit the duty to defend with explicit policy language, although I would be surprised as the Act is a public policy related

Motion to Compel Arbitration Denied as Subject Matter Outside Scope of Arbitration Clause (South Carolina Court of Appeals, April 20, 2010)

In this week’s selection from the South Carolina Construction Defect Law Blog, attorney Clay Olson examines a recent South Carolina decision which, at first glance, seeks to limit the scope of arbitration provisions.  After further review, however, the case simply states what arbitration clauses are enforceable as to issues contemplated within the arbitration clause. 

This week the South Carolina Court of Appeals issued and opinion which appears to further limit arbitration clauses and their enforceability.  In Faltaous v. Anderson Ocean Club Development, a circuit court order denied Anderson Ocean Club’s (“Developer”) motion to compel arbitration, causing some speculation as to the future of arbitration in South Carolina.  While Arbitration is still considered to be a favorable means of resolving disputes, the Faltaous decision further suggests that South Carolina refuses to uphold any and all arbitration clauses.

In a decision that certainly has implications on the construction industry, the Anderson Ocean Club clause at issue stated, as follows:

ARBITRATION AGREEMENT: Any and all claims, disputes, demands, actions and causes of action of every nature and kind which arise out of or are in any manner whatsoever related to the development, design, construction, condition, merchantability, habitability, fitness for a particular purpose or any other implied or express warranty for the common elements of or the individual units at the [condominium] that are asserted against Seller, the architect or contractor for the Project, and their respective agents, employees, owners, officers, subcontractors, consultants, successors or assigns by any entity formed to serve as the Regime’s Homeowners’ Association or by any person or entity which now has or hereafter acquires any interest in a unit at the [condominium] shall be subject to and resolved by final and binding arbitration conducted in Horry County, South Carolina pursuant to the terms of the South Carolina Arbitration Act found at South Carolina Code Section 15-48-10, et. Seq. (Emphasis Added)

In my analysis, the arbitration provision appears to be one which seeks to compel arbitration of construction defect claims by future owners and the Owners Association.  The Court in http://www.sccourts.org/opinions/displayOpinion.cfm?caseNo=4679  focused on the factual allegations contained in the Plaintiff’s lawsuit, which sought to recover an earnest money deposit under causes of action including negligent misrepresenation, the Interstate Land Sales Full Disclosure Act, and the South Carolina Unfair Trade Practices Act.  According to the allegations made by the Plaintiff, the Developer failed to disclose that parking for the condominium building was not onsite but, rather, located two streets behind the condominium.   Based on the alleged misrepresentations, the Plaintiff sought a refund of earnest money deposits which were made subject to a preconstruction deposit and reservation agreement.   

While the Court’s decision is succinct and not overly detailed, it implies that arbitration may only be used to decide those disputes which are contemplated in the arbitration clause.  Since the clause at issue references construction disputes (“development, design, construction, condition, merchantability, habitability, fitness for a particular purpose”), the Plaintiff’s breach of contract claims are not subject to arbitration.

The lesson to be learned for contractors and developers is clear:  Be careful to draft clauses which are broad enough to cover issues of concern.  It is pretty certain that this clause would have been upheld in a construction defect suit, as the clause is clear as to claims made for design and construction issues.  One will never know if the developer in this matter did not foresee potential contract actions, or the attorneys representing the developer failed to recognize potential issues.  In any event, South Carolina has certainly made it clear that arbitration clauses are not enforceable per se, and the disputes arbitrated must be contemplated by those parties to the contract and subject arbitration clause.