SC answers question for Fourth Circuit in arbitration dispute

CHARLESTON – “The United States Court of Appeals for the Fourth Circuit has certified a question to this Court that concerns two areas of state law: the law of contract formation, and the doctrine of unconscionability,” begins a Nov. 15 opinion authored by state Supreme Court Chief Justice Menis Ketchum.

Norman and Angelia Nelson purchased a home from Dan Ryan Builders in May 2008, signing a contract that contained an arbitration clause.

The clause demanded arbitration in the event of any “dispute arising under or pursuant to this Agreement” that might be raised by the Nelsons. However, “DRB reserved the right to seek arbitration or to file an action for damages, if the Nelsons ‘default[ed] by failing to settle on the Property within the time required under [the] Agreement.’”

In May 2010, the Nelsons filed a lawsuit against DRB in the Circuit Court of Berkeley County, alleging design and construction issues which resulted in property damages and bodily injury.

DRB then filed a petition in the United States District Court for the Northern District of West Virginia seeking to compel the Nelsons to arbitrate their claims pursuant to the Federal Arbitration Act.

The Nelsons argued that the arbitration provision was unenforceable for two reasons – it lacked consideration and it was unconscionable. The district court did not rule on unconscionability but dismissed DRB’s petition to compel arbitration “because the arbitration provision lacked mutuality of consideration.”

Dan Ryan Builders then appealed to the Fourth Circuit, “arguing that the arbitration provision did not require separate consideration or mutual obligations. DRB argued that the provision was enforceable because there was otherwise sufficient consideration to support the entire contract.”

The Fourth Circuit, after determining that West Virginia law was unclear on the point, then certified this question to the West Virginia Supreme Court:

“Does West Virginia law require that an arbitration provision, which appears as a single clause in a multi-clause contract, itself be supported by mutual consideration when the contract as a whole is supported by adequate consideration?”

Ketchum wrote the Court’s answer: “We conclude that West Virginia’s law of contract formation only requires that a contract as a whole be supported by adequate consideration. Hence, a single clause within a multi-clause contract does not require separate consideration. However, we further conclude that under the doctrine of unconscionability, a trial court may decline to enforce a contract clause – such as an arbitration provision – if the obligations or rights created by the clause unfairly lack mutuality.”

The Fourth Circuit will now continue proceedings on the case in the light of the clarification offered by the state court.