Enforceable arbitration clause in construction contract

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Where the parties’ construction contract unambiguously provided that the American Arbitration Association’s rules applied in the event of a dispute, the trial court erred by deciding which of appellants’ claims were subject to arbitration. The AAA rules provide that the arbitrator determines arbitrability.

Arbitration rules

“Because the contract contains an enforceable arbitration clause that covers both the arbitrability question and the Cummingses’ substantive claims, the trial court erred in denying Canaan Homes’ motion for arbitration. …

“When an ‘arbitration clause includes expansive language and incorporates a specific set of rules requiring that the arbitrator determine arbitrability,’ it constitutes ‘clear and unmistakable’ evidence that the parties intended for the arbitrator to determine arbitrability.”

In this case, “the arbitration clause is broad and expansive. It covers ‘all claims, controversies, disputes, and other matters in question between [the parties] arising out of or relation [sic] to this Agreement … or breach hereof or to any alleged defects relation [sic] to the condition.’

“And it provides that any such dispute will be decided by arbitration ‘in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association … at [Canaan Homes’] option.’ …

“[T]he only arbitration rules available to the parties are the Construction Industry Arbitration Rules of the American Arbitration Association (the ‘AAA Rules’).”

Arbitrator decides

“Under the AAA Rules, ‘[t]he arbitrator shall have the power to rule on his or her own jurisdiction’ and to ‘determine the existence or validity of a contract of which an arbitration clause forms a part.’ … The broad reference to the AAA Rules in the arbitration clause thus evidences a ‘clear and unmistakable’ intent by the parties to have the arbitrator determine arbitrability. …

“In denying Canaan Homes’ motion for arbitration, the trial court found that the arbitration clause does not incorporate the AAA Rules, but ‘simply refers to them as the manner of proceeding or the rules of procedure once the case gets to arbitration.’ We disagree.

“In the absence of Virginia precedent directly on point, we turn to federal case law for instructions. Federal courts have generally considered rules incorporated when an arbitration clause requires dispute resolution to follow those rules. …

Although the Cummingses correctly point out that none of this case law is binding upon this Court, they fail to cite any case law to the contrary — that is, case law that draws a distinction between incorporating certain arbitration rules and ‘simply refer[ing] to them as the manner of proceeding or the rules of procedure once the case gets to arbitration.’

“And they do not cite any cases suggesting that the word ‘incorporate’ is required for an arbitration clause to incorporate a set of arbitration rules. Thus, reviewing de novo, we find the language of the arbitration clause sufficient to incorporate the AAA Rules.

No ambiguity

“The trial court found that the second sentence in Clause I, ‘The demand for arbitration shall be filed in writing and shall be made within a reasonable time after the claim, controversy, dispute or other matter in question would be barred by the applicable statute of limitations,’ was ambiguous and renders the arbitration clause unenforceable. We disagree.

“While poorly drafted, the sentence is not ambiguous when interpreted within context. …

“The trial court found that to enforce the provision, it would have to rewrite it[.] … But the trial court need not, and should not, rewrite the provision here.

“The provision has two literal meanings—first, that the arbitration demand must be made within a reasonable time but after the statute of limitations expires, or second, that the arbitration demand must be made before the end of a reasonable time if made after the statute of limitations expires.

“The first interpretation is unreasonable, as it would render meaningless the provision, ‘In the event that certain issues do not get resolved by arbitration, both parties waive their right to a jury trial.’

“If a claim could not be arbitrated until its statute of limitations expires, then the parties would no longer have an opportunity to litigate any issues left unresolved by arbitration, whether with a jury or not.

“In fact, even the Cummingses argue that it would be ‘unconscionable’ to require ‘the parties to wait five years before starting the arbitration process.’

“The second interpretation—that the language simply extends the statute of limitations for arbitration purposes for a reasonable time—is the only reasonable interpretation. Thus, the provision is unambiguous and enforceable. …

“We reverse and remand for the trial court to compel arbitration and stay further proceedings.”

Canaan Homes, et al. v. Cummins, et al., Record No. 1047-22-4, Aug. 29, 2023. CAV (unpublished opinion) (Ortiz) From the Circuit Court of Prince William County. (Hudson) Sean Patrick Roche for appellants. Matthew A. Crist for appellees. VLW 023-7-338, 8 pp.