Delaware Superior Court Addresses Competing Arbitration Clauses

On November 9, 2018, Judge Carpenter of the Delaware Superior Court issued the Court’s opinion denying Toll Brothers, Inc.’s motion to dismiss homeowners Frederick and Connie Wang’s complaint, thus allowing all six counts of the Wang’s claims against their builder to move forward.

As some background, the Wangs filed suit against Toll Brothers in March of 2015, alleging that their home had suffered significant water intrusion related damage as a result of Toll Brothers’ failure to properly install the windows and stucco exterior during construction.  Toll Brothers filed a motion to dismiss on the grounds that the contract of sale, drafted by Toll Brothers, contained a binding arbitration clause which governed any disputes between the Wangs and Toll Brothers.  Attorneys for the Wangs, Blake Bennett and Christopher Lee of Cooch and Taylor, P.A., argued that the motion should be denied because an arbitration clause found in the later executed warranty agreement controlled, and that arbitration clause explicity stated that the Wangs had the right to “pursue remedies other than conciliation and binding arbitration.”  Alternatively, Mr. Bennett and Mr. Lee argued that the arbitration provision in the contract was unconscionable, which is an issue of fact for a jury.

During a hearing on that motion to dismiss in August of 2015, Judge Carpenter declined to dismiss the complaint but rather stayed the cased pending the outcome of court-ordered arbitration.  At no time did the Court opine that such arbitration would be binding arbitration.  The Court later wrote that it ordered the arbitration because it recognized “that expensive continual litigation would not be helpful to getting Plaintiffs’ house fixed nor in the best interest of Toll Brothers, who had an excellent reputation in the building community.”

The parties moved forward with arbitration in May of 2017, and although the arbitrator ruled in the Wangs’ favor, the Wangs were dissatisfied with the damages awarded and decided to continue to litigate the matter in the Superior Court.  Shortly thereafter, Toll Brothers filed another motion to dismiss on the grounds that binding arbitration had occurred.  The Wangs opposed that motion on the grounds, once again, that the arbitration was not binding arbitration as the arbitration provision in the warranty controlled.  Toll Brothers concurrently filed a complaint to affirm the arbitration award in Chancery Court.

After oral argument before Judge Carpenter, the Court issued its opinion that a) it did not order the parties to binding arbitration in August of 2015, and b) that the arbitration clause in the warranty superseded the arbitration clause in the contract because, consistent with the Delaware Court of Chancery’s decision in Country Life Homes, Inc. v. Shaffer, the warranty was executed at a later date than the contract.  As the Court noted, “when a later-in-time contract addressed the same issues (here, the means of dispute resolution and the rights to be asserted), it will prevail in the absence of evidence to the contrary.”

In its opinion, the Court stated the following regarding its ruling after the August of 2015 oral argument:

The Court was clear that it was hesitant to enforce the contractual arbitration provision as there was a conflict between the Contract and Warranty arbitration clauses.  This hesitation makes it more than obvious that the Court’s suggestion that the parties first go to arbitration – clearly meant non-binding arbitration.  In hindsight, this good faith effort by the Court to hopefully get the parties to come to a reasonable, common sense resolution of this dispute merely provided the parties more grounds to advance legal arguments instead of addressing the real issues of this litigation.  This is clearly unfortunate, as is so often the case, the parties are now only making litigation decisions and not good business ones.

As a result of the Court’s ruling, it retained jurisdiction over all counts of the complaint and the arbitration award will not be entered as a judgment in any court nor may it “be cited as evidence or precedent, with any preclusive effect, in any court, arbitration, or other proceeding.”

The Court’s ruling is likely to be heavily relied upon in Delaware residential construction litigation matters as there are often competing and contradictory arbitration provisions in the contracts and warranty agreements executed by the parties.

Chris Lee

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