RICHMOND, Va. (Legal Newsline) -- The U.S. Court of Appeals for the Fourth Circuit has remanded an arbitration clause case back to the district court after receiving the state Supreme Court's response to a certified question.
The question regarded the mutual consideration of arbitration clauses in contracts. The unpublished opinion was issued per curiam after being heard by the three-judge panel of Barbara Milano Keenan, Henry F. Floyd and Norman K. Moon.
The case, styled Dan Ryan Builders, Inc. v. Nelson, concerns the purchase of a home by Norman and Angelia Nelson from Dan Ryan Builders in May 2008. As part of the purchase, the Nelsons signed a contract that contained an arbitration clause.
In May 2010, the Nelsons filed a lawsuit against DRB in the Circuit Court of Berkeley County, alleging design and construction issues that 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 state 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?"
In the answer, the state's high court recognized that litigants, such as the plaintiffs in this case, often challenge arbitration clauses that appear not to impose equal duties to arbitrate on each of the parties.
Arbitration clauses are challenged on the grounds that they "lack consideration" or "lack mutuality of obligation."
"In its answer to our certified question," the opinion states, "the West Virginia court further explained, however, that mutuality of obligation or a lack thereof properly may be considered when a court assesses whether a contract or term therein is unconscionable under West Virginia law.
"The West Virginia court was careful to emphasize that any such review concerning unconscionability requires an inquiry that is case-specific, and cannot be conducted in a manner targeting arbitration provisions for disfavored treatment.
"Nevertheless, under West Virginia's unconscionability doctrine, a 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.
"In the present case, the parties disputed whether the arbitration clause in this case was unconscionable under West Virginia law. The district court did not rule on that issue.
"Because the issue of unconscionability is a fact-specific determination, we conclude that this issue is appropriately decided in the first instance by the district court.
"Accordingly, we vacate the judgment of the district court, and remand for further proceedings consistent with this opinion and the opinion of the West Virginia court."