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Schumacher Homes of Circleville, Inc. v. Spencer

Schumacher Homes of Circleville, Inc. v. Spencer

Case No. 
14-0441
Type of Proceeding: 
Appeal from the Circuit Court of Mason County (Judge Nibert)
Issues: 

The most significant issue is:  Did the Circuit Court err by ruling on questions of arbitrability despite the existence of a delegation cause in the parties’ arbitration agreement?

Background: 

Respondents, John and Carolyn Spencer, entered into a contract with Petitioner, Schumacher Homes, for the construction of their personal residence.  The contract contained a choice-of-law provision and an arbitration clause that required all disputes between the parties be decided by private arbitration, rather civil lawsuits, with the except of disputes relating to the enforcement of any mechanics lien asserted by Schumacher.  The arbitration clause further provided that the “arbitrator shall decide all issues deciding the arbitrability of the dispute.”  This is known as a “delegation” clause.

Respondents sued for defects in the construction of the home.  Petitioner moved to dismiss, citing the arbitration clause in the construction contract.  The trial court concluded that the arbitration clause was unconscionable based, in part, on the language exempting certain kinds of disputes from the scope of the clause.  The trial court did not, however, specifically address the delegation clause.

Positions of the Parties: 

Petitioner (Schumacher):

Petitioner argues that the validity of the arbitration provision must be decided by the arbitrator in accordance with the language included in the arbitration clause and consistent with controlling federal law.  Petitioner further argues that, to the extent that state law is relevant, the court erred by applying West Virginia law rather than Ohio law as provided for in a choice-of-law provision.  However, the parties seem to agree that West Virginia and Ohio law are similar with respect to challenges based on the doctrine of unconscionability.  Petitioner further claims error based on the trial court’s reliance on two West Virginia statutes that provide for a more flexible and less exacting evidentiary standard to establish an unconscionability defense.

Respondents (John and Carolyn Spencer):

Respondents fail to specifically address several of the assignments of error in their brief.  They do, however, cite State of West Virginia, ex rel. Richmond American Homes of West Virginia, Inc., vs. Sanders, No. 11–0770.  In Richmond American, the Court acknowledged the so-called “severability” doctrine established by the United States Supreme Court and held:

“We conclude that under the FAA and the doctrine of severability, only if a party to a contract explicitly challenges the enforceability of an arbitration clause within the contract, as opposed to generally challenging the contract as a whole, is a trial court permitted to consider the challenge to the arbitration clause.  However, the trial court may rely on general principles of state contract law in determining the enforceability of the arbitration clause. If necessary, the trial court may consider the context of the arbitration clause within the four corners of the contract, or consider any extrinsic evidence detailing the formation and use of the contract.

“Accordingly, the circuit court was correct, in interpreting the arbitration provision, to consider the Purchase Agreement as a whole, and was within its authority under the FAA to rely upon contract language and circumstances outside of the arbitration provision in its unconscionability analysis.”

The most intriguing question here is whether the Supreme Court will extend the holding in Richmond American, allowing the trial court to consider challenges to the delegation clause based on language and circumstances outside of the delegation clause itself.  Here, Respondents primarily base their argument on language outside of the delegation clause  indicating a lack of mutuality of obligation to arbitrate between the parties.  However, for the Supreme Court to consider this argument, it will have to address the delegation clause and determine whether it is valid.

Probable Impact: 

The Supreme Court has remained faithful to its holding in Richmond American, which some would consider controversial.  Whether the Court will extend this rule to apply to the delegation clause remains to be seen.  Nevertheless, the Respondents’ failure to respond directly to several of the assignments of error could potentially spell doom to their cause.  Assignment of the case to the Rule 20 docket signals the Supreme Court is prepared to weigh in on the issue.

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