Dan Ryan Builders, Inc. v. Nelson

• Decision Date: 15 November 2012
• Docket Number: No. 12–0592.,12–0592.
• Citation: 737 S.E.2d 550,230 W.Va. 281
• Court: West Virginia Supreme Court
• Parties: DAN RYAN BUILDERS, INCORPORATED, Petitioner v. Norman C. NELSON and Angelia Nelson, Respondents.

230 W.Va. 281

737 S.E.2d 550

DAN RYAN BUILDERS, INCORPORATED, Petitioner

v.Norman C. NELSON and Angelia Nelson, Respondents.

No. 12–0592.

Supreme Court of Appeals of West Virginia.

Submitted Oct. 17, 2012.

Decided Nov. 15, 2012.

Syllabus by the Court

1. “Under the Federal Arbitration Act, 9 U.S.C. § 2, a written provision to settle by arbitration a controversy arising out of a contract that evidences a transaction affecting interstate commerce is valid, irrevocable, and enforceable, unless the provision is found to be invalid, revocable or unenforceable upon a ground that exists at law or in equity for the revocation of any contract.” Syllabus Point 6, Brown v. Genesis Healthcare Corp., 228 W.Va. 646, 724 S.E.2d 250 (2011).

2. “The purpose of the Federal Arbitration Act, 9 U.S.C. § 2, is for courts to treat arbitration agreements like any other contract. The Act does not favor or elevate arbitration agreements to a level of importance above all other contracts; it simply ensures that private agreements to arbitrate are enforced according to their terms.” Syllabus Point 7, Brown v. Genesis Healthcare Corp., 228 W.Va. 646, 724 S.E.2d 250 (2011).

3. “The fundamentals of a legal contract are competent parties, legal subject matter, valuable consideration and mutual assent. There can be no contract if there is one of these essential elements upon which the minds of the parties are not in agreement.” Syllabus Point 5, Virginian Export Coal Co. v. Rowland Land Co., 100 W.Va. 559, 131 S.E. 253 (1926).

4. “A promise or contract where there is no valuable consideration, and where there is no benefit moving to the promisor or damage or injury to the promisee, is void.” Syllabus Point 2, Sturm v. Parish, 1 W.Va. 125 (1865).

5. “A valuable consideration may consist either in some right, interest, profit or benefit accruing to the one party or some forbearance, detriment, loss or responsibility given, suffered, or undertaken by the other.” Syllabus Point 1, Tabler v. Hoult, 110 W.Va. 542, 158 S.E. 782 (1931).

6. The formation of a contract with multiple clauses only requires consideration for the entire contract, and not for each individual clause. So long as the overall contract is supported by sufficient consideration, there is no requirement of consideration for each promise within the contract, or of “mutuality of obligation,” in order for a contract to be formed.

7. “The doctrine of unconscionability means that, because of an overall and gross imbalance, one-sidedness or lop-sidedness in a contract, a court may be justified in refusing to enforce the contract as written. The concept of unconscionability must be applied in a flexible manner, taking into consideration all of the facts and circumstances of a particular case.” Syllabus Point 12, Brown v. Genesis Healthcare Corp., 228 W.Va. 646, 724 S.E.2d 250 (2011).

8. “Substantive unconscionability involves unfairness in the contract itself and whether a contract term is one-sided and will have an overly harsh effect on the disadvantaged party. The factors to be weighed in assessing substantive unconscionability vary with the content of the agreement. Generally, courts should consider the commercial reasonableness of the contract terms, the purpose and effect of the terms, the allocation of the risks between the parties, and public policy concerns.” Syllabus Point 19, Brown v. Genesis Healthcare Corp., 228 W.Va. 646, 724 S.E.2d 250 (2011).

9. A court in its equity powers is charged with the discretion to determine, on a case-by-case basis, whether a contract provision is so harsh and overly unfair that it should not be enforced under the doctrine of unconscionability.

10. In assessing whether a contract provision is substantively unconscionable, a court may consider whether the provision lacks mutuality of obligation. If a provision creates a disparity in the rights of the contracting parties such that it is one-sided and unreasonably favorable to one party, then a court may find the provision is substantively unconscionable.

Susan R. Snowden, Esq., Martin & Seibert, L.C., Martinsburg, WV, for Petitioner.

Lawrence M. Schultz, Esq., Burke, Schultz, Harman & Jenkinson, Martinsburg, WV, for Respondents.

KETCHUM, Chief Justice:

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. The question from the Court of Appeals arises from a contract that contained an arbitration provision which required one party to the contract to arbitrate all of their claims, but allowed the other party to file a lawsuit for some of its claims. A federal district court previously determined that the arbitration provision was not enforceable because it lacked “mutuality of obligation” and “mutuality of consideration.”

The Court of Appeals asks:

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?

Dan Ryan Builders, Inc. v. Nelson, 682 F.3d 327 (4th Cir.2012). 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.

I.Factual and Procedural Background

Dan Ryan Builders, Inc. (“DRB”), constructed a new home in Berkeley County, West Virginia. In May 2008, Norman Nelson signed a 56–page contract with DRB for the sale and purchase of that home for $385,000.00. The contract contained an arbitration clause which states, in part, that:

Any dispute arising under or pursuant to this Agreement, or in any way related to the Property and/or with respect to any claims arising by virtue of any representations alleged to have been made by [Dan Ryan Builders] ... shall be settled and finally determined by arbitration and not in a court of law ... The parties hereto specifically acknowledge that they are and shall be bound by arbitration and are barred from initiating any proceeding or action whatsoever in connection with this Agreement.¹

In the same arbitration provision, however, DRB reserved the right to seek arbitration or to file an action for damages, if Mr. Nelson “default[ed] by failing to settle on the Property within the time required under [the] Agreement.”

Mr. Nelson alleges that, after he completed the purchase of the house, he found numerous, substantial defects in the house's construction. In May 2010, Mr. Nelson and his wife Angelia filed a lawsuit against DRB in the Circuit Court of Berkeley County. The lawsuit seeks damages from DRB for allegedly concealing its knowledge of an illegal septic system, of previous basement flooding, and of substandard concrete. It also alleges that DRB negligently designed and constructed the septic system, which resulted in property damages and bodily injury. DRB answered the Nelson's complaint.²

DRB subsequently filed a petition in the United States District Court for the NorthernDistrict of West Virginia, pursuant to the Federal Arbitration Act (“the FAA”),³ seeking to compel Mr. and Mrs. Nelson ⁴ to submit their claims to arbitration. The district court stayed litigation of the Berkeley County lawsuit until DRB's petition could be resolved.

In response to DRB's petition, the Nelsons argued to the district court that the arbitration provision (which allowed DRB to pursue some claims in court while requiring the Nelsons to arbitrate all of their claims) was unenforceable because it lacked consideration, and because it was unconscionable. The district court declined to rule on the whether the clause was conscionable, but dismissed DRB's petition to compel arbitration because the arbitration provision lacked mutuality of consideration. The district court's order stated:

[T]his Court finds that the arbitration clause in the Agreement of Sale used by DRB in its transaction with the [Nelsons] ... fails for want of mutual consideration. The arbitration clause begins with an appearance of mutuality ... As the clause continues, however, the reader finds that any hope of mutuality can only be described as fleeting.... Therefore, ... the instant arbitration clause must fail for want of mutual consideration.

Dan Ryan Builders, Inc. v. Nelson, 2010 WL 5418939, *6 (N.D.W.Va.2010).

DRB appealed the district court's order to the United States Court of Appeals for 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. On May 10, 2012, the Court of Appeals noted various West Virginia cases on the law of contracts—particularly cases discussing consideration, mutuality and unconscionability in the context of arbitration—and concluded that our law was unclear on the issues raised by DRB's appeal. Accordingly, the Court of Appeals certified its question to this Court.

II.Standard of Review

We review the question from the Court of Appeals de novo. See, Syllabus Point 1, Light v. Allstate Ins. Co., 203 W.Va. 27, 506 S.E.2d 64 (1998) (“A de novo standard is applied by this Court in addressing the legal issues presented by a certified question from a federal district or appellate court.”); Syllabus Point 1, Bower v. Westinghouse Elec. Corp., 206 W.Va. 133, 522 S.E.2d 424 (1999) (“This Court undertakes plenary review of legal issues presented by certified question from a federal district or appellate court.”).

III.Analysis

Because the parties'...