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Contract – Construction Defects – Breach of Warranty – Arbitration Agreement

Plaintiffs purchased a student apartment complex built and owned by defendants but subsequently discovered purported design and construction defects that resulted in millions of dollars in repairs and lost rent. Defendants sought to compel plaintiffs to arbitrate their breach of warranty claims. Plaintiffs were subject to arbitration clauses when they sought to obtain benefits from contracts containing those clauses by enforcing warranties that work would be performed in accordance with those contracts.

We grant defendants’ motion to the extent it sought to stay plaintiffs’ claims pending arbitration.

Plaintiffs sued the original owner, architect, general contractor, and two subcontractors for a student apartment complex, alleging that numerous, serious defects in the complex’s design and construction caused millions of dollars in repair and lost rent. Two defendants moved to dismiss, or alternatively to stay, plaintiffs’ claims against them, arguing that those claims had to be resolved in arbitration.

Plaintiffs asserted breach of warranty claims against defendants, attributing the complex’s defects to defendants’ faulty workmanship, failure to comply with plans and specifications, and deficient engineering services. Plaintiffs further allege that defendants were aware of certain problems before the complex was sold to plaintiffs and conspired to conceal those problems.

In support of their motion, defendants relied upon the arbitration clause found in the construction and engineering contracts with the original owner of the complex. In opposition to defendants’ motion, plaintiffs argued none of these contracts were assigned to them as part of their purchase of the complex and that their claims were not attempting to enforce any contract terms.

We first rule that the issue of arbitrability was one for the court to decide. Although defendants argued that the contracts’ arbitration clauses incorporated the AAA’s Construction Rules, which delegated the issue of arbitrability to the arbitration, we find no evidence that plaintiffs shared defendants’ intent to arbitrate the issue of arbitrability. Accordingly, we must rule on the issue of whether plaintiffs are bound by the arbitration clauses and what claims are subject to arbitration.

We note that several doctrines permit enforcement of an arbitration agreement against a non-signatory. We rule that the doctrine of estoppel permitted the arbitration clauses in the contracts at issue to be enforced against plaintiffs. We hold that a non-signatory, such as plaintiffs, is estopped from denying an arbitration clause when it receives a direct benefit from a contract containing an arbitration clause. We reject plaintiffs’ argument that they received no benefit from the contracts, since their claims arise from the contractor warranty agreement that explicitly state defendants performed all work in accordance with the contracts containing the arbitration clauses.

Finally, we hold that all of plaintiffs’ claims were subject to arbitration, including their conspiracy claim, as the claim clearly related to defendants’ duties under the construction and engineering contracts as the claim alleged defendants’ concealment of their failure to comply with those duties.

                                                                                 

Motion to stay pending arbitration granted.

Charlotte Student Hous. DST v. Choate Constr. Co. (Lawyers Weekly No. 020-067-18, 16 pp.) (Adam Conrad, J.) 2018 NCBC 88

 

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