Often in construction litigation the parties wish to move the case to arbitration. However, there are certain circumstances in which such change of litigation forums should be carefully analyzed. The case of White River Village, LLP v. Fidelity and Deposit Company of Maryland, serves as an example of one of those circumstances.
In March 2013, U.S. District Court Judge Blackburn ruled on a motion for summary judgment filed by Fidelity and Deposit Company of Maryland (“F&D”). The order grants the motion in part and denies it in part. White River Village, LLP (“White River”) was the owner of the project which hired S&S Joint Venture (“S&S”), the contractor, to build two similar developments, directly adjacent to each other. The contracts between Whiter River and S&S for the two projects were so substantially similar that the court referred to them as the S&S Contracts. F&D issued payment and performance bonds guarantying the obligations of S&S under the S&S Contracts.
After S&S defaulted on the construction contracts, F&D, as the surety, undertook to complete performance on the contracts. White River alleged that F&D was liable for construction defects and delays in completing the project, and failed to fulfill its obligations under the performance bonds after it overtook the construction of the projects. Specifically, White River asserted claims for (1) breach of performance bonds; (2) bad faith breach of insurance/surety contract; (3) civil conspiracy; (4) negligence (against a different company); (5) breach of express warranty; (6) breach of payment bonds; (7) slander of title; and (8) deceit.
Initially, the case was brought in the U.S. District Court for the District of Colorado, but Judge Blackburn ordered the parties to arbitrate certain aspects of the case according to an arbitration provision in the S&S Contracts. However, the bonds did not contain an agreement to arbitrate and, thus, White River’s claims based on those remained in district court and were stayed until conclusion of the arbitration. Thus, F&D’s counterclaims went to arbitration and were fully litigated before White River was able to litigate its claims in the district court.
F&D was successful in proving its counterclaims and third-party claims against White River in the arbitration. White River was also allowed to assert various affirmative defenses in the arbitration, though it was not successful on any of them. Accordingly, F&D filed the motion for summary judgment arguing that White River’s claims already were resolved in the arbitration. F&D relied on the doctrines of issue preclusion and claim preclusion. On the other hand, White River argued that its claims related to the bonds were stayed, not resolved, and reserved for litigation in federal court.
The first issue, breach of performance bonds, included a determination of what the arbitration panel decided and what was excluded from the panel’s consideration. The exclusions are important as they continue through Judge Blackburn’s order. The first exclusion was that the arbitration did not resolve White River’s claims based on the alleged failure of F&D to remove all pre-existing mold and other damaged materials prior to replacement of decks on the buildings. The second exclusion the panel did not resolve was White River’s claim based on the alleged failure of F&D to install Tyvek in some portions of the project.
As for the bad faith claim, Judge Blackburn found that White River was precluded from asserting factual contentions contrary to the myriad factual issues that were addressed and resolved by the arbitration panel. Judge Blackburn did allow White River to bring its claim to the extent it would be based on the alleged conduct at issue in the exceptions noted.
Judge Blackburn found that White River’s civil conspiracy claim was not adjudicated by the arbitration panel and would not be precluded.
Similar to the bad faith claim, Judge Blackburn found the claim for breach of express warranty was not to be precluded for the specific carved out exceptions. Otherwise, Judge Blackburn concluded that the issue had been resolved by the arbitration panel and White River was barred from asserting any factual contentions contrary to the panel’s conclusions.
Finally, White River’s breach of payment bond was completely precluded by Judge Blackburn. The judge concluded that White River was obligated to raise the issue as a defense when addressing the breach of contract issues the arbitration. Since White River never raised the issue in the arbitration, Judge Blackburn determined claim preclusion barred it from raising the claim in the district court case.
In summary, to the extent White River’s claims were based on the alleged failure of F&D to remove all pre-existing mold and other damaged materials prior to replacement of decks on the buildings or the alleged failure of F&D to install Tyvek in some portions of the project, and the associated damages claims, neither issue preclusion or claim preclusion bar the claims. White River was barred from asserting: (1) any other claim that F&D breached the terms of the performance bond and the underlying S&S contracts in any way; (2) any claim that it did not breach its obligations under the performance bonds and the S&S contracts by failing to make payment under the S&S contracts; and (3) any factual contention that was contrary to the conclusions of the arbitration panel.
As the White River case demonstrates, arbitration is not always the best course of action for a contractor. There are other factors that need to be considered before a final decision is made regarding in what forum all or part of the case will be litigated.