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Measure Twice, Cut Once - Invalid Agreement Nullifies Claim for Arbitration (PA)

May 1, 2018

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On April 27, 2018, the Superior Court of Pennsylvania affirmed the trial court’s decision to deny a defendant’s preliminary objections to compel arbitration in <em><a href="http://blog.wcmlaw.com/wp-content/uploads/2018/05/Brennan-v.-NVR-Inc..pdf">Brennan v. NVR, Inc.,</a></em>  Plaintiffs Terrance and Gladys Brennan executed a purchase agreement with defendant NVR, Inc. (NV Homes) for the construction of their home.  The agreement stated that the purchaser would receive a limited warranty before settlement on the home, which contained language mandating binding arbitration.  The plaintiffs did not receive a copy of the limited warranty until nine months after settlement.
Prior to settlement, the plaintiffs had an inspection done which identified defects in the house-wrap, flashing, and window installation which would allow water intrusion.  The plaintiffs brought these findings to NVR’s project manager prior to settlement who reassured them that NVR would take care of the issues.  Based on this representation, the plaintiffs completed settlement.  After settlement, however, the plaintiffs noticed water leaks around their doors, windows, and walls and a subsequent inspection found that the original defects had not been fixed.
The plaintiffs filed a complaint alleging fraudulent misrepresentation and violation of Pennsylvania’s unfair trade practices and consumer protection laws. NVR filed preliminary objections in the form of a motion to compel arbitration based on the warranty agreement.  The trial court overruled these preliminary objections and ordered NVR to file an answer.  NVR then filed an appeal.
First, the Superior Court first found that an order denying a motion to compel arbitration is immediately appealable in Pennsylvania, which allowed the Court to examine the agreement on the merits.  The court next moved to whether the arbitration agreement was enforceable.  To decide whether arbitration should be compelled, courts use a two-part test: 1) does a valid agreement to arbitrate exist; and 2) is the dispute within the scope of the agreement.  Here, the court found that there was no valid agreement to arbitrate.  First, the original purchase agreement did not contain an arbitration clause.  Next, the warranty that does mention mandatory arbitration was never signed by the plaintiffs, was buried in the homeowner’s manual, and was only provided to them nine months after settlement.  Even if there was a valid agreement, the court found that it would not fall within its scope as the warranty only dealt with disputes over improper construction of the home and not claims for fraudulent misrepresentation.
An agreement must be valid and cover the scope of the dispute.  If a company provides a clear and well-drafted agreement, then it can avoid the costs and risks, known and unknown, presented by trial, by moving a case into arbitration. Here, the contractor included an arbitration agreement in the HO manual, but never mandated its execution before settlement on the home.  As such, there was no <em>de facto</em> agreement in place.
This decision also highlights prudent pleading by plaintiff's counsel -- by alleging fraudulent misrepresentation instead of improper construction, plaintiff's suit did not fall within the scope of the arbitration agreement, even if the agreement were valid.  Thanks to Peter Cardwell for his contribution to this post.  Please email <a href="mailto:BGibbons@wcmlaw.com">Brian Gibbons</a> with any questions.

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