January 29, 2021
Can Construction Contracts Require Arbitration Outside of Virginia?
To be useful, contract rights need a reasonably convenient remedy. What is convenient to one party may not be convenient to the other. When parties include an arbitration clause in a contract, such proceedings will have to occur in a “place” such as a lawyer’s conference room, a hotel room or nowadays, perhaps a zoom videoconference. In some construction cases, the builder, owner and property are all in the same state. In others, the contractor and owner, or the subcontractor may be based in different places. No one wants to be forced to litigate or arbitrate far from their home base. Contractors frequently put language in arbitration clauses that designate a mandatory state, city or county where any arbitration proceedings must take place. This can be confusing, because one would naturally expect any dispute over a specific property to take place in the city or county where that property is located. However, federal law includes a public policy in favor of arbitration and the freedom of parties to make agreements in arbitration clauses. However, in Virginia and other states, there are statutes which try to prevent out of state parties from requiring that arbitration be conducted outside the state for construction work done in state. Va. Code § 8.01-262.1 provides that,
The forum for any arbitration proceedings required in such a contract . . . , shall be in this Commonwealth. If the contract provides for arbitration proceedings outside the Commonwealth, such provision is unenforceable and arbitration proceedings shall be in the county or city where the work is to be performed, unless the parties agree to conduct the proceedings elsewhere within the Commonwealth.
How does one reconcile this statute with federal law that tries to honor the language of arbitration agreements? In 1998, the U.S. District Court for the Western District of Virginia considered this question, with Senior Judge Jackson L. Kiser publishing a decision. Gray Company was a general contractor on a project to be performed in Halifax County, located in southern Virginia. Gray brought M.C. Construction Corporation on to this project by two subcontracts. MC sued Gray in Virginia courts. Gray removed the case to the federal district court and sought to force MC to arbitrate the claims in Kentucky (Gray was a Kentucky corporation) pursuant to Kentucky law. The arbitration agreements in the subcontracts authorized Gray (not MC) to decide between Halifax County or Lexington, Kentucky as the forum for any arbitration proceedings. Unsurprisingly, Gray chose Kentucky. MC argued that Va. Code § 8.01-262.1 made the forum selection clause unenforceable. Gray said that the Federal Arbitration Act preempted Virginia’s arbitration forum statute, pursuant to the Supremacy Clause of the U.S. Constitution. The FAA applies to proceedings to enforce arbitration provision of contracts affecting interstate commerce. The U.S. Supreme Court, in numerous decisions, ruled that in enacting the FAA, Congress intended to foreclose or preempt state statutes that would work to undercut the enforceability of the language of arbitration agreements. A contract may be otherwise governed by state law, except for the arbitration clause to which the parties look to federal law. Does it make sense for general wording in the FAA to preempt attempts by states from enacting consumer protection or “home-town” legislation with the idea of promoting procedural fairness in the arbitration context? This is generally the policy of the federal courts. However, the effect of the FAA is to give precedence to the language of the arbitration agreement made by the parties. Each arbitration agreement is construed according to its own terms. Upon efforts by parties to have courts compel or deny arbitration of claims, the FAA requires the court to, “make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.” Judge Kiser found that the Virginia statute preempted by the FAA, to the extent that the agreement required arbitration elsewhere. I am not aware of any Supreme Court of Virginia or Fourth Circuit Court of Appeals agreeing or confirming this with regard to that state statute. Any party to a construction contract with a forum selection clause where a legal claim needs to be brought or defendant ought to seek the assistance of an attorney to determine whether or not such a clause is enforceable, because the language and circumstances may be different from those in the MC vs. Gray case.
Many newer HOAs and condominiums have arbitration agreements in their covenants that may apply to some or all disputes arising out of the dealings between the lot owners, developers and/or boards. I have never seen a HOA arbitration clause that required the parties to arbitrate outside of the state where the subdivision was. However, usually the FAA applies to association arbitration agreements. I can imagine a HOA related dispute over the arbitration forum arising in the community association context where the association is in a rural area and the developer or management company are based in a nearby city. Board members don’t want to travel for arbitration hearings any more than owners do.
The MC v. Gray decision came out in 1998, when videoconferences were relatively uncommon and usually only conducted by large companies with significant budgets for such technology. Even before the Coronavirus, it was common for arbitrators to hear motions by teleconference or on briefs submitted by email. Now, in 2021, most Americans have Zoom, FaceTime or some other videoconference app on the laptop or smartphone. Since 2020, internet videoconference has mostly replaced the traditional in person meeting. Many courts are conducting hearings and trials through videoconference. Many HOAs hold their meetings on Zoom or GoToMeeting. Mediations and arbitrations are also now conducted through internet videoconference in light of the coronavirus pandemic. Most arbitration agreements do not mention videoconference as a requirement or option for arbitration, however groups such as the American Arbitration Association are trying to promote that, because it means that more arbitration can move forward. The option of videoconference or teleconference for arbitration ought to be explored or considered when looking at the prospect of arbitration or in negotiating a contract with an arbitration clause.
Arbitration is not necessarily a bad thing, particularly in larger cases where cost and time savings may be had. Because of the greater flexibility of arbitration procedures and the pandemic related backlogs in the courts, arbitration may get a result faster. However, when an arbitration agreement is being negotiated or disputed it is necessary to have an attorney familiar with this area of the law review the language with the client so that decisions can be made on more than an assumption as to what is enforceable. There are no appellate court precedents (yet) specifically interpreting Virginia’s construction arbitration forum statute.
Legal Authority:
M.C. Construction Corp. v. Gray Co., 17 F. Supp. 2d 541 (W.D. Va. 1998)
January 27, 2021
Modernizing HOA Law or Exploiting a Crisis?
“Never let a good crisis go to waste.” -Winston Churchill.
The Virginia General Assembly is currently in session. One interesting bill to Virginia homeowners is 2021 HB1816. This bill seeks to amend the Property Owners Association Act and Virginia Condominium Act regarding the use of “electronic means” for meetings and voting. Making videoconference a larger and better part of HOAs and condominiums is a good thing. But this flawed bill ought to undergo changes necessary to protect Virginia landowners and the integrity of the community association “open meeting” policies in place in Virginia.
I am a practicing attorney who represents lot owners and unit owners in community association matters. Sometimes my clients are in opposition to association boards, and in other cases they are dealing with a dispute with a neighbor where they are aligned on the same side as the board. I am familiar with the essential role of already existing “open meeting” statutes for community association in establishing procedural safeguards. To the extent that state law gives associations substantial power, these open meeting rules must be preserved and strengthened.
As Virginia law currently stands, the statutes require almost all deliberations of boards of directors to be conducted in properly-noticed meetings that owners are able to attend or follow along and participate in contemporaneously. The POAA (and Condo Act) prohibits boards and committees from doing business in informal “work sessions” or email exchanges (with very limited exceptions for executive session). Va. Code § 55.1-1816. This is important, because most HOAs have the power under their governing instruments and the POAA to adopt rules and regulations that can impose limits on how they can use or improve their property. Va. Code § 55.1- 1819. This is significant because the ability to use or improve property is an essential aspect of its value as an investment, and the freedoms we enjoy as Americans have to be exercised somewhere, and the home is the most important place for exercising freedoms of all kinds. The “open meeting” requirements for HOAs and Condos, which are supposed to (supposedly) function as “mini-democracies”, are similar to the open government laws that require local government board members to conduct all business (with very limited exceptions) in noticed meetings.
HB1816 would weaken these protections, and in associations where safeguards are not otherwise enshrined in their governing instruments, facilitate common practices by HOA boards, committees, and managers to circumvent the “open meeting” requirements by making important decisions for the community by text message, email, telephone, or informal social gatherings.
HB1816 , in the amendments to § 55.1-1832(F) and § 55.1-1935(E), would allow any meeting of a HOA or condominium, be it a board meeting, committee meeting, or annual or special meeting of the members to be conducted by “electronic means.” Most Virginians are now familiar with various forms of videoconference, be it Zoom, WebEx, Google Meets, Microsoft Teams, GoToMeeting or other similar programs. The Coronavirus has made these technologies a common practice. I have previously posted about the use of remote meeting technology in my December 2020 article, Presenting to HOA Boards and Committees in Remote Hearings. I use these services and think that they are a great thing. I think that they ought to be used in Condominium and HOAs because they have the power to increase participation by many members who may not otherwise be able to participate because of a disability, mobility concerns, inability to drive, or childcare obligations. This also promotes access to justice because homeowners are more likely to be able to retain an attorney to help them in such hearings because it reduces travel time.
In 2020, the General Assembly passed special, emergency legislation that helped for association boards to meet and conduct business during the coronavirus epidemic. I posted analyses of that in my May 2020 post, Virginia Temporarily Relaxes HOA Open Meeting Statutes for Coronavirus. HB1816 would work to make that permanent and more. It’s the “more” part that is a problem.
The problem with HB1816 is not that it facilitates use of these videoconference programs in HOAs is that it goes well beyond that. In conjunction with other changes, HB1816 seeks to broaden the definition of “electronic means” in Va. Code § 55.1-1800 and § 55.1-1900 to include “teleconference, videoconference, internet exchange, or other electronic methods.” Those statutes incorporate the definitions found in Va. Code § 59.1-480 of the Uniform Electronic Transactions Act. That statute defines “Electronic” as “relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.” But the referenced statute doesn’t define “internet exchange” or “other electronic methods”. The definition as written is broad enough to encompass text message and email correspondence between board members, committee members and/or members. This is a terrible way for HOAs and condominiums to decide important questions such as enactment of million dollar budgets, to change rules to governing the use of land in the subdivision, or to impose penalties against an owner for an alleged rule violation. In many HOAs and condominiums, this would facilitate boards changing the rules on an informal basis, as they see fit. Founding Father John Adams believed that the USA ought to be “a government of laws, not of men.” In other words, everyone has to follow the laws (or the declaration or contract), including the rulers or directors. HB1816 would in many cases cause the POAA to reflect a public policy that the rules and standards in the governing documents simply don’t matter, its whatever the board wants. The is because HB1816 would remove statutory protections requiring HOA boards to follow their own rules and to not change the rules whenever they want to do something different.
HB1816 easily passed the House of Delegates and now sits in the General Laws Committee of the Virginia Senate. I hope that it does not get out of that committee, without changes to the definition of “Electronic Means.” Note that passage of this bill as written would not be “game over” for homeowners dealing with HOA bullies. But failure to fix the language would “bless” all sorts of mischief that needs to be stopped. Boards still need to follow the declaration and bylaws and the other protections of the POAA and common law. But legal reforms ought to make the law better and more clear, not the opposite. It appears to me that certain people are promoting this bill at this time to try to exploit the pandemic before it is over, by use of this bill which is ostensibly to help people do social distancing. For these reasons, I do not support HB1816. I think that the definition of “Electronic Means” needs to be revised, to only include technologies similar to Zoom, WebEx, MS Teams and the like, and to not include text message, chat rooms or emails.
January 28, 2021 Update:
On the evening of January of January 27, 2021, the Virginia Senate General Laws Committee reported out SB 1183 which appears to be a bill originating in the senate that is identical, or nearly so with, HB1816. This legislation has not yet been voted on by the full senate.
February 9, 2021 Update:
Around February 5, 2021, the Virginia Senate postponed further action on HB1816 and SB 1183 to the General Assembly’s “special” 2021 session which is essentially an extension of time for the “general” session.
Close of Special Session Update:
In the General Assembly’s 2020 Special Session 1, HB1816 was passed by both legislative chambers and signed by Governor Northam.
Referenced Legal Authority:
Va. Code § 55.1-1800 (POAA Definitions – Existing Law)
Va. Code § 55.1-1816 (POAA Board Meetings – Existing Law)
Va. Code § 55.1-1832 (POAA Technology – Existing Law)
Va. Code § 55.1-1900 (Condo Act Definitions – Existing Law)
Va. Code § 55.1-1935 (Condo Act Technology – Existing Law)
Va. Code § 55.1-1949 (Condo Act Meetings – Existing Law)
HB1816 (General Assembly Website)
SB1183 (General Assembly Website)
Who Is My Virginia Legislator?
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