Arbitration Clause Survives Termination of Work Order

Arbitration Clause Survives Termination of Work Order

June 27, 2018

A California Corporation, Swinerton Builders, Inc. ("Swinerton"), entered into a Master Services Agreement (MSA) with a West Virginia company, March-Westin Company, Inc. ("March-Westin"), for March-Westin to provide timber products.  Swinerton subsequently issued a work order to March-Westin under the MSA for a project in Colorado and, following a disagreement on schedule and price, rescinded the work order.  March-Westin filed a complaint against Swinerton in the U.S. District Court for the Northern District of West Virginia, which Swinerton moved to dismiss on the basis that the Court lacked jurisdiction.   In deciding the Motion to Dismiss, Judge Irene M. Keeley held1  the Court had neither personal nor subject matter jurisdiction.   

The Court rejected an argument by March-Westin that the Court had jurisdiction because the arbitration provision was terminated, holding instead, subject matter jurisdiction did not exist, because rescinding the work order did not terminate the MSA. The MSA required the parties to mediate and then participate in binding arbitration. The Court further held that even if Swinerton had repudiated the MSA, the arbitration clause in the agreement would survive, and hence March–Westin's claims would be subject to binding arbitration.  March–Westin had contended that Swinerton repudiated the MSA when it stated that "Swinerton Builders hereby terminates any current work being done by March Westin on the ... Work Order issued July 21, 2017, and the Subcontract ... should be considered rescinded," and that "Swinerton is terminating any and all agreements with March Westin as it relates to this Project."  Since in its notice, Swinerton expressly terminated only work being done on a "work order" and "subcontract," and not the MSA which was not project-specific and which covered the parties' general relationship, the Court held that the termination of "any and all agreements with March Westin as it relates to this Project" did not implicate the MSA.  Court noted that under the doctrine of anticipatory breach, i.e. repudiation, the renunciation of an executory contract must be unequivocal and deal with the entire performance.  

In analyzing personal jurisdiction, the Court merged the statutory inquiry (whether jurisdiction is authorized by the long-arm statute of the state) with the Constitutional inquiry (whether application of the long-arm statute is consistent with the due process clause), because the West Virginia's long-arm statute is coextensive with the Due Process Clause.  The Court applied the three part test which considers "(1) the extent to which the defendant purposefully availed itself of the privilege of conducting activities in the State; (2) whether the plaintiffs' claims arise out of those activities directed at the State; and (3) whether the exercise of personal jurisdiction would be constitutionally reasonable."  It held that Swinerton failed to satisfy the fact-intensive first prong which considers whether it meets "the minimum contacts requirement of constitutional due process that it purposefully availed itself of the privilege of conducting business under the law of the forum state," and hence did not analyze the two other prongs.

In deciding that Swinerton did not have "minimum contacts," the Court noted that: a) although Swinerton maintains a registered agent in West Virginia, it is not a licensed contractor in the state and does not perform any work there; b) it has no offices or other facilities in West Virginia; c) it does not direct business activities to, or otherwise advertise in, West Virginia; and d) Swinerton does not own any property in West Virginia.  It further found that Swinerton did not engage in "significant or long-term business activities" in West Virginia, and that the parties' communications "are exactly what one might expect between sophisticated parties negotiating a relatively significant construction contract."

While the court’s personal jurisdiction analysis is instructive, it will vary based on the facts in each situation.  But contractors and suppliers should take note of the Court’s holding that rescinding a work order, or even the Master Services Agreement, will not provide subject matter jurisdiction, if the MSA requires arbitration of the dispute.