Supreme Court of Virginia Decides Issues Relating to Arbitrability and Res Judicata Effect of Arbitration Awards

Waterfront Marine Construction, Inc. v. North End 49ers Sandbridge Bulkhead Groups A, B and C, 251 Va. 417; 468 S.E.2d; 1996 Va.

In 1988, the North End 49ers Sandbridge Bulkhead Group (49ers) entered into a contract with Waterfront Marine Construction, Inc. (WMC) after accepting its bid to construct a bulkhead. The agreement included a provision providing for arbitration of any controversy or claim “arising out of or relating to the Contract or the breach thereof.”

An engineering firm in 1989 inspected the installed bulkhead and pronounced it to be defective, whereupon the 49ers filed a demand for arbitration with the American Arbitration Association (AAA) seeking damages, and WMC filed a demand seeking to recover the unpaid balance of the construction price. In 1991, following a hearing, the AAA panel entered an award denying the 49ers’ claim and granting the WMC’s claim, conditional that WMC perform certain work within a certain time limit to the satisfaction of an independent engineer. Unable to agree on the independent engineer, WMC did not perform the specified work and later on that year severe storms hit the bulkhead, causing damage.

The 49ers filed a second demand with the AAA claiming it to be “a continuation of the previous arbitration case.” WMC filed a motion in the trial court seeking a declaratory judgment that the 49ers’ second demand was barred by collateral estoppel and res judicata. The court, however, referred the matter to arbitration.

The arbitration panel determined that the dispute was arbitrable and entered an award requiring the 49ers to pay the unpaid balance, and WMC to pay $491,795 for the cost of repair and replacement of the bulkhead. The 49ers filed a motion to confirm this award, and WMC filed a motion to vacate it. These motions were heard in 1995 and WMC’s motion to vacate was denied.

On appeal, the Virginia Supreme Court held: (1) that the issue of arbitrability was to be determined by the court rather than the arbitrators; (2) that the claim based upon WMC’s alleged noncompliance with the initial arbitration award was not arbitrable; and (3) that the claim for breach of warranty brought by the 49ers in the second proceeding was barred by the doctrine of res judicata notwithstanding that the damages may have increased between the first and second proceeding.

The Court held that, although the Uniform Arbitration Act permits parties to specify that the issue of arbitrability is to be determined by the arbitrators, in the absence of such a specification, the issue is to be determined judicially. Addressing the issue itself, therefore, the court observed that while the contract included a broad arbitration clause, providing for the arbitration of any controversy or claim “arising out of or relating to the contract or the breach thereof,” it did not apply to a controversy relating solely to the terms of an arbitration award which did not require reference to the terms of the contract to resolve. Accordingly the claims relating to noncompliance with the award were not arbitrable.

Next the court was required to address issues relating to whether the 49ers claims for breach of warranty relating to the damage to the bulkhead were foreclosed by the doctrine of res judicata. Initially, the court considered whether the res judicata issue was to be determined in arbitration or judicially. The Court held that the res judicata issue was to be judicially determined, noting that the dispute over the plea of res judicata was related to the applicability of the elements of the common law doctrine, rather than a controversy “arising from” or “relating to the contract.” The Court held that the doctrine of res judicata should apply to unconfirmed as well as judicially confirmed arbitration awards, and then held that the breach of warranty claim asserted in the second demand was no different than the breach of contract claim asserted in the first proceeding even though that damages suffered as a result of the alleged defects may have increased between the two proceedings. The court also noted that although the description of the defects differed in the two proceedings, the doctrine of res judicata applied to all claims which might have been brought, because doctrine restricts a party from splitting its cause of action.

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