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| I'd call this extreme. |
By Eric Fanning
If you can
say that title five times fast I’ll give you the deed to my house. Just kidding—I rent. [Pause for laughter] . . . All jokes aside, we have a contract dispute
to suss out folks, so let’s get serious.
We see a lot
of contract disputes and arbitration clauses around here at SCOV Law (for example,
this recent piece from our editor), so I’m not gonna reinvent the wheel. Hermitage Inn Real Estate Holding Co. hired a
firm called Extreme Contracting (yikes!) to do some work on the Hermitage Base Lodge Project. (Just as an aside, I’ll never make enough
money to even set foot on the grounds there, but from the website it looks like
a very nice place!) (Just as another
aside—as this piece was being written, news came out that the Hermitage
Club is facing bankruptcy, so I might not have a chance to visit there
anyway!). The contract was for
$681,987.81. Not quite up to Dr. Evil’s standards,
but still a good amount of cash.
Less than a
year after they went into business together, things went south between the two
parties, and Hermitage Inn sued Extreme Contracting for breach-of-contract and brought indemnification claims for liens
imposed on the property by Extreme’s unpaid subcontractors. Since Extreme didn’t have representation at
the time the litigation started, the company’s principal filed a pro se answer
(and also a counterclaim for $185,000).
The principal claimed that Extreme did not have enough money to hire
counsel due to not being paid for the Hermitage job, and asked the court for more
time to prepare a defense or, (I love this), “lessons of the law.”
Since trial judges
don’t moonlight as law tutors for pro se corporate litigants, the court
instructed Extreme’s principal to hire counsel by March 6, 2015, which was
extended to April 13 (here’s
a good case on the corporate representation rule for anyone who wants to
put their law nerd cap on). Extreme
finally got a lawyer in mid-May, well after the deadline, but before the court
could rule on Hermitage’s subsequent motions to strike the pro se answer and
for default judgment. Counsel asked for
more time to respond to Hermitage’s motions, and that was granted over their
objection.
Extreme, now
with representation, moved to dismiss the complaint and to enforce the
mandatory arbitration clause in the contract both parties signed. Hermitage of course objected, and demanded
default judgment because Extreme’s answer failed to adequately respond to the
allegations or provide grounds for their denials, and therefore should be
treated as a failure to obey a scheduling
order. Alternatively, Hermitage
argued that the case should be stayed pending arbitration, and that Extreme
should be responsible for initiating arbitration since they were the ones
looking to enforce the mandatory arbitration clause.
The trial
court denied Hermitage’s motion for default, and also denied Extreme’s motion
to dismiss, and stayed the case pending arbitration, directing Extreme to
initiate arbitration by October 1.
Extreme asked for another two weeks, but missed the extended
deadline. Hermitage, yet again, moved
for default judgment, and the court gave Extreme one last chance to show that
it initiated arbitration. That didn’t
happen, and so the court awarded final judgment to Hermitage by default, and
now SCOV gets to weigh in.
SCOV looks
first to the arbitration clause at issue here.
It’s not ambiguous, and it was part of the contract that the parties
both agreed to, so SCOV looks to its plain language: “In the event of any dispute hereunder, the
matter shall be submitted to and settled by binding arbitration in accordance
with the Construction Industry Rules of the American Arbitration
Association.” Both of the parties agree
that arbitration was required here, so this part is easy. What’s disputed is who was required to initiate
arbitration. Hermitage Inn says that
they’re fine with arbitration, but by filing suit they waived their right to
arbitration, plus Extreme was the party looking to enforce the arbitration
clause, so they had the duty to initiate it.
If you think this is a backwards argument, you’re not alone, because
SCOV agrees with you.
In addition
to the fact that neither Hermitage Inn nor the trial court cited any legal
basis for that position, SCOV finds that requiring a defendant in a case to
initiate arbitration in a contract dispute defies “basic notions of fairness,
and the plain language of the AAA Construction Industry Rules.” Backed up with a compelling amount of case
law, SCOV says that the duty to initiate arbitration rests with the party
making the claim for relief, not the respondent. In this case, this happens to be Hermitage
Inn, because they’re the plaintiff!
Therefore, the court never should have ordered Extreme, as the
defendant, to initiate arbitration.
With that
out of the way SCOV is next asked to decide if the sanction levied against Extreme—the default judgment—was proper.
SCOV comes down with a resounding NO.
First of all, the default was based on an invalid arbitration initiation
obligation on the part of Extreme Contracting, the defendant. SCOV then goes even further and says that
even if Extreme had the obligation to initiate arbitration, default judgment
still would not have been the proper remedy for the plaintiff.
Hermitage
argued that Extreme’s failure to initiate arbitration violated a “scheduling
order.” This is important because under
the Vermont Rules of Civil Procedure, a party who violates a scheduling order
may be subject to sanctions, including “a judgment of default against the
disobedient party.” SCOV doesn’t buy
it. SCOV doesn’t consider the
arbitration order to be a “scheduling order” because there was no pretrial or
discovery hearing called for that purpose and therefore doesn’t fit the rule’s
plain language.
Next, SCOV
is hesitant to approve “litigation-ending” sanctions except for only in the
most egregious cases. This usually
involves willful or deliberate disregard for court orders or bad faith. SCOV doesn’t see that kind of behavior here,
so no dice. Finally, a sanction of
default here would have the effect of imposing a litigation-ending sanction on
a party who waived their right to arbitration, which is inconsistent with the
Federal Arbitration Act.
Hermitage
wants SCOV to dispense with Extreme’s arguments regarding the arbitration order
and default judgment because they failed to preserve them for appeal. In spite of Extreme’s history of failing to
comply with all kinds of deadlines, and the insufficiency of many of their
arguments on motion, SCOV holds that this case should be decided on the merits,
and not by default (courts in general strongly prefer settling case on their
merits). SCOV concedes that Extreme
missed deadlines throughout the case, however their motion to set aside the
default came before final judgment was granted, and therefore should be granted
for “good cause.” SCOV adopts the Second
Circuit’s three-part standard to determine whether or not “good cause” exists
to vacate the entry of default. This
standard balances (1) “whether the default was willful, (2) whether the moving
party has presented a meritorious defense, and (3) whether setting aside the
default would prejudice the party who secured the entry of default.”
As to the
first factor, there was no finding made about whether or not the default was
“willful,” but SCOV doesn’t think it’s necessary to remand this for findings
because the other two factors carry greater weight here. Addressing the third factor, SCOV concludes
Hermitage made no showing of prejudice (delay alone or normal litigation
expenses don’t count).
As SCOV
notes, the main crux of the case involves the second factor, whether the
defendant presented a meritorious defense.
This is where things get a little weird.
As SCOV previously stated, Extreme had a meritorious defense to the
default judgment. On the other hand, they
never presented an adequate defense to the underlying action, breach-of-contract. Still, SCOV says that the scales tip in
Extreme’s favor, and therefore there was good cause to set aside the default
judgment so that this can be decided on the merits.
SCOV vacates
the default judgment and remands the case for some extreme arbitration
(assuming Hermitage Inn can afford to stay in the litigation).
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