Weatherguard v. D. R. Ward – 2/27/2007

March 6, 2007

Arizona Court of Appeals Division One Holds That A Subcontractor Is Required to Arbitrate a General Contractor’s Indemnity Claim Against It Where the Subcontract Expressly Incorporates “General Conditions,” Which in Turn Incorporate The Arbitration Provision of the Prime Contract Between the General

In 1993, D.R. Ward Construction Company, a general contractor, signed a contract to construct a home for the Gaskins, and the parties entered into a prime contract. The prime contract contained an arbitration provision requiring all claims or disputes between the parties “arising out of or relating to the” contract or “the breach thereof” to be decided by arbitration. Ward and Weatherguard Roofing Company, Inc. later entered into a subcontract pursuant to which Weatherguard would perform waterproofing and roofing. This subcontract expressly incorporated by reference certain “General Conditions,” which in turn purported to incorporate the arbitration provision of the prime contract.

The house was completed in 1995, and in 2002, the Gaskins notified Ward of a claim that construction defects had caused water intrusion and mold damage. In May 2003, the Gaskins served a demand for arbitration on Ward and sought damages. Ward asserted that the subcontractors, including Weatherguard, were liable for the defects and demanded indemnification from and arbitration with the subcontractors.
Ward asserted that provisions in the subcontract’s “general conditions,” which were contained in a document separate from – but referenced in – the subcontract, gave Ward the right to demand arbitration and required the subcontractor’s to “prepare and present Contractor’s case, to the extent the proceedings are related to Subcontractor’s claims under this Subcontract.” Before the arbitration took place, however, Ward settled with the Gaskins. After the settlement, Weatherguard requested the superior court to stay the arbitration, asserting that Weatherguard had not agreed to arbitrate any dispute between it and Ward. The Superior Court denied the request for a stay.

The Court of Appeals affirmed, and held that “[b]ecause Weatherguard’s subcontract with Ward expressly incorporated the general conditions, and the general conditions incorporated the arbitration provision of the prime contract, Weatherguard was required to arbitrate Ward’s indemnity claim against it.” In so holding, the Court rejected, inter alia, Weatherguard’s argument that even if the general conditions became part of the subcontract, the general conditions did not incorporate by reference, and thus did not bind Weatherguard to, the arbitration provision in the prime contract. The Court declined to follow this stricter approach, finding instead that “no specific word or phrase – such as a specific reference to arbitration – is required” in order to incorporate an arbitration provision by reference. Rather, courts “must examine the language used by the parties and construe their words as imposing obligations or granting rights that ‘reasonably appear to have been intended by the parties.’”

Judge Norris authored the opinion, with Judge Timmer, Presiding Judge, and Judge Johnsen concurring.