kf2qd:
It would look like you need to get some RC suppressors for the AC Relays. Whenever you switch off a coil you get are probably goint to get some noise - might get lucky and switch at zero crossing but...They make RC suppressors that you can get from an industrial suppliers. Check for an Allen-Bradley distributor.
Another possible method is to put some ferite beads on the lines running to the Arduino board. ou are getting induced voltage spikes that are affecting the low voltage side of your control box.
Thank you for the advice. Perhaps that is what happening and why it is a bit random, depending on where it is switched. In regards to the RC suppressor I will investigate it more. I found a good writeup by S+S, The Official website for all your motor control and protection needs | Sprecher + Schuh
I doubt that I will get this accessory for my contactor, as it isn't as high end as the S+S but I could try to replicate it with individual components.
My contactor is a 24VAC coil.