IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
FILED
August 2, 1999
HERMAN VANDERHEYDEN, d/b/a )
VANDERHEYDEN CONSTRUCTION )
Cecil Crowson, Jr.
COMPANY, )
Appellate Court Clerk
)
Plaintiff/Appellant, ) Shelby Chancery No. 110306-2
)
v. )
) Appeal No. 02A01-9803-CH-00070
AJAY, INC. and FEDERAL SAVINGS )
BANK, )
)
Defendants/Appellees. )
APPEAL FROM THE CHANCERY COURT OF SHELBY COUNTY
AT MEMPHIS, TENNESSEE
THE HONORABLE FLOYD PEETE, JR., CHANCELLOR
For the Plaintiff/Appellant: For the Defendant/Appellee
AJAY, Inc.:
Robert V. Redding Michael I. Less
Karen B. Hall Clifton M. Lipman
Jackson, Tennessee Adam M. Nahmias
Memphis, Tennessee
For the Defendant/Appellee
Federal Savings Bank:
Richard M. Carter
Memphis, Tennessee
REVERSED AND REMANDED
HOLLY KIRBY LILLARD, J.
CONCUR:
W. FRANK CRAWFORD, P.J., W.S.
DAVID R. FARMER, J.
OPINION
This is a construction case. The defendant owner hired the plaintiff contractor to build a
movie theater. The contract contained an arbitration clause. The owner terminated the contractor
before the construction was completed. The contractor filed suit against the owner regarding an
amount of money required to be held in escrow pursuant to Tennessee Code Annotated § 66-11-144,
which permits the contractor to seek “any remedy in a court of proper jurisdiction . . . .” The trial
court stayed the proceedings and ordered the parties to arbitration. We reverse and remand.
On June 25, 1996, Defendant/Appellee AJAY, Inc. (“AJAY”) entered into a construction
contract with Plaintiff/Appellant Vanderheyden Construction Company (“Vanderheyden
Construction”) to build a multiple screen movie theater. The original contract price was $3,043,538.
The contract included an arbitration provision:
4.5.1 Controversies and Claims Subject to Arbitration. Any controversy or Claim
arising out of or related to the Contract, or the breach thereof, shall be settled by
arbitration in accordance with the Construction Industry Arbitration Rules of
American Arbitration Association, and judgment upon the award rendered by the
arbitrator or arbitrators may be entered in any court having jurisdiction thereof,
except controversies or Claims relating to the aesthetic effect and except those
waived as provided for in Subparagraph 4.3.5.
(emphasis in original).
The contract between the parties also provided that AJAY would deposit into escrow a
certain percentage of the contract price, based on work performed, as retainage, pursuant to
Tennessee Code Annotated § 66-11-144.1 Tennessee Code Annotated § 66-11-144 provides that,
in a contract for the improvement of real property, a certain percentage of the contract price must be
deposited by the owner in an escrow account and released to the contractor “[u]pon satisfactory
completion of the contract.” Tenn. Code Ann. § 66-11-144(c) (1993). Vanderheyden Construction
alleges that AJAY agreed to deposit the funds at Defendant/Appellee Federal Savings Bank
(“Federal Savings”).
On September 25, 1997, AJAY terminated Vanderheyden Construction for alleged “defective
and/or deficient work in an untimely manner . . . .” Vanderheyden Construction then discovered
that AJAY had not deposited the retainage funds as required.
1
The parties each submitted a copy of the contract with their respective pleadings. The
contract provided that the retainage percentage was set at five percent (5%); however,
Vanderheyden Construction’s copy of the contract indicated that the 5% figure was marked
through and 7 ½% was written on the contract twice in the same clause which provided for the
retainage amount. AJAY’s copy of the contract did not include these alterations. The parties
apparently do not dispute the agreed upon percentage of retained funds.
On December 23, 1997, Vanderheyden Construction filed a lawsuit seeking injunctive relief
against AJAY, Ambarish Keshani (“Keshani”), vice-president of AJAY, and Federal Savings.
Vanderheyden Construction sought a temporary and permanent injunction requiring the defendants
to deposit $220,687.98 in an escrow account or with the court. Vanderheyden Construction also
sought a judgment against AJAY for the retainage amount, as well as prejudgment and postjudgment
interest, or the imposition of an equitable lien on the property in satisfaction of the debt.
Vanderheyden Construction later filed an amended complaint asserting that AJAY breached
the contract by, inter alia, wrongfully terminating Vanderheyden Construction, interfering with their
performance of the contract, and failing to approve and pay for changes requested by AJAY.
Vanderheyden Construction also sought declaratory judgment, requesting the trial court declare the
arbitration clause void and determine all of the issues between the parties pursuant to Tennessee
Code Annotated § 66-11-144.
In AJAY’s Answer, it asserted that Vanderheyden Construction was not entitled to injunctive
relief because it failed to demonstrate that immediate or irreparable injury would result if the funds
were not deposited.2 AJAY sought to enforce the arbitration clause.
After a hearing, the trial court held that Vanderheyden Construction’s claims were subject
to arbitration and stayed the proceedings pending arbitration:
It appears to the Court . . . that the contract between the parties requires that all
disputes arising out of or in connection with the construction contract between the
parties be resolved by arbitration in the manner set out in the contract, and that the
relief sought and the claims asserted in Vanderheyden’s Amended Complaint for
Injunctive Relief do arise out of or are connected with the construction contract and,
therefore, are subject to the arbitration agreement between the parties and, therefore,
this matter must be stayed and all claims of Plaintiff Vanderheyden must be resolved
by arbitration.
On February 27, 1998, Vanderheyden Construction filed a motion for certification as a final
judgment under Rule 54.02 of the Tennessee Rules of Civil Procedure, or in the alternative,
permission to file an interlocutory appeal under Rule 9 of the Tennessee Rules of Appellate
Procedure. The trial court denied Vanderheyden Construction’s motion for certification as a final
judgment but granted Vanderheyden Construction permission to file an interlocutory appeal.
2
On January 12, 1998, in accordance with Rule 41 of the Tennessee Rules of Civil
Procedure, Vanderheyden Construction voluntarily dismissed Keshani from the action.
2
Vanderheyden Construction now appeals the trial court’s order staying the court proceedings and
requiring the parties to arbitrate.
On appeal, Vanderheyden Construction argues that the trial court erred in ordering the parties
to arbitration because Tennessee Code Annotated § 66-11-144, by providing the contractor a
“remedy in a court of proper jurisdiction . . . ,” creates an exception to the enforcement of an
arbitration clause under the Tennessee Uniform Arbitration Act, Tennessee Code Annotated § 29-5-
301, et seq. Vanderheyden Construction also argues that the Tennessee Uniform Arbitration Act is
unconstitutional as a violation of Article 1, Section 17, the open courts provision, of the Tennessee
Constitution.3
On appeal, the pertinent facts in this case are undisputed. Questions of law are reviewed de
novo without a presumption of correctness. Campbell v. Florida Steel Corp., 919 S.W.2d 26, 35
(Tenn. 1996).
Tennessee Code Annotated § 66-11-144 provides as follows:
(a) Whenever, in any contract for the improvement of real property, a certain amount
or percentage of the contract price is held back by the owner or contractor, that
retained amount shall be deposited in a separate escrow account with a third party
giving proper security for the performance of the obligation of the owner or
contractor.
(b) As of the time of the deposit of the retained funds, such funds shall become the
sole and separate property of the contractor, subcontractor, materialman, or laborer
to whom they are owed.
(c) Upon satisfactory completion of the contract, to be evidenced by a written release
by the owner or contractor, all funds accumulated in the escrow account together
with any interest thereon shall be paid immediately to the contractor, subcontractor,
materialman or laborer to whom such funds and interest are owed.
(d) In the event the owner or contractor fails or refuses to execute the release
provided for in subsection (c), then the contractor, subcontractor, materialman, or
laborer, shall seek any remedy in a court of proper jurisdiction and the person
holding the fund as escrow agent shall bear no liability for the nonpayment thereof
to the contractor, subcontractor, materialman, or laborer.
3
The Attorney General notified the Court by letter that the Office of Attorney General
would not intervene in this matter unless this Court reached the constitutionality of the
Tennessee Uniform Arbitration Act, Tennessee Code Annotated § 29-5-301, et seq.
3
***
(h) Compliance with this section shall be mandatory, and may not be waived by
contract.
Tenn. Code Ann. § 66-11-144 (1993) (emphasis added). The Tennessee Uniform Arbitration Act
provides, in part, that any agreement between parties to submit an existing or future dispute to
arbitration is binding and enforceable, and courts are granted jurisdiction to enforce arbitration
awards. See Tenn. Code Ann. § 29-5-302 (Supp. 1998).
The first issue on appeal is Vanderheyden Construction’s contention that the trial court erred
in denying its request for an injunction requiring AJAY and Federal Savings to deposit into escrow
the retainage in dispute. Vanderheyden Construction argues that the language in Tennessee Code
Annotated providing for the deposit of the funds into escrow is mandatory.
In response, AJAY argues that Vanderheyden Construction is not entitled to injunctive relief
because it cannot demonstrate irreparable injury. AJAY contends that Vanderheyden Construction
must show that it satisfactorily completed the contract under Tennessee Code Annotated § 66-11-
144.
Federal Savings argues that Tennessee Code Annotated § 66-11-144(d) releases it from
liability for the nonpayment of the funds by providing that “the person holding the fund as escrow
agent shall bear no liability for the nonpayment thereof to the contractor . . . .” Tenn. Code Ann. §
66-11-144(d) (1993). Consequently, Federal Savings contends that Vanderheyden Construction has
no claim against it, nor any basis for injunctive relief.
Tennessee Code Annotated § 66-11-144 provides, in part:
(a) Whenever, in any contract for the improvement of real property, a certain amount
or percentage of the contract price is held back by the owner or contractor, that
retained amount shall be deposited in a separate escrow account with a third party
giving proper security for the performance of the obligation of the owner or
contractor.
Tenn. Code Ann. § 66-11-144(a) (1993) (emphasis added). It is undisputed that AJAY did not
deposit the retainage in an escrow account with a third party as required by the statute. AJAY says
that the funds that would have been deposited into escrow were used to correct and complete
Vanderheyden Construction’s unsatisfactory work. However, Section 66-11-144 states that owners
“shall” deposit the retainage percentage in an escrow account. This language is mandatory and not
discretionary. Gabel v. Lerma, 812 S.W.2d 580, 582 (Tenn. App. 1990) (citing Stubbs v. State, 393
4
S.W.2d 150 (Tenn. 1965)). Even if AJAY contends that Vanderheyden Construction’s work was
not satisfactory, the funds must be deposited into escrow until the dispute between the parties is
resolved. Therefore, the trial court erred in failing to grant an injunction requiring AJAY to deposit
the retainage into escrow. The trial court is reversed on this issue, and the cause must be remanded
for entry of an appropriate order.
Vanderheyden Construction next argues that the trial court erred in staying the court
proceedings and ordering the parties to arbitration. It notes that Tennessee Code Annotated § 66-11-
144(d) provides that if the owner refuses to pay the retainage to the contractor, “then the contractor
. . . shall seek any remedy in a court of proper jurisdiction . . . .” Vanderheyden Construction asserts
that this statutory remedy would be nullified if the arbitration provision were enforced. It argues that
Tennessee Code Annotated § 66-11-144 is a statute enacted specifically to address a situation such
as this, which must control over a general statute such as the Tennessee Uniform Arbitration Act,
providing generally for the enforcement of any contractual arbitration provision. AJAY contends
that Vanderheyden Construction must first show “satisfactory completion of the contract” under
Tennessee Code Annotated §66-11-144(c). AJAY maintains that the trial court correctly enforced
the parties’ agreement to arbitrate disputes because public policy in Tennessee favors alternative
dispute resolution.
In construing statutes, courts are “restricted to the natural and ordinary meaning of the
language used by the Legislature within the four corners of the statute, unless an ambiguity requires
resort elsewhere to ascertain legislative intent.” Austin v. Memphis Publishing Co., 655 S.W.2d
146, 148 (Tenn. 1983); see also Memphis Publ’g Co. v. Holt, 710 S.W.2d 513, 516 (Tenn. 1986).
Tennessee courts have also addressed situations in which both a general and a specific statute are
applicable:
Where there is a general provision applicable to a multitude of subjects, and also a
provision which is particular and applicable to one of these subjects, and inconsistent
with the general provision, it does not necessarily follow that they are so inconsistent
that they both cannot stand. The special provision will be deemed an exception, and
the general provision will be construed to operate on all the subjects introduced
therein except the particular one which is the subject of the special provision.
State ex rel v. Safely, 112 S.W.2d 831, 833 (Tenn. 1938) (citing Crane v. Reeder, 22 Mich. 322
(1871)); see also Commercial Standard Ins. Co. v. Hixson, 133 S.W.2d 493, 495 (Tenn 1939);
5
Cordova Area Residents for the Environment v. City of Memphis, 862 S.W.2d 525 (Tenn. App.
1992).
The Tennessee Uniform Arbitration Act is clearly a general statute, applicable in nearly any
situation in which the parties have agreed to submit disputes to arbitration. See Tenn. Code Ann.
§29-5-302 (Supp. 1998). On the other hand, Tennessee Code Annotated § 66-11-144 applies only
to contracts for the improvement of real property in which the contract price is $500,000 or greater.
See Tenn. Code Ann. § 66-11-144(g) (1993). Sections (a) and (b) require the owner to deposit a
certain percentage of the contract price in an escrow account, and the statute also gives protection
to the contractor by providing that the retainage is the property of the contractor. See Tenn. Code
Ann. § 66-11-144(a)-(b) (1993). Unlike the Uniform Arbitration Act, Tennessee Code Annotated
§ 66-11-144 is specific in nature and applies to the situation set out in the statute.
In situations falling within the provisions of the statute, it sets forth a remedy for disputes
regarding retainage by mandating that “the contractor . . . shall seek any remedy in a court of proper
jurisdiction . . . .” Tenn. Code Ann. § 66-11-144(d) (1993). This statute is not ambiguous. Giving
the language its ordinary and natural meaning, it states that the contractor may go to court to recover
the retainage. See Austin, 655 S.W.2d at 148; Memphis Publ’g Co., 710 S.W.2d at 516. Moreover,
Tennessee Code Annotated § 66-11-144(h) states that “[c]ompliance with this section shall be
mandatory, and may not be waived by contract.” Tenn. Code. Ann. §66-11-144(h) (1993). This
indicates that the remedy for the contractor set forth in the statute cannot be waived by the
contractual arbitration provision.
Under all of these circumstances, we must conclude that the remedy set forth in the statute
is the exclusive remedy for disputes arising under the statute. Therefore, we find that the trial court
erred in staying the proceedings below and ordering the parties to arbitration. The decision of the
trial court is reversed and remanded for further proceedings.
This holding pretermits the issue regarding the constitutionality of the Tennessee Uniform
Arbitration Act, as well as the issues raised by Federal Savings.
6
The decision of the trial court is reversed, and the cause is remanded for further proceedings
consistent with this Opinion. Costs are taxed against the Appellee, for which execution may issue
if necessary.
HOLLY KIRBY LILLARD, J.
CONCUR:
W. FRANK CRAWFORD, P. J., W.S.
DAVID R. FARMER, J.
7