97-537
No. 97-537
IN THE SUPREME COURT OF THE STATE OF MONTANA
1998 MT 87
JAMES R. RATCHYE and MARY ANN RATCHYE; MARC A.
LIECHTI and MARCEEN L. LIETCHTI; WAYNE L. STEVENS
and DIANE M. STEVENS, individually and as officers and directors
of TROUTBECK RISE HOMEOWNERS ASSOCIATION; and
TROUTBECK RISE HOMEOWNERS ASSOCIATION, INC.,
a Montana corporation,
Plaintiffs and Respondents,
v.
GERALD B. LUCAS and TROUTBECK LAND DEVELOPMENT
COMPANY, a Montana corporation,
Defendants and Appellants.
APPEAL FROM: District Court of the Eleventh Judicial District,
In and for the County of Flathead,
The Honorable Ted O. Lympus, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
John E. Bohyer and Fred Simpson, Jr.; Phillips & Bohyer, P.C.;
Missoula, Montana
For Respondents:
Randall S. Ogle; Ogle & Worm, PLLP; Kalispell, Montana
Submitted on Briefs: December 23, 1997
Decided: April 23, 1998
Filed:
__________________________________________
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Clerk
Justice Jim Regnier delivered the opinion of the Court.
¶1 On July 16, 1997, plaintiffs filed a motion seeking specific performance
of a settlement agreement, or, in the alternative, an order requiring arbitration
pursuant to the Montana Uniform Arbitration Act. After a hearing, the District
Court entered an order granting the plaintiffs specific performance rather than
ordering the parties to submit to arbitration. Troutbeck Land Development
Company and Gerald B. Lucas appeal. We reverse and remand.
¶2 The following issues are presented on appeal:
¶3 1. Did the District Court err by denying the defendants' request to
submit to arbitration?
¶4 2. In an arbitration under the settlement agreement, do the
Commercial Arbitration Rules of the American Arbitration Association or the
Montana Uniform Arbitration Act apply?
FACTUAL AND PROCEDURAL BACKGROUND
¶5 Respondents are homeowners and officers and directors of the
Troutbeck Rise Homeowners Association, Inc. (hereinafter "homeowners
association" or TRHA). Their homes are located in the Troutbeck Rise
subdivision near Lakeside, Montana. The subdivision was developed in the
1970s by the appellants in this case, Troutbeck Land Development Company
and Gerald B. Lucas (hereinafter "developers" or TLDC).
¶6 When the subdivision was approved by government officials, the
developers were required to complete a water system for the subdivision,
which included two water holding tanks and two wells. Both parties dispute
whether the developers adequately completed the water system for the
subdivision. The homeowners association contends that the existing water
system is inadequate to meet the needs of the subdivision's households.
¶7 On September 21, 1995, the homeowners association filed a complaint
in the Eleventh Judicial District Court, Flathead County, seeking to compel the
developers to complete the water system as designed and approved in the
1970s. The developers denied the allegations of the complaint based on their
contention that the water system was complete as built.
¶8 Before trial, on October 17, 1996, the parties entered into a settlement
agreement. The parties also executed an addendum to the settlement
agreement on November 25, 1996. The settlement agreement establishes a
procedure to assure that the water system of the subdivision was completed on
or before July 1, 1998. Under the agreement, the developers are required to
complete the second well and storage tank. The developers are also required
to develop a road called the "Skookum Road connection," subject to the
approval of state and local government officials. The agreement further
provides that the developers must post a performance bond or letter of credit
at some time if the water system and road is not completed and approved by
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July 1, 1997. Finally, the agreement provides that any dispute regarding the
agreement would be settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association.
¶9 By July 1, 1997, the water system was not completed. The
homeowners association requested that the developers post the required
performance bond or letter of credit. However, the developers declined to do
so. The developers contend that although they have not completed the system
and road, they are not required to post the bond or letter of credit until July 1,
1998.
¶10 Subsequently, on July 16, 1997, the homeowners association filed a
motion to enforce settlement agreement in the District Court. The
homeowners association requested that the court order specific performance
of the settlement agreement by requiring the developers to post a performance
bond or letter of credit pursuant to Paragraph 4 of the settlement agreement,
or, in the alternative, for an order requiring arbitration pursuant to the Montana
Uniform Arbitration Act rather than as established in the settlement agreement.
The developers responded, arguing that the court should compel the parties to
arbitrate under the Commercial Arbitration Rules of the American Arbitration
Association. The developers also opposed the homeowners association's
request for specific performance.
¶11 On September 9, 1997, the District Court entered an order and rationale
requiring the developers to post a bond or letter of credit in the amount of
$335,715 on or before September 18, 1997. The court also denied the parties'
application to compel arbitration on the grounds that the agreement is clear
and "there is . . . no need for the attendant delay and additional expense which
would be required to submit this issue to arbitration."
¶12 On September 17, 1997, the developers filed a notice of appeal. On
September 26, 1997, the homeowners association filed a motion to dismiss the
developers' appeal with this Court, arguing, first, that the District Court's order
was correct in requiring specific performance and not appealable because the
homeowners association never refused to arbitrate the dispute and, second, that
the order is not a final judgment from which an appeal is appropriate. On
October 7, 1997, this Court issued an order denying the homeowners
association's request to dismiss the appeal, concluding that the District Court
did deny arbitration and that under § 27-5-324, MCA, the order is appealable.
The developers now appeal from the September 8, 1997, order and rationale
of the District Court.
ISSUE 1
¶13 Did the District Court err by denying the defendants' request to submit
to arbitration?
¶14 We review a district court's conclusion of law regarding arbitrability to
determine whether it is correct. Missoula County High School Educ. Ass'n v.
Board of Trustees, Missoula County High Schools (1993), 259 Mont. 438,
442, 857 P.2d 696, 698. When a court is asked to compel arbitration of a
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dispute, the threshold inquiry should be whether the parties agreed to arbitrate.
Van Ness Townhouses v. Mar Industries Corp. (9th Cir. 1988), 862 F.2d 754,
756. The rationale for such an inquiry comes from the fact that "arbitration is
a matter of contract and a party cannot be required to submit to arbitration any
dispute which he has not agreed so to submit." Tracer Research Corp. v.
National Environmental Services Co. (9th Cir. 1994), 42 F.3d 1292, 1294
(quoting United Steelworkers v. Warrior & Gulf Navigation Co. (1960), 363
U.S. 574, 582, 80 S. Ct. 1347, 1353, 4 L. Ed. 2d 1409, 1417).
¶15 In this case, both the developers and the homeowners association argue
about the meaning of certain provisions of the settlement agreement. The
pertinent sections of the settlement agreement for this Court's discussion
provide:
4. If the water system is not completed and approved by July 1,
1997, TLDC and Gerald B. Lucas (hereinafter Lucas) agree to post a
performance bond or an approved letter of credit in the sum of
$335,715.00, in favor of the TLDC and the Troutbeck Rise
Homeowners Association (hereinafter TRHA), as security for
completion of the water system for Troutbeck Rise Subdivision, Phases
I and II, and approval by appropriate state and local officials, on or
before July 1, 1998. . . . Only TLDC may take draws against said
performance bond or letter of credit prior to July 1, 1998, upon
approval of the above referenced engineering certification committee,
and only TRHA may take draws against said performance bond or
letter of credit, after July, 1, 1998, upon approval of the above
referenced engineering certification committee if the water system is
not completed, approved and certified by the above referenced
engineering certification committee and appropriate state and local
officials by July 1, 1998.
. . . .
12. Any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.
Arbitration shall be conducted by a panel of three (3) arbitrators, one
arbitrator appointed by each of the parties hereto, and the third
arbitrator appointed by the first two arbitrators so appointed.
. . . .
14. No remedy referred to in this Agreement is intended to be
exclusive, but shall be cumulative and in addition to any other remedy
referred to herein or otherwise available to either party at law or in
equity. Either party shall have the remedy of specific performance of
this Agreement.
¶16 The developers argue that the District Court erred in ordering specific
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performance and not granting the parties' application to compel arbitration
under the settlement agreement. The developers assert that the court was
without power to order specific performance because the settlement agreement
in Paragraph 12 specifically provided for arbitration. The developers contend
that a court may refuse to enforce a settlement agreement only under certain
grounds available at law or equity which are sufficient to revoke a contract.
See § 27-5-114(2), MCA. Moreover, the developers argue that the court's
refusal to order arbitration was not based on sufficient grounds and must be
reversed.
¶17 The homeowners association counters that, under Paragraph 14 of the
settlement agreement, the court could order specific performance of the
agreement rather than compel the parties to submit to arbitration. The
homeowners association argues that the settlement agreement indicates that all
available remedies could be pursued by either party and that, in this particular
instance, they were seeking specific performance, which is specifically
included as a remedy under Paragraph 14 of the settlement agreement. In this
case, where the parties do not dispute whether the water system was completed
on time, the settlement agreement is clear, allowing the homeowners
association the remedy of specific performance without having to first go
through arbitration. Therefore, according to the homeowners, the District
Court was correct in ordering the developers to post a performance bond or
letter of credit.
¶18 In its order, the District Court stated that both parties acknowledge that,
as of July 1, 1997, "the plans and specifications for the Troutbeck Rise water
system have not been approved by the State of Montana and the water system
has not yet been completed." The court then pointed out that under Paragraph
4 of the settlement agreement, "it is clear that a performance bond is required
on July 1, 1997, if the water system was not completed." The court
determined that the intent of the parties could by ascertained by the language
of the settlement agreement. The court concluded by ruling that:
The language in the instant contract (the Settlement Agreement)
is clear on its face that the parties intended to require a
performance bond or approved letter of credit in the sum of
$335,715.00 to be posted by July 1, 1997, if the water system
was not completed by July 1, 1997, and there is, accordingly, no
need for the attendant delay and additional expense which
would be required to submit this issue to arbitration.
¶19 Settlement agreements requiring arbitration of disputes are enforceable
in Montana, as are any other contracts. See Chor v. Piper, Jaffray &
Hopwood, Inc. (1993), 261 Mont. 143, 148, 862 P.2d 26, 29. Under § 27-5-114,
MCA, a written agreement to submit any controversy to arbitration is
valid and enforceable except on the grounds that exist at law or in equity for
the revocation of a contract. Furthermore, when a party moves for arbitration
under a valid agreement as described by § 27-5-114, MCA, and the opposing
party refuses to arbitrate, a district court must order the parties to proceed with
arbitration. Section 27-5-115, MCA.
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¶20 The homeowners association contends that, in this case, it did not deny
the existence of an agreement to arbitrate or refuse to arbitrate, rather, they
moved the District Court for a motion to enforce the settlement agreement to
either order specific performance or compel the parties to arbitrate. The
homeowners association notes that the developers did not file a motion to
compel arbitration pursuant to § 27-5-115, MCA, in the proceeding before the
District Court. The homeowners association states that the District Court was
correct in not ordering the parties to arbitrate because the settlement agreement
was clear that under Paragraph 14, the remedy of specific performance was
available, providing authority for the court to order the developers to post a
bond without requiring the parties to submit to arbitration.
¶21 However, in its motion to dismiss the appeal filed with this Court, the
homeowners association made the same argument that neither party made an
application to compel arbitration before the District Court nor did the
homeowners association refuse to arbitrate. In an order issued October 7,
1997, this Court rejected that argument and stated that:
[T]he effect of the district court's order was to deny the parties'
application for an order compelling arbitration. While neither
party refused, per se, to arbitrate as required by § 27-1-115(1),
MCA, there was, nevertheless, a dispute as to what rules would
govern the arbitration, thus necessitating the intervention of the
district court to decide this issue and order arbitration.
¶22 Although the District Court was aware that the parties disagreed over
the interpretation of Paragraph 4, it ruled that under the language of the
settlement agreement it was clear that the developers were required to post a
bond on July 1, 1997, if the water system was not completed. The court noted
that under the settlement agreement the intention of the parties in requiring the
bond then was clear, therefore, there was no need to submit the issue to
arbitration because of its "attendant delay and additional expense." However,
these reasons are not sufficient grounds for the court to set aside the arbitration
provision in Paragraph 12.
¶23 Under Paragraph 12 of the settlement agreement "any controversy or
claim arising out of this agreement shall be settled by arbitration." The
homeowners association contends that there is no dispute or controversy under
the settlement agreement because the parties agree that completion of the
water system as defined in the settlement agreement has not been achieved by
July 1, 1997. However, the underlying issue in this case is whether, under
Paragraph 4 of the settlement agreement, the developers were required to post
a performance bond or letter of credit on July 1, 1997, or if they have until
July 1, 1998, to post a performance bond or letter of credit. This Court
determines that this disagreement between the parties is a controversy that
arises from the settlement agreement itself. Although the settlement agreement
did , indeed, contemplate the remedy of specific performance, this was not an
alternative to arbitration, but a remedy available to the arbitrators when
interpreting and enforcing the settlement agreement.
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¶24 As stated above, an agreement to submit any controversy to arbitration
is valid and enforceable except on the grounds that exist at law or in equity for
the revocation of a contract. Section 27-5-114, MCA. A court may rescind a
written contract under circumstances such as mistake, duress, menace, fraud,
undue influence, failure of consideration, void consideration, or lack of
consent of the parties. See §§ 28-2-1714(1) and -1711, MCA. Also, a court
may set aside a contract that is unlawful or which prejudices the public
interest. See § 28-2-1714(2) and (3), MCA. In this case, none of the parties
allege that any of these grounds exist to void the arbitration clause. Moreover,
we conclude that the court's reasons for not ordering arbitration because of the
clarity of the settlement agreement and the inherent delay and expense of
arbitration are not valid under § 27-5-114, MCA.
¶25 Furthermore, under § 27-5-115(5), MCA, a motion to compel parties
to arbitrate "may not be refused on the ground that the claim in issue lacks
merit or good faith or because no fault or grounds for the claim sought to be
arbitrated have been shown." We determine that once the District Court
realized that the parties had a dispute concerning the agreement, it could not
ignore the arbitration provision in Paragraph 12 and proceed to decide the
dispute. Instead, the court should have ordered the parties to arbitrate the
dispute as they agreed.
¶26 We conclude that in ordering the developers to post a bond, the District
Court exceeded its authority under § 27-5-115(5), MCA. By deciding that the
developers violated Paragraph 4 of the settlement agreement, the court
undertook to consider and decide the merits of the dispute between the parties.
A district court may not decide the merits of a case when a valid agreement
requires the parties to a dispute to submit to arbitration.
¶27 We hold that the arbitration clause in Paragraph 12 of the settlement
agreement between the developers and the homeowners association is binding
and enforceable. We determine that the dispute between the developers and
the homeowners association regarding the interpretation of Paragraph 4 is a
controversy arising out of the settlement agreement that must be settled in
arbitration rather than by the District Court.
¶28 Therefore, we conclude that the District Court erred in ordering the
developers to post a performance bond or letter of credit rather than ordering
the parties to submit to arbitration under Paragraph 12 of the settlement
agreement.
ISSUE 2
¶29 In an arbitration under the settlement agreement, do the Commercial
Arbitration Rules of the American Arbitration Association or the Montana
Uniform Arbitration Act apply?
¶30 In reversing the District Court's order, thereby requiring the parties to
submit to arbitration, this Court must now determine what rules would apply
in arbitration between the parties. The developers contend that under the plain
language of the settlement agreement, the Commercial Arbitration Rules of the
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American Arbitration Association should apply. Paragraph 12 of the
settlement agreement states that "any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled by arbitration
in accordance with the Commercial Arbitration Rules of the American
Arbitration Association."
¶31 The homeowners association counters that should arbitration be
necessary, it should be required pursuant to the Montana Uniform Arbitration
Act. As the homeowners association points out, the notice provision on the
front page of the settlement agreement states: "THIS AGREEMENT IS
SUBJECT TO ARBITRATION PURSUANT TO TITLE 27, CHAPTER 5,
MONTANA CODE ANNOTATED." Moreover, the homeowners association
contends that should arbitration be required, it would be far more efficient and
expeditious to proceed under the Montana Uniform Arbitration Act rather than
proceeding under Commercial Arbitration Rules of the American Arbitration
Association.
¶32 At the time the settlement agreement was drafted, the notice provision
was required under § 27-5-114(4), MCA (1995). This provision was required
to be placed on the front page of the settlement agreement in order for the
agreement to comply with Montana law. By the inclusion of this clause on a
settlement agreement or contract, the statute did not mandate that an
arbitration proceed pursuant to the rules established under the Montana
Uniform Arbitration Act. Instead, its purpose was to merely notify parties that
the agreement contained an arbitration clause. After the parties executed the
settlement agreement, § 27-5-114(4), MCA (1995), was found to be preempted
by federal law and declared invalid. See Doctor's Associates, Inc. v. Casarotto
(1996), 517 U.S. 681, 116 S. Ct. 1652, 134 L. Ed. 2d. 902. Subsequently, the
statute was repealed by the Montana Legislature in 1997.
¶33 Paragraph 12 of the settlement agreement specifically provides that the
parties would arbitrate any controversy or claim pursuant to the Commercial
Arbitration Rules of the American Arbitration Association. If the language of
a contract is clear and explicit, then that language governs its interpretation.
See § 28-3-401, MCA. The fact that the homeowners association now claims
that an arbitration proceeding under the American Arbitration Association
rules is less efficient, slower, or more expensive than an arbitration proceeding
under the Montana Uniform Arbitration Act is immaterial. In this case, under
Paragraph 12 of the settlement agreement, both the homeowners association
and the developers bargained for and agreed that the Commercial Arbitration
Rules of the American Arbitration Association would apply.
¶34 Therefore, we conclude the parties should arbitrate their dispute
pursuant to the Commercial Arbitration Rules of the American Arbitration
Association.
¶35 Reversed and remanded for further proceedings consistent with this
opinion.
/S/ JIM REGNIER
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We Concur:
/S/ J. A. TURNAGE
/S/ KARLA M. GRAY
/S/ W. WILLIAM LEAPHART
/S/ WILLIAM E. HUNT, SR.
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