United States Court of Appeals,
Fifth Circuit.
No. 94-30153.
Karen McKEE, Wife of/and Curtis K. Kilpatrick, Plaintiffs-
Appellants,
v.
HOME BUYERS WARRANTY CORPORATION II, Defendant-Appellee.
Feb. 27, 1995.
Appeal from the United States District Court Eastern District of
Louisiana.
Before WHITE1, Associate Justice (Ret.), BARKSDALE and PARKER,
Circuit Judges.
ROBERT M. PARKER, Circuit Judge:
Karen McKee, Wife of/and Curtis K. Kilpatrick (the
"Kilpatricks") filed this action against Home Buyers Warranty
Corporation II ("HBW") to recover for damage to their home which
they contend was covered under HBW's structural warranty. HBW
filed a motion for summary judgment, contending that the dispute
was conclusively resolved in a prior arbitration. The district
court granted the motion. The Kilpatricks now appeal, contending
that the arbitration was not binding. Because the district court
correctly determined that HBW was entitled to summary judgment
based on the prior arbitration, we affirm.
I.
The Kilpatricks bought a house in 1985. The builder enrolled
1
The Honorable Byron R. White, Associate Justice of the
United States Supreme Court, (Ret.), sitting by designation
pursuant to 28 U.S.C. § 294(a).
1
the house in HBW's limited ten-year structural warranty program.
The house suffered from excessive differential settlement and
the Kilpatricks filed a claim with HBW. HBW sent the Kilpatricks
a letter notifying them that it had denied their claim because HBW
had determined that the defect did not render the house "unsafe,
unsanitary, or otherwise unlivable" as required to invoke coverage
under the warranty. HBW stated that arbitration was required
before any litigation and referred the Kilpatricks to the provision
in their warranty booklet requiring conciliation or arbitration as
a condition precedent to any attempted litigation.
The Kilpatricks requested through their attorney that the
matter be submitted to arbitration with the American Arbitration
Association ("AAA") as provided in the warranty booklet. The
Kilpatricks' attorney reviewed the AAA rules and represented them
at the arbitration. The arbitrator determined that the problems
with the Kilpatricks' house were not covered by the warranty and
ruled in favor of HBW. The Kilpatricks did not appeal the
arbitrator's decision or file a proceeding in court to have it
vacated, modified, or corrected. Instead the Kilpatricks filed
suit on the contract in Louisiana state court, and HBW removed to
federal court based on diversity of citizenship.
Along with its answer, HBW filed a counterclaim for
confirmation of the earlier arbitration. HBW also filed a motion
for summary judgment based on arbitration and award. The district
court granted the motion and the arbitration award was confirmed.
II.
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A.
We review a grant of summary judgment de novo, viewing all
evidence in the light most favorable to the non-moving party.
E.g., Insurance Company of North America v. Dealy, 911 F.2d 1096
(5th Cir.1990). Our review of the district court's confirmation of
an arbitrator's award is likewise de novo. Executone Information
Systems, Inc. v. Davis, 26 F.3d 1314 (5th Cir.1994). We also
approach this case in the light of the "liberal federal policy
favoring arbitration." Moses H. Cone Memorial Hosp. v. Mercury
Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765
(1983).
B.
The central issue in this case is whether the district court
correctly determined that the parties agreed to binding
arbitration. The Kilpatricks contend that the warranty called for
non-binding arbitration based on a provision in the warranty that
"[t]he dispute resolution process shall precede any litigation
attempted by either party."2 The Kilpatricks argue that the fact
2
The section of the warranty entitled "Conciliation and
Arbitration" provides:
"Should the Builder or Homebuyer(s) disagree with the
Insurer's decision to deny the claim as recommended by the
Service, the contesting party shall call for conciliation
with the Service or an arbitration to be conducted by the
American Arbitration Association (A.A.A.), or other mutually
agreeable arbitration service at the Service's expense....
The conciliation and/or arbitration process will be
conducted in accordance with the warranty conditions
described herein and the rules and regulations of the A.A.A.
or other mutually agreeable arbitration service. The
dispute settlement process shall precede any litigation
attempted by either party on items that are specifically
3
that the warranty makes arbitration a condition precedent to
litigation indicates that the arbitration is non-binding. We
disagree.
Numerous courts have held that arbitration is binding where
the rules under which the arbitration is conducted call for binding
arbitration. E.g., Rainwater v. National Home Ins. Co., 944 F.2d
190 (4th Cir.1991) (holding that an arbitration in accordance with
AAA rules is a binding arbitration); Commonwealth Edison Co. v.
Gulf Oil Corp., 541 F.2d 1263, 1273 (7th Cir.1976) (holding that
incorporation of rules of arbitration in agreement established
requisite consent to judgment); I/S Stavborg (O.H. Meling,
Manager) v. National Metal Converters, Inc., 500 F.2d 424 (2d
Cir.1974) (holding that agreement to be bound by arbitration and
consent to judgment could be inferred by reference to rules which
provide for binding arbitration); see also Varley v. Tarrytown
Associates, Inc., 477 F.2d 208, 210 (2d Cir.1973) (conceding that
agreement to binding arbitration could be expressed by
incorporating arbitration rules, but finding that AAA rules in
force at the time did not allow for entry of judgment); cf.
Dowling v. Home Buyers Warranty Corp. II, --- S.C. ----, 428 S.E.2d
709 (1993) (finding that there was no agreement to arbitrate where
the Arbitration Acknowledgement and correspondence from the
arbitration agency stated that the arbitration would not be
binding). The decisions holding that reference to AAA rules as
included in this warranty.... The dispute will be resolved
or an award rendered by the arbitrator within 40 days from
the time the form is received by the arbitration service."
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permitting entry of judgment are longstanding. Consequently, all
parties are on notice that resort to AAA arbitration will be deemed
both binding and subject to entry of judgment unless the parties
expressly agree otherwise. Rainwater, 944 F.2d at 194.
In the instant case, it is undisputed that the warranty
provided that AAA rules would govern if the dispute were submitted
to AAA arbitration. The arbitration was conducted under AAA rules
and those rules provided for binding arbitration unless the
applicable law or the terms of the warranty specified otherwise.3
We must therefore determine whether there is anything in the
warranty that specifies non-binding arbitration.
We find the Kilpatricks contention that the "condition
precedent" language in the warranty calls for non-binding
arbitration unpersuasive. We agree with the Fourth Circuit's
treatment of this issue in Rainwater:
Though [the Kilpatrick's] claim has some surface appeal, we
think that the "condition precedent" language cannot carry all
the weight [the Kilpatricks] would ascribe to it.
Traditionally, federal courts were hostile to arbitration
clauses since it was thought they could be avoided at the whim
of either party. See generally Continental Grain Co. v. Dant
& Russell, Inc., 118 F.2d 967 (9th Cir.1941) (arbitration
agreements could not be enforced in federal courts prior to
passage of FAA). As a result, parties frequently included
"condition precedent" language to make certain that the
arbitration process ran its course before a federal court
could entertain a suit. See, e.g., Pettus v. Olga Coal Co.,
3
The American Arbitration Association Home Warranty
Arbitration Rules under which the arbitration was conducted
provide in Rule 26(c): "Unless the applicable law or warranty
program, the insurance policy, or another applicable document
provides otherwise, the parties to these rules shall be deemed to
have consented that judgment upon the arbitration award may be
entered in any federal or state court having jurisdiction
thereof."
5
137 W.Va. 492, 72 S.E.2d 881, 885 (1952) (holding that
"condition precedent" language did not oust court of
jurisdiction, something frowned upon at common law, but rather
made suit premature until the terms of the contract were
fulfilled). Therefore, we read "condition precedent" to some
extent as an artifact left over from the days of hostility
toward arbitration. To the extent that the phrase has
meaning, we find that it does not undermine the binding nature
of arbitration, but instead applies to the confirmation
process permitted by 9 U.S.C. § 9, or to other litigation in
which the arbitration award would be final but just a sub-text
in some larger litigation context.
Rainwater, 944 F.2d at 194.
Because the Kilpatricks submitted the dispute to arbitration
under AAA rules that required binding arbitration unless the
warranty provided for non-binding arbitration, and the warranty did
not provide for non-binding arbitration, the district court was
correct in determining that the arbitration was binding.
C.
The Kilpatricks assert that the threshold question of whether
the parties agreed to binding arbitration is purely a matter of
contract to be determined according to state law. The Kilpatricks
contend that if we construe the warranty according to Louisiana
law, the federal policy favoring arbitration would not apply and
that a state policy requiring that ambiguities in a document be
resolved against the sophisticated drafter would control. The
difficulty with this argument is that the Federal Arbitration Act
(FAA), 9 U.S.C. § 2, declares that written agreements to arbitrate
are enforceable when contained in a contract involving interstate
commerce, see Allied-Bruce Terminix Companies, Inc. v. Dobson, ---
U.S. ----, 115 S.Ct. 834, --- L.Ed.2d ---- (1995), and the
Kilpatricks' warranty certainly falls within this category. The
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Supreme Court has explained that, in construing an arbitration
agreement within the scope of the FAA, "as with any other contract,
the parties' intentions control, but those intentions are
generously construed as to issues of arbitrability." Mitsubishi
Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626
105 S.Ct. 3346, 3354, 87 L.Ed.2d 444 (1985). That is, the FAA
"create[s] a body of federal substantive law of arbitrability,
applicable to any arbitration agreement within the coverage of the
Act," Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983), and that
body of federal law requires that, "in applying general state-law
principles of contract interpretation to the interpretation of an
agreement within the scope of the Act, ... due regard must be given
to the federal policy favoring arbitration, and ambiguities as to
the scope of the arbitration clause itself resolved in favor of
arbitration." Volt Information Sciences, Inc. v. Stanford
University, 489 U.S. 468, 475-76, 109 S.Ct. 1248, 1254, 103 L.Ed.2d
488 (1989). We think that this "federal policy favoring
arbitration" covers more than simply the substantive scope of the
arbitration clause—i.e., whether the Kilpatricks' claims were
properly submitted to arbitration—and encompasses an expectation
that such procedures will be binding. As a matter of federal law,
the language of the warranty agreement is not sufficiently specific
to call for non-binding arbitration. Although this case is
controlled by federal law, for the following reasons the
Kilpatricks' state law arguments net them nothing. First, the
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policy favoring arbitration is not exclusively federal; both
federal and state jurisprudence dictate that any doubt as to
whether a controversy is arbitrable should be resolved in favor of
arbitration. Russellville Steel Co., Inc. v. A & R Excavating,
Inc., 624 So.2d 11, 14 (La.App. 5th Cir.1993); Woodson
Construction Company, Inc. v. R.L. Abshire Construction Co., Inc.,
459 So.2d 566 (La.App. 3d Cir.1984). Second, if we construe the
warranty according to Louisiana law, it unambiguously calls for
binding arbitration.
A comparison of the Louisiana Arbitration Law, LSA-R.S.
9:4201, et seq., and the FAA reveals that the parties could not
have agreed to non-binding "arbitration" in a contract subject to
the Louisiana Arbitration Law because arbitration is by definition
a binding procedure under that law.
Arbitration is binding only if a court may enter judgment on
the award made pursuant to the arbitration. While the Louisiana
Arbitration Law generally parallels the FAA, there is a significant
difference between the sections dealing with entry of judgment.
Disputes about whether arbitration is binding can arise under the
FAA because the FAA provides that a court may enter judgment on the
arbitration award only if the parties agreed that a court may enter
judgment. See 9 U.S.C. § 9. Such disputes do not arise under the
Louisiana Arbitration Law because the Louisiana law provides that
a court may enter judgment if the parties agreed to arbitration;
the Louisiana Law simply makes no provision for non-binding
arbitration. See LSA-R.S. 9:4209. Thus, under the Louisiana
8
Arbitration Law, if the parties agreed to a non-binding procedure,
they did not agree to arbitration.
If the Court construes the warranty according to Louisiana
law, we could find the dispute resolution provision in the warranty
ambiguous only if we determined that the "condition precedent"
language means that the parties did not really agree to arbitrate,
even though the warranty explicitly calls for arbitration. Such a
stretch is plainly contrary to the federal and state policies
favoring arbitrability. We are aware of no case in which a
Louisiana court has determined that such "condition precedent"
language has any meaning other than that ascribed to it in
Rainwater. On the contrary, in cases where it can be determined
that an arbitration clause contained "condition precedent" language
similar to that in the instant case, Louisiana courts have held
that the dispute was subject to arbitration without even taking
notice of the "condition precedent" language. E.g., Southern
Motels Investment Corporation v. Tower Contracting Co., Inc., of
Tex., 174 So.2d 852 (La.App. 1st Cir.1965) (holding that the claim
was subject to arbitration but defendant waived right to arbitrate
by filing suit); Lawton v. Cain, 172 So.2d 734 (La.App. 2d
Cir.1965) (holding that the claim was subject to arbitration but
plaintiff waived right to arbitrate by filing suit). We are
therefore unable to find that the warranty calls for anything other
than binding arbitration under Louisiana law.
D.
The Kilpatricks next argue that even if the arbitration was
9
binding, HBW should be equitably estopped from asserting its
defense of arbitration and award because HBW allegedly represented
to the Kilpatricks that the arbitration was non-binding. This
contention is based on the "condition precedent" language in a
letter from HBW's claim representative which contained similar
language and referred them to the applicable section of the
warranty booklet and from the language in the warranty booklet
itself. The Kilpatricks maintain that if they had realized that
the arbitration would be binding, they would have foregone
arbitration and filed a lawsuit initially.
Under Louisiana law, equitable estoppel applies if there is
representation by conduct or work, justifiable reliance on that
representation, and change of position to one's detriment as a
result of that reliance, although estoppel applies only as a last
resort and once the ends of justice so demand. Chevron U.S.A.,
Inc. v. Traillour Oil Co., 987 F.2d 1138 (5th Cir.1993). The
Kilpatricks' estoppel argument fails because HBW did not represent
that the arbitration would be non-binding. HBW merely represented
that arbitration was a condition precedent to litigation. While
this language might be unartful and anachronistic, it does not
denote non-binding arbitration. Although the "condition precedent"
language might be misleading to a layman, we note that the
Kilpatricks requested AAA arbitration through their attorney who
reviewed the AAA rules and represented them at the arbitration
proceedings. Nor do the Kilpatricks suggest that they were induced
to take a cavalier attitude toward the arbitration or that they
10
would have handled the arbitration more effectively if they
believed it was a binding proceeding. Under these circumstances,
the ends of justice do not demand estoppel.
E.
The Kilpatricks finally argue that the district court erred
in ruling on HBW's motion for summary judgment while discovery
requests were pending regarding changes to the dispute resolution
clause in later warranties issued by HBW. The Kilpatricks contend
the changes are relevant to HBW's understanding of whether the
dispute resolution clause called for binding arbitration. Because
we have determined that the arbitration provision in the warranty
is not ambiguous, we find no merit in this contention.
Under Louisiana law, the intent of the parties to a contract
may be construed from the face of the document, without considering
extrinsic evidence, and judgment entered as a matter of law if the
contract is unambiguous. American Totalisator Co., Inc. v. Fair
Grounds Corp., 3 F.3d 810 (5th Cir.1993). When the words of the
contract are clear and unambiguous and lead to no absurd
consequence, no further inquiry may be made into the parties
intent. Rutgers, State University v. Martin Woodlands Gas Co., 974
F.2d 659, 661 (5th Cir.1992). Because we have determined that the
arbitration clause in the Kilpatricks' warranty is not ambiguous,
the district court did not err in granting summary judgment without
considering changes to the arbitration provisions incorporated into
warranties issued subsequent to the Kilpatricks'.
For the reasons stated above, the judgment of the district
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court is AFFIRMED.
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