Holm-Sutherland Co., Inc. v. Town of Shelby

No

No. 98-309

IN THE SUPREME COURT OF THE STATE OF MONTANA

1999 MT 150

295 Mont. 65

982 P.2d 1053

HOLM-SUTHERLAND CO., INC., a Montana Corporation,

Plaintiff and Respondent,

v.

THE TOWN OF SHELBY, MONTANA,

Defendant and Appellant,

and

THOMAS, DEAN & HOSKINS, INC., a Montana corporation,

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Defendant.

APPEAL FROM: District Court of the Ninth Judicial District,

In and for the County of Toole,

The Honorable Marc Buyske, Judge presiding.

COUNSEL OF RECORD:

For Appellant:

Jack L. Lewis; Jardine, Stephenson, Blewett & Weaver, Great

Falls, Montana

For Respondent:

W. Anderson Forsythe and Gerry P. Fagan; Moulton, Bellingham,

Longo & Mather, Billings, Montana

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Submitted on Briefs: January 28, 1999

Decided: June 29, 1999

Filed:

__________________________________________

Clerk

Justice James C. Nelson delivered the Opinion of the Court.

¶1. The Town of Shelby appeals from an order of the Ninth Judicial District Court,
Toole County, compelling arbitration of this contract dispute. We affirm in part and
reverse and remand in part.

¶2. We address the following issues:

1. Did the District Court err in ruling that Montana municipalities have authority to
contractually agree to binding arbitration as a forum or means for resolving claims arising
out of a contract?

2. Did the court err in requiring Safeco Insurance Company to ratify the actions of Holm-
Sutherland Co., Inc. rather than substituting Safeco as the real party in interest?

3. Did the court err in ruling that Holm-Sutherland did not waive its right to demand
arbitration?

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Based on our resolution of the above issues, we do not find it necessary to address the
issue of whether the arbitration provision was assignable.

¶3. In 1994, Holm-Sutherland contracted with the Town of Shelby to construct sewer
and water improvements in the town. One provision of their written contract stated:

All claims, disputes and other matters in question arising out of, or relating to, the
CONTRACT DOCUMENTS or the breach thereof, except for claims which have been
waived by the making and acceptance of final payment as provided by Section 20, shall be
decided by arbitration in accordance with the Construction Industry Arbitration Rules of
the American Arbitration Association.

¶4. In June 1995, a dispute arose under the contract and Holm-Sutherland
demanded arbitration. Instead of agreeing and proceeding to arbitration, the Town
of Shelby filed a complaint in the District Court seeking injunctive protection against
arbitration. The Town asserted that the arbitration clause in the parties' contract
was invalid on a technicality because it failed to comply with a Montana statute
requiring that arbitration clauses in Montana contracts appear underlined and on
the first page of the contract. See § 27-5-114(4), MCA (1993). Holm-Sutherland filed
a notice of appearance and "No Objection" to the Town's request for a temporary
injunction, and the court granted that relief. The law imposing the notice
requirements as to contractual arbitration clauses was subsequently overturned by
the United States Supreme Court and repealed by the Montana Legislature. See
Casarotto v. Lombardi (1994), 268 Mont. 369, 886 P.2d 931, overruled in Doctor's
Assoc. v. Casarotto (1996), 517 U.S. 681, 116 S.Ct. 1652, 134 L.Ed.2d 902; 1997 Mont.
Laws 19 § 1.

¶5. In the meantime, Holm-Sutherland filed an action in the Cascade County District
Court against the Town of Shelby and the Town's engineering firm, Thomas Dean &
Hoskins, Inc., seeking damages for breach of contract and consequential damages.
That action was eventually consolidated with the injunction action before the Toole
County District Court. Discovery ensued, and the case was set for trial three times.

¶6. In January 1998, some twenty months after Casarotto was overruled and less
than ten weeks prior to the third date set for trial, Holm-Sutherland moved to

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compel arbitration. The Town objected on grounds that it lacked the authority to
bind itself to arbitration and that Holm-Sutherland had waived its right to arbitrate.
The District Court ordered arbitration, and the Town of Shelby appeals.

Issue 1

¶7. Did the District Court err in ruling that Montana municipalities have authority
to contractually agree to binding arbitration as a forum or means for resolving
claims arising out of a contract?

¶8. The Town of Shelby points out that a municipality such as itself which is not
operating under a self-governing charter has only those powers given by the
legislature. See D & F Sanitation Service v. City of Billings (1986), 219 Mont. 437, 445,
713 P.2d 977, 982. The Town asserts that the duty to determine the validity of claims
against a municipality is statutorily placed upon the municipality's council under §§
7-6-4301 and -4302, MCA, and that this duty cannot be delegated to an arbitrator.
The Town does not cite any case or statute directly supporting its argument. Because
this is a legal issue of statutory interpretation, our standard of review is whether the
District Court's decision was correct. See State v. Bell (1996), 277 Mont. 482, 486, 923
P.2d 524, 526.

¶9. The District Court reasoned that a municipality has broad power to contract for
services necessary for the effective administration of its duties under § 7-1-4124(23),
MCA. The court further reasoned that the Montana Uniform Arbitration Act, §§ 27-
5-111 to -324, MCA, illustrates a general state policy favoring arbitration and that
there is also a strong federal policy favoring arbitration.

¶10. We agree with the District Court. Clearly the Town of Shelby has the power to
enter into contracts, because Montana law specifically grants that power to
municipalities. See § 7-1-4124(4), MCA. Additionally, a municipality may "exercise
powers not inconsistent with law necessary for effective administration of authorized
services and functions." Section 7-1-4124(23), MCA. These powers establish a city's
ability to be bound to the terms of a contract which contains a binding arbitration
clause.

¶11. The two abovementioned statutory provisions coupled with the Montana
Legislature's general endorsement of binding arbitration agreements make it clear

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that Montana municipalities possess the authority to contractually agree to binding
arbitration as a forum or means for resolving claims arising out of a contract. We
hold that the Town of Shelby had the power to enter into an agreement which
includes an arbitration provision.

Issue 2

¶12. Did the court err in requiring Safeco Insurance Company to ratify Holm-
Sutherland's actions rather than substituting Safeco as the real party in interest?

¶13. On August 22, 1994, Holm-Sutherland transferred all of its assignable rights to
this contract to its bond underwriter, Safeco, as collateral security to repay all loss
and expense to Safeco. This transfer of rights did not become known to the Town of
Shelby until January of 1998, as a result of a discovery response.

¶14. Soon thereafter, the Town moved to substitute Safeco as the real party in
interest pursuant to Rule 17(a), M.R.Civ.P. The District Court instead required
Safeco to ratify this action, which was accomplished. The Town of Shelby argues that
Safeco should have been substituted rather than required to ratify this action.
However, while the Town raises this issue, it admits that resolution of the issue makes
little difference for purposes of this appeal. Additionally, Holm-Sutherland asserts
that it did not convey to Safeco its entire claim against the Town of Shelby and its
engineers, and thus retains an interest in this action.

¶15. Rule 17(a), M.R.Civ.P., specifically provides that "ratification . . . or
substitution shall have the same effect as if the action had been commenced in the
name of the real party in interest." Safeco's ratification thus relates back to the
beginning of this action. We therefore treat Safeco as if it were the party originally
performing each action or causing each filing by Holm-Sutherland.

¶16. We hold the court did not err in requiring ratification rather than ordering
substitution.

Issue 3

¶17. Did the court err in ruling that Holm-Sutherland did not waive its right to
demand arbitration?

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¶18. We review de novo a trial court's decision as to whether an arbitration clause
has been waived. Downey v. Christensen (1992), 251 Mont. 386, 389, 825 P.2d 557, 559
(citing Fisher v. A.G. Becker Paribas Inc. (9th Cir. 1986), 791 F.2d 691, 694). See also,
Britton v. Co-op Banking Group (9th Cir. 1990), 916 F.2d 1405, 1409, citing Fisher,
reviewing de novo the same issue presented in the case at bar--whether the
undisputed facts of a party's participation in litigation and delay in seeking
arbitration constitute a waiver of arbitration.

¶19. Waiver may be established by express declarations or acts or may be implied by
a course of action or conduct which induces the belief that the intention and purpose
was waiver. Thiel v. Johnson (1985), 219 Mont. 271, 274, 711 P.2d 829, 832. "When
parties have contracted to settle disputes through arbitration, the party asserting
waiver bears a heavy burden of proof." Downey, 251 Mont. at 389, 825 P.2d at 559
(citing Britton, 916 F.2d at 1412).

¶20. In Downey, this Court opined that a party asserting the waiver of an arbitration
right must demonstrate:

1. knowledge of the existing right to compel arbitration;

2. acts inconsistent with the right to arbitrate the dispute; and

3. prejudice to the party resisting arbitration.

Downey, 251 Mont. at 389, 825 P.2d at 559. In setting forth these three factors, we did not distinguish between
express and implied waiver. The Town of Shelby argues that the three factors do not apply here because Downey
was an implied waiver case and this is an express waiver case. The Town asserts that where there has been an
express waiver of the right to demand arbitration, it is not necessary to show prejudice to the party resisting
arbitration. To that extent, it asserts that the District Court's reliance on Downey was misplaced.

¶21. There is no allegation that Holm-Sutherland ever explicitly waived, orally or in
writing, its contractual right to demand arbitration, which would normally be the
means of accomplishing an express waiver of that right. See Thiel, 219 Mont. at 274,
711 P.2d at 832. The Town of Shelby instead asserts that Holm-Sutherland expressly

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waived its right to demand arbitration by demanding a trial by jury. The Town's
authority for this proposition consists of two cases: Beverly Hills Development Corp. v.
George Wimpey of Florida, Inc. (Fla. App. 5 Dist. 1995), 661 So.2d 969, and Gilmore v.
Shearson/American Exp., Inc. (2nd Cir. 1987), 811 F.2d 108. In each of those cases,
the court ruled that the defendant had expressly waived its right to arbitrate by its
inconsistent act of withdrawing its motion to compel arbitration. In the present case,
however, Holm-Sutherland did not withdraw a motion to compel arbitration. We
conclude that the Town of Shelby has not established that Holm-Sutherland
expressly waived its right to demand arbitration.

¶22. We therefore look to whether Holm-Sutherland's actions constituted an implied
waiver of the right to arbitrate under the three factors set forth in Downey. The
presence of the first factor, knowledge of the existing right to compel arbitration, is
not in dispute. The second and third factors are contested.

¶23. After Holm-Sutherland initially demanded arbitration before the American
Arbitration Association, the Town of Shelby filed its complaint for an injunction,
alleging that the provision concerning arbitration in the parties' contract failed to
comply with Montana's statutory requirement that a contract containing an
arbitration clause provide first page, underlined notice of the arbitration provision.
Holm-Sutherland voluntarily appeared in that court action and filed notice of "No
Objection" to a temporary injunction prohibiting arbitration.

¶24. Holm-Sutherland also included a demand for trial by jury in its answer to the
complaint seeking to enjoin arbitration. Rule 38(d), M.R.Civ.P., provides that "[a]
demand for trial by jury made as herein provided may not be withdrawn without the
consent of the parties." This rule has been strictly construed to mean that a party
initially demanding a trial by jury may not withdraw such a demand without the
consent of the other party.

The great weight of authority gives Rule 38(d), M.R.Civ.P., a literal interpretation and
prohibits unilateral withdrawal of the demand for a jury trial without the consent of both
parties. We hold accordingly that where one party has made a proper demand for a jury
trial, the other party may rely on it. If at a later date the demanding party desires to waive
the demand, the opposing party has the right to determine whether to consent to a trial
before the judge or to insist upon a jury trial.

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Safeco Ins. Co. v. Lovely Agency (1982), 200 Mont. 447, 451, 652 P.2d 1160, 1162 (citation omitted).
The Town of Shelby had a right to rely upon Holm-Sutherland's demand for jury trial.

¶25. Holm-Sutherland argues, however, that under Downey, the fact that it initially
asserted its arbitration right as an affirmative defense is enough to defeat the
allegation that it waived that right. In Downey, this Court stated:

The Downeys were on notice of Christensen's and Baker Boy's intent to rely on the
arbitration clause in the franchise agreement from the outset because they explicitly
included the right to arbitrate in their answers as affirmative defenses. This factor alone
sufficiently defeats a claim of waiver.

Downey, 251 Mont. at 390, 825 P.2d at 559-60 (citing Michael v. SS Thanasis (N.D. Cal. 1970), 311 F.
Supp.170, 181) (emphasis added).

¶26. The Michael court did observe that some federal courts have taken the position
mentioned in the emphasized statement. However, we do not read Michael or
Downey's reference as standing for the proposition that, as in the case sub judice, a
party can simply raise arbitration as an affirmative defense in its answer and,
without risking waiver, then fail to consistently press for the non-judicial remedy
but, instead, embrace and engage in litigation for a lengthy period of time,
demanding arbitration again only shortly before trial.

¶27. Moreover, unlike Downey, the present case also encompasses an action
separately initiated by Holm-Sutherland, in which action Holm-Sutherland did not
assert its contractual right to arbitration. In November 1995, Holm-Sutherland filed
a complaint and demand for jury trial against the Town of Shelby and the
engineering firm for the sewer and water project, Thomas Dean & Hoskins, in the
Eighth Judicial District Court, Cascade County. That action was based upon the
same contract and circumstances out of which Holm-Sutherland's previous demand
for arbitration arose. However, Holm-Sutherland's complaint made no demand for
arbitration. Moreover, the complaint contained inextricably intertwined claims
against two defendants only one of which the Town of Shelby was a party to the
contract containing an arbitration clause. The damage action was eventually
transferred by mutual stipulation to Toole County and was consolidated with the
action previously filed by the Town of Shelby.

¶28. When a party instigates litigation on a contract without the mention of a right to

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arbitrate, that party presumptively waives the right to later demand arbitration
pursuant to a clause in the contract. See, e.g., Duferco Steel Inc. v. M/V Kalisti (7th
Cir. 1997), 121 F.3d 321, 326; Cabinetree of Wisconsin, Inc. v. Kraftmaid Cabinetry,
Inc. (7th Cir. 1995), 50 F.3d 388, 390; Worldsource Coil Coating, Inc. v. McGraw
Constr. Co., Inc. (6th Cir. 1991), 946 F.2d 473, 479; Shinto Shipping Co. Ltd. v. Fibrex
& Shipping Co., Inc. (N.D. Cal. 1976), 425 F.Supp. 1088, 1092.

¶29. Holm-Sutherland argues that its decision to pursue litigation rather than
arbitration was dictated by this Court's Casarotto decisions. It cites Fisher v. A.G.
Becker Paribas Inc. (9th Cir. 1986), 791 F.2d 691, as authority that a delay of as much
as three and a half years between the initiation of court action and a demand for
arbitration may not be sufficient to constitute waiver of the right to demand
arbitration.

¶30. As in this case, the state of the law when Fisher was initiated led the parties to
believe that arbitration was not an option. In Fisher, however, the demand for
arbitration was promptly made upon the reversal of the state of the law. Not so in the
present case. If Holm-Sutherland was merely waiting for the law to change in order
to renew its demand for arbitration, it need not have waited twenty months after the
United States Supreme Court reversed this Court's Casarotto decision before making
a demand for arbitration. Instead of demanding arbitration in a timely manner after
the United States Supreme Court's Casarotto decision, Holm-Sutherland waited until
only a few weeks before trial and then filed its motion to compel arbitration.

¶31. We conclude that under these facts and despite the statement in Downey
referred to in ¶ 25 above, Holm-Sutherland's subsequent actions were inconsistent
with its initial assertion of the right to demand arbitration. Holm-Sutherland elected
to pursue a judicial remedy through the Montana court system. This decision
resulted in the use of judicial resources and reasonably caused the Town of Shelby to
believe that an election to forego arbitration had affirmatively been made.

¶32. The remaining factor under Downey is prejudice to the party resisting
arbitration. In Van Ness Townhouses v. Mar Industries Corp. (9th Cir. 1988), 862 F.2d
754, 759, the court held that the plaintiff was prejudiced by the defendant's
inconsistent acts in allowing its arbitration claim to stale for two years while
pursuing litigation avenues. In Northland Ins. Co. v. Kellogg (Okla. App. 1995), 897
P.2d 1161, the court found prejudice to the party opposing arbitration as a result of

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the actions of the party later demanding arbitration of waiting ten months to do so,
requesting a jury trial, and moving for summary judgment. As a result, the right to
demand arbitration was waived. An eight-month delay in asserting the right to
arbitrate, coupled with the taking of five depositions, constituted prejudice to the
party opposing arbitration in S & H Contractors, Inc. v. A.J. Taft Coal Co., Inc. (11th
Cir. 1990), 906 F.2d 1507, 1514. A Connecticut court held that engaging in robust
pretrial litigation, including attending chamber conferences, participating in twice
changing the date of trial, and engaging in discovery not afforded in arbitration,
prejudiced the party opposing arbitration and constituted waiver of the right to
arbitrate. McDonnell v. Dean Witter Reynolds, Inc. (D. Conn. 1985), 620 F.Supp. 152,
159.

¶33. In the instant case, Holm-Sutherland first acquiesced in the granting of an
injunction prohibiting arbitration, thus communicating its decision to forego
arbitration and to embrace trial. Holm-Sutherland then filed a complaint in which it
entirely disregarded the right to arbitrate, instead demanding a trial by jury. The
Town of Shelby was prejudiced by the unnecessary delay and expense of answering a
complaint entirely superfluous to the pursuit of arbitration. Even if those acts are
deemed reasonable responses to this Court's Casarotto opinions, Holm-Sutherland
continued to actively pursue litigation instead of arbitration for some twenty months
after Casarotto was overruled. The Town was prejudiced by having to spend both
time and money in trial preparation, and by having to divulge its litigation strategies
and arguments in discovery in preparation for that litigation.

¶34. We hold that the District Court erred in determining that Holm-Sutherland had
not impliedly waived its contractual right to demand arbitration, and that Holm-
Sutherland, through its actions, did in fact waive that right. We therefore reverse the
decision of the District Court and remand this matter for further proceedings
consistent with this Opinion.

/S/ JAMES C. NELSON

We concur:

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/S/ J. A. TURNAGE

/S/ KARLA M. GRAY

/S/ TERRY N. TRIEWEILER

/S/ JIM REGNIER

/S/ W. WILLIAM LEAPHART

/S/ THOMAS C. HONZEL

District Judge, sitting for Justice William E Hunt, Sr.

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