# FILED April 7, 1998 Cecil Crowson, Jr. Appellate C ourt Clerk IN THE COURT OF APPEALS OF TENNESSEE WESTERN SECTION AT JACKS ON

THE TIPTON COUNTY DEPA RTMENT) OF PUBLIC INSTRUCTION BY ) TIPTON COUNTY BOARD OF ) EDUCATION, ) ) Plaintiff/Appellee, ) Tipton Equity No. 15381 ) vs. ) ) Appeal No. 02A01-9704-CH-00084 DELASHMIT ELECTRIC COMPANY, ) a partnership composed of AUBREY ) DELASHMIT, NEAL DELASHM IT and ) MICHAEL PUHLMAN and F RONTIER ) INSURANCE COMPANY, ) ) Defendants/App

ellants. )

APPEAL FROM THE CHANCERY COURT OF TIPTON COUNTY

AT COVINGTON, TENNESSEE THE HONORABLE JOHN HILL CHISOLM, CHANCELLOR

For the Plaintiff/Appellee : For the Defendan ts/Appellants : Walker T. Tipton M. Clark Spoden Covington, Tennessee Nashville, Tennessee James Lynn Werner Columbia, South Carolina

REVERSED AND REMAN DED

HOLLY KIRBY LILL

ARD, J.

CONCUR: W. FRANK CRAWFORD, P.J., W.S. ALAN E. HIGHERS, J.

OPINION2

This is a breach of contract case involving the enforcement of an arbitration clause. We find the arbitration clause applicab le, reverse the

judgment of the lowe

r court, and rema

nd the case

for arbitration. On June 13, 1995 Appe

llee Tipton County Bo

ard of Educat ion (the Board) entered into a contract with Delashmit

E lectric Company (

Delashmit), requ

iring Delashmit to pe

rform certain electrical work in a new coun ty high school buildin

g. The contract i

nclu ded by reference an arbitration clause. Delashm it provided a performance bond, issued by Frontier Insurance Company (Frontier), in the amoun t of $691,000. This performance bond covered the contract between the BoardandDelashmit, andincorporated by reference the terms of the original contract between the two principles, including the arbitration clause. The performance bond provided that

, upon default by Delashmit, Frontier wo u ld remedy the default by completing the job itself in accord with the contract terms, or by paying for another contractor to complete the job. The Board alleged tha

t on June 25, 1995, De

lashmit “abandoned the construction job leaving substantial work unfinished.” The Board notified Frontier and deman ded that it comply with the terms of the performance bond by completing the job. Frontier refused. The Board then filed this lawsuit against Frontier

andDelashmit. In response, Frontier filed a motion to compel arbitration. Withoutelaborating on its reasoning, the trial court denied Frontier’s motion to

compel arbitration. Frontier now appeals. On appeal, Frontier

argues that the tr

ial court erred

in denying its motion to compel arbitration. In response, the Board argues that it did not have authority to bind itself to an arbitration agreement. The Board also argues that Frontier, as a third party surety, cannot enforce the arbitration provisions against th

e Board. The Board f

urther contends t

hat the arbitrati

on provision is unenforceable under Tennessee statutes because it mandates arbitration in another state. The Board contends that the trial court correctly denied

Frontier’s motion to

compel because the Board does not

have the power to agree to arbitration in this case. A governmental body such

as the Board has no authority other than that granted to it by the Legislature: “Like the counties themselves,county legislative bodies possess only the powers vested in them by the Tennessee Constitution or by state law.” State v. Bilbrey , 878 S.W.2d 567, 571 (Tenn. App. 1994) (citing State

v. Wilson , 194 Tenn. 140, 142-43, 250 S.W.2d 49, 50 (1952)). The Board arguesthat, because the Legislature has not expressly granted the Board the power to enter into arbitration agreements, the1 Tennessee Code A nnotated § 49-2-2

03(4)(C)(1) & (2

) provides: ( 1) No count y board of education shall contract for the construction of school buildings or additions to existing buildings, the expenditure f

or which is in

excess of ten thousand dollars ($10,000) except when such contract be made after competitive bids. *** (2) Constr

uction manageme

nt services which are provided for a fee and which involve supervision of the planning, design, bid and co nstruct ion phases of the project, but not the performance of a c tual construction work, are deemed to be professional services and may be per formed by a qualified person on the basis of recognized

competence and

integrity. ... Contr

acts for su c h services shall be procured through competitive bids as provided in

this subsection or b

y a request

for proposals process. 3 arbitration agreement in this contract is void. Frontier argues that the arbitration agreement is valid and enforceable, and that the Board possessed the authority to ex ecute and bind it self to such a contract: “[C]ontracts made by governmental bodies are as binding as those made by private persons, and of t h is there can be no doubt.” Blackwell v. The Quarterly County Court of Shelby Co. , 622 S.W .2d 535, 5 40 (Tenn. 1981) (citing City of Chattanooga v. Tennessee Electric Power Co. , 172 Te nn. 52 4, 112 S.W.2d 385 (1938)). Tennessee law provides local school boards with the authority to contract for the construction of sch ool buildings . Tenn. Code Ann. § 49-2-203(4)(C)(1) & (2) (1996); 1 see also Benson v. Hardin County , 173 T enn. 246, 116 S.W.2d 1025 (1938) (holding that the exclusive management and control of county schools is in the county board of education). However, section 49-2-203(4)(C)(1) & (2) does not specifically mention arbitration clauses in contracts. Frontier argues that the Board has the authority to enter arbitration agreements

as an incident to its statutorily p rovided po wer to contract and bring suit, and in conformity with the Tennessee Uniform Arbitration Act and the United States ArbitrationAct. Frontier asserts further that, as surety, it steps i

nto the shoes of the

principal and may

assert the claims

or de fenses of the principal on its own behalf. Under Tennessee law, a school board has the authority t o contract fo r the construction of school buildings. Tenn. Code Ann. § 49-2-203(4)(C) (1996). The Legislature has delegated to the Boardthe power to contr act regarding ma

tters “such as ar

e necessary an

d usual, fit and pro

per, to enable [it] to secure or to carry into effect the purposes for which it was created. . . .” See Crocker

v. Manchester , 178 Tenn. 67, 156 S.W.2d 383 (1941). This is not an unlimite d power to contra

ct. Id. at 383. Tennessee courts have implicitly recognized that cities and counties also have thepower2 Tennessee Code A nnotated § 29-5-3 02 provides as foll ows: (a) A written agreement to submit any existing controversy to arbitration or a provis ion in a written contract to submit to arbitration any controversy thereafter ari sing between the parties is valid, enforceable and irrevocable save upon suc h ground s as exist at law or i n equity for the re

vocation of any c

ontract; provided , however, that for contracts relating to farm property, structur es or goods, or to property and structures utilized as a residenc e of a party, the clause providing for arbitration shall

be additionally sig

ned or initialed by

the parties.

4 to contract for ar

bitration under th

e Uniform Arbitra

tion Act, Tennessee Code Annotated § 29-5-301 to -320 (Supp. 1996). 2 See Dickson County v. Bomar Constr. Co., Inc. , 935 S.W.2d 413 (Tenn. App. 1996). In Dickson County , the county sued a contractor for

allegedly breac

hing a contract to construct a jail. The contractor moved to dismiss the action, asserting that the Countywas obligated to arbitrate the d

ispute. The arbitr

ation clause of th

e contract state

s: Any controversy or Clai m arising out of or related to the Contract, or the breach thereof, shall be settled by arbitration in accordanc e with the Construction Industry Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof, . . . . Id. at 414. The trial c

ourt denied the mot

ion to compel arbitration onother grounds. The Court of Appealsreversed, and remanded the case for entry of an order “either

dismissing the suit or staying all proceedings until the completion of arbitration as provided in the contract.” Id. at 415. The Court found that “[b]y statute and . . . case law in this state, arbitration clau ses of such contra

cts have been upheld and enforced, and such arbitration clauses are not against public policy.” Id. at 414. This Court has previously considered whether a municipal board has the authority

to enter into a contract that includes an arbitrati on clause. See Anderson County v. Architectural Techniques Corp. , No. 03A01-9303-CH-00110, 1993 WL 346473 (Tenn. App. Sept. 9, 1993). In Anderson County , a disp ute arose b etween the County Board of Education and Architectural Techniques Corporation (“Ar tec”), concer

ning payment for w

ork on renovation

projects i

n tw o school properties. Id. at *1. After Artec demanded arbitration, the County and the Board o f Education filed a declaratory judgment action and requested a stay of arbitration. Id. The complaint alleged, inter alia , that “the arbitr ation clause in

the signed agreement [was] of no legal force and effect and therefore no contract fo r arbitration exist[ed].” Id. The trial court entered an order denying the application for a stay of arbitration and requiring the parties to arbitrate

the dispute. Id. at *3. Anderson County and the Board of Education appealed. Id. The appeal was dismissed as5

premature, and the parties proceeded to arbitration. This resulted in an award by the arbitrat or t o Artec, which was confirmed by the trial court. Anderson County and the Board then appealed the award. This Court

concluded “that

the trial court co

rrectly found tha

t there is a

written agreement betweenthe parties to submit controversies to arbitration and that the suit in this case was proper ly submitted to arbitration.” Id. at *5. Blaine v. John Coleman Hayes & Assoc., Inc. , 818 S.W.2d 33 (Tenn. App. 1991), involved

an arbitration clau

se contained in a c

ontract betwee

n a city and an eng

ineer hir ed to construc t a wastewater

treatment plant. The City alleged that it had been fraudulently induced to enter the contract,and consequently that the arbitration clause was void. The City sought resc ission on this basis. The City prevailed on its rescission claim, and this Court de termin ed that the arbitration clause was unenforceable. Had the contract been found to be enforceable , however, th e appellate court indicated that the parties would have been required to proceed to arbitration. Id. at 37-38. These decisions are consistent with the language of the Tennessee Uniform Arbitration Act andwith decisions from other jurisdictions holding that the uniform acts generally allow school boards, counties, and other political subdivisions to agree to arbitration. See , e.g. , Consolidated Pacific Eng’g, Inc. v. Grea ter Anchorage Area Bo

rough Sch. Dist. , 563 P.2d 252 (Alaska 1977); Bingham Co. Comm’n v. Interstate Elec. Co. , 665 P.2d 1046, 1050 (Idaho 1983) ; Vista v. Sutro & Co. , 60 Cal. Rptr. 2d 488 (Cal. App. 1997); St auffer Constr. C o., Inc. v. Board of Educ. , 460 A.2d 609 (Md. App. 1983); D. Wilson Constr. Co., Inc . v. McAllen Indepen

dent Sch. Dist. , 848 S.W.2d 226 (Tex. App. 199 2). Under the cir

cumstances in

this case, we find that the Board had the authority to bind itself to the arbitration agreement incorporated by refer en ce into the contract at issue. The Board also a rgues that Frontier, as a third party surety, cannot enforce the arbitration provisions against the Board. However, as surety, Frontier may assert the rights of a principal to the contra ct even though it is not a

party to the origin

al contract betw

een the Board and

Delashmit

. Frontier “does not have to b

e a signatory to th

e con tract when the c

ontract is specif

ically incorporated

by reference in the surety bond.” E xchange Mut. Ins. Co. v. The Haskell Co. , 742 F.2d 274 (6th Cir. 1984). In this case, the performanc e bond specifica

lly incorporates by reference the contract betwe

en the Board and D

elashmit, w hich includes the a rbitration provisi

ons. This argument is without

merit.6

The Board also contends that the arbitration agreement is void under Tennessee Code Annotated § 66-11 -208(a). This sta tute provides in pe

rtinent part: [A] provision in any contract, subcontract or purchase order for the improvement

of real prope rty in this state is vo id and against publi

c policy if it makes

the contract, subcontract

or purchase order

subject to the substantive laws of another state or mandates that the exclusive forum fo r any litigation, arbitra tion or other disput

e resolution process is located in another state. Thus, the Board asserts that the arbitration agreement is void because it “mandates that the exclusive forum for [the] . . . arbitration . . . is located in another state.” Tenn. Code Ann. § 66-11-208(a). The contract between the Board and Delashmit does not contain a forum sel ection clause. However, the Construction Industry Arbitration Rules, published by the Am eri can Arbitration Association, applyto the arbitration clause at issue in

this case. These Rules provide that when the parties cannot agree on a locale for the procee ding, the arbitrator may move the arbitration proceeding to another venue . This language doe s not “mandate tha

t th e excl usive forum” for the arbitration is in another state. Rather, under the Arbitration Rules, there is only a possib ility that

venue for the arbitration could be moved to another state. Therefore, the arbitration prov

ision in this contract is not contrary to the public policy set forth in TennesseeCode Annotated § 66-11-208(a) and therefore is not void. In sum, the Board had the authority to bind itself to the arbitration provisions of thecontract in this case. Frontier, as surety, could enforce the arbitration provisions against the Board becaus

e the contract for

the performance bond

incorporates by reference the contract between the Board and Delashmit, including the arbitration provisions. The arb it ration provisions do not “mandate” that the “exclusive foru

m” for the arbitr

ation is in another

state, and there

fore are not void u nder Tennessee Code Annotated § 66-11-208(a). Consequently, Frontier may enforce the arbitration provisions against the Board. The decision of the trial court, denying Frontier’s motion to compel arb i tration, must be reversed, and the cause must be remanded for entry of an order compelling arbitration. The decision of the trial court is reversed and remanded for entry of an order compelling arbitration. Costs are assessed against the Appellee, for which execution may issue if necessary.

HOLLY KIRBY LILLARD, J.7

CONCUR:

W. FRANK CRAW

FORD, P. J., W.

S.

ALAN E. HIGHERS, J.