### IN THE COURT OF APPEALS OF TENNESSEE AT JACKSON January 23, 2001 Session ROSE CONSTRUCTION, INC. v. RAINTREE DEVELOPMENT COMPANY,

LLC
An Appeal from the Chancery Court for Shelby County No. 110162-1 Walter L. Evans, Chancellor

No. W2000-01388-COA-R3-CV - Decem ber 31, 2001

This is an arbitration case. The plaintiff construction company agr eed to construct the defendant develop er’s pla

nned dev elopment

project . When dis putes ar ose out of

the part ies’ performance, they terminated the contract. The parties then enter ed into arbitration. The arbitration panel found in favor of the plaintiff for $974,068.00 plus interest, including a $250,000 award for attorney’s fees. The plaintiff filed an action in the chancery cour t, seeking confirmation of the award. The defendant asked the chance ry court to vacate the arbitration award. T he trial court vacated the entire award, finding that the arbitration panel exc eeded its authority in awarding attorney’s fees. The plaintiff construction company appeals. We reverse, finding that

the award of attorney’s fees is authorized under the parties’ contra ct, andremandthe case for confirmation of the arbitration award in toto

. Tenn. R. App.P. 3 Appeal as of Right ; Judgment

of the Cha

ncery Court is Rev

ersed and Remanded.

H OLLY K. L ILLARD , J., delivered the opinion of the court, in which A LAN E. H IGHERS , J., and D AVID R. F ARMER , J., joined. Christopher

M. Caputo, Mich ael I. Less, and Clifton M. Lipman, Memphis, Tennessee, for the appellant, Rose Construction, Inc. Larry E . Parrish , Memphis, Tenness ee, for the appe llee, Raintree De

velopmen t, LLC.
OPINION

This is an appeal from the trial court’s order vacating an arbitration award. On January 29, 1996, Rose Construction, Inc. (“Rose”), and Raintree Development Company, LLC (“ Raintre e” ), entered into a con struction

agreem ent under which Rose

agreed to construct the Raintree Planned Development

Project (“the project”) in Collierville, Tennessee. In Section 4.5.1 of the construction agreem ent, the part

ies agreed to arbitrate all controversies arising out of the contract “in accordance withthe Construction Industry Arbitration Rules of the American Arbitration Association”1 The p anel m em bers w ere Lew is H. Con ner, Jr., Dav id K. T aylor, and Edw in Rod gers. -2- (“Arbitration Rules”). Rule L-6 of the Arbitration Rules provides that any award resulting from such arbitration may include “an award of attorn eys’ fe es if all

parties have requested such an awa rd or it is authorized by law or their arbitration agreement.” The par ties agre e that Rule

L-6 is incorporated into the contract by refere nce.
After work on the project was substantially completed, disputes arose between the pa rties regarding change

orders, the quality of the workmanship, and payments due. On October 9, 1997, Raintree terminated the contract. On October 15, 1997, Rose notifed Raintree that Rose had terminated the contract on September 30, 1997 because of Raintree’s failure to pay.

On October

29, 1997, Rose filed a demand for arbitration. On November 7, 1997, Rose filed suit against Raintree in the Shelby County Chancery Court to enforce a me chanic’s lien it had previous ly filed. On November 26, 1997, Rose filed a motion to st ay the litigation pending resoluti on of the pr

eviously f

iled arb itration d

emand. O n August 11 , 1998, de spite Rain tr ee’ s persistent attempts to resist arbitration, the trial court entered an order staying the litigation pending resolutio n of the a

rbitrati on proce edings.

On March 15 , 1999, by c ertifie d letter, Rose notified Rai ntree that it intended to seek an award of attorney’s fees under the Tennessee Prompt Pay Act. See Tenn. Code Ann. § 66-34-101, et seq. (1993 & Supp. 2001) (“The Act”). From March 29 to April 19, 1999, the arbitration panel 1 conducted

the arbitration proceedings. At the arbitration hearing, Rose argued that it was entitled to attorney’s fees under the Act beca use of Raintree’s bad

faith. On April 6, 1999, the arbitration panel entered an order permitting Rose to introduce evidenc e on that issue.

On June 21, 1999, the arbitration panel issued an award in favor of Rose. The panel ordered R aintree to pay Rose the following: (1) $789,068 for construction costs, (2) $60,000 for a p ass
through claim of

a Rose sub contractor, (3) $250,000 in attorne y’s fee s under th

e Prompt Pa

y Act, and (4) pre-award and

post-awa rd intere st at a ra

te of ten percen t (10%). The arb itration p anel als o determinedthat Raintree was entitled to a credit of $125,0 0 0 for wor k remain ing on the p

roject, making the total amount awarded to Rose $974,068.00 plus interest.

On June 25, 1999, Rose fi led a mot ion in cha ncery c ourt for

summary ju dgment and to confirm the award of the arbitration panel. On August 11, 1999, Raintree f iled its own motion for summary judgment, arguing t hat the a ward should not be confirmed . On November 30, 1999, Raintree filed a me

morandum

withthe chancery court arguing, inter alia , that the arbitration award should be vacated in its entirety because the arbitra tion panel exceeded its authority in awarding attorney’s fees.

On the same date, November 30, 1999, the trial court conducte d a hearing on whe ther to confirm or vacate the award of the ar bitration panel. At the hea ring, the trial judg e stated

that “this court in reading [

Arnold v. Morgan Keegan & Co. , 914 S.W.2d 445 (Tenn. 1996),] is satisfied that-3-

the court cannot vacate an awar d due to an error of law or error of f act or beca use it disa grees w ith the arbitrators.” The tria

l court the n expres sed its intent to “ on its own motion modify the awa rd to exclude the award of attorney’s fees. And the Court will confirm all the other aspects of the award.” However, no order was entere d as a result of that hearing.
Thereafter, the trial

court se nt counse l for the p arties it s propose d findingso f fact and conclusions of law. On March 3, 2001, the trial cou

rt conducted a hea

ring to ad dress the comments and concerns of the parties on the proposed findings. Subsequently, on March 30, the trial court issued an Order and a detailed Memorandum of La w, changing its original position and vacating the entire arbitra

tion awar d. In its Me

morandum , the tria

l court fo und that the partie s had ente red into
a valid arbitration agreement, but that “[t]here is no basis or foundation in the enumerated langua ge of the contr act which allows f

or the aw ard of a

ttorney f ees in the event of arbitr ation.” The t rial court theref ore held that the a

ward of attorne y’s fee s to Ro se “goes outside and beyond the arbitration agreem

ent” itse lf. With r

espect t o Rose’s a sserti on that the Prompt Payment Act authorized

such relief, the trial court found tha t the Act a pplied “o nly in a ‘chancery court’ lawsuit,” and that the Act was “ cl early no t applica ble ” in arbitration proceedings. (Emphasis in original). Moreo ver, the tri al court held that Tennessee Code Annotated § 29-5-31 prohibits the awa rd of attorney’s fees in a

rbitrati o n proceedings unless such relief is provided for in the arbitra tion agreem ent. Finally, the trial c ourt held that Raint

ree’s d ue proce ss rights we re viola ted beca use Rain tree was not given sufficient notice of Rose’s intent to seek attorney’s fee s, and b ecause th e arbitration panel failed to issue a ru ling before the commencement of the hearing that Rose wa s entitled to seek a

ttorney’ s fees. T

he trial c ourt t

hen va cated the entire

arbitra tion awar d becau se “[t]he award of attorney fees under the Prompt Pay Actby the arbitrators constituted more tha n just
a mere er ror in construing the prevailing law, but was a complete failure to apply the law or the contract.” From th

is order , Rose now

appeals

. Tennessee has adopted

the Uniform Arbitration Act, Tennessee Code Annotated § 29-5-301 et seq. (2001) which governs the scope of our review. See D & E

Constr. Co. v. Robert J. Denley Co. , 38 S.W.3d 513 , 518 (Te nn. 2001) ; Arnold v. Morgan Keegan & Co. , 914 S.W.2d 445 , 44 8 (Tenn. 1996). The role of the trial and appella te court in reviewing the decision of a n arbitra tor is quitelimited. The decision of the arbitration panel will be set asid e “only in very unusual circumstances.” Arnold , 914 S.W.2d at 448 (quoting First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 942 (1995)). Under Arnold , the court is re quired to utilize a “deferential” standard of review. The court is “not permitted to consider the merits of an arbitration awa rd even if the parties allege that the award rests on errors of f act or misrepresentations of the contract.” Id. at 450. We must accept the fac ts as deter

mined by th

e arbitr ation panel unless we find th at those f acts ar e clear ly
errone ous, and legal issues should be reviewed “in a manner designed to minimize the interference with an efficient and economical system of alternative dispute r esolution.” Id.

Under th e Unifor m Arbitration Act, the trial court may vacate the awa rd of the arbitration panel if, among other reasons, “the arbitrators exceeded their power s” in making the award. Tenn. Code Ann. § 29-5-313(a)(3). “Arbitrators exceed their powers whe n the issue that

they decide is not within the scope of the agreement to arbitrate.” D & E Constr. , 38 S.W.3d at 518. The trial court may modify or correct the award when “ [t]he arbitrators have awarde d upon a matter not submitted-4-

to them and the award may be corrected without af fecting the merits of the decision upon the issues submitted.” Tenn. Code Ann. § 29-5-314; see D & E Con str. , 38 S.W.3d at 518.
Under Tennessee law, generally, the preva iling party may not recover attorney’s fees incurr ed in arbitra tion unles s the par

ties’ contract provides for such recovery. See D & E Constr. , 38 S.W.3d at 519-20. In this case, the parties dispute whether their contra ct provides for such recovery.

The trial court below found t hat th e parties’ contract contained no provision regar ding attorney’s fees. However, Section 4.5.1 of the contract incorporates by referenc e Rule L-6 of the Arbitration Rules. As noted above, Rule L-6 provides that an arbitration awa rd may include “an award of a ttorneys’ fees if . . . it is authorized by law or [the parties’] arbitration agreement.” On appeal, Rose argues that attorney’s fees in this case are “authorized by law” under the Prompt Pay Act, Tennessee Code Annotated § 66-34-602(b). Generally, the Act provides for certa in remedies to owners, contractors, and subcontractors ar ising out of the nonpayment for services rendered. See Tenn. Code Ann. § 66-34-60 2; see also Wasco, Inc. v. R. P. In dus. , No. 01-A-01-9407-CH00343, 1994 WL 70 6663, at* 3 (Tenn. Ct. App. Dec. 21, 1994) (holding that § 66-34-602(b) provides for attorney’s fees for

the prevailing party in construction disputes). With respect to attorney’s fee s, the Act states that “[r]easonable attorney’s fees may be awarded ag ainst the nonprevailing party; provided that such nonprevailing party has acted in bad faith.” Tenn. Code A nn. § 66-34-602(b). In this case, the arbitration panel held that it was authorized under the contract

by Rule L-6 to include a

ttorney’ s fees in

its a ward . The panel found that Raintree had acted in bad fa ith and, based on thi s finding, concluded that Rose was entitled to recover attorney’s fe es under the Ac t. The panel found that, because Rose was entitled to recove r under the Act, its entitle ment to attorney’s fees was “authorized by law,” and consequently, attorney’s fees were recoverable under the arbitration contract.

Raintree argues t

hat the r ecover y of attor ney’s fe es is notauthorized by the incorporation of Rule L-6 into the contract. Raintree asserts that the issue is governed by Tennessee Code Annotated § 29-5-311, not the Prompt Pay Act, because the statutes are inco nsis tent and §29-5-311 more specific ally addresses the issue o f attorney’s fees in arbitration proceedings. Section 29-5-311 provides : “Unless otherwise provided in the agreem en t to arbitrate, the arbitrators’ expenses and fees, together

with other

expense s, not i ncluding co unsel fees, incurred in the conduct of the arbi tration, shall be paid as provided in the award.” Tenn. Code Ann. § 29-5- 311. I n D & E Construction , the Tennessee Supreme Court inter preted this statute as meaning “clearly and unambiguo

usly that attorney’s fees are not to be awarded for work perfor med i n arbitration proceedings absent the parties’ understanding to the contrary.” D & E Constr. , 38 S.W.3d at 519 (emphas is in original). Raintree argues that the reasoning used by the arbitration panel, and a rgued
on appeal by Rose, is circular: Rule L-6 allows for the recovery of attorney’s fees where authorized by law, but the applicable law (§ 29-5-311) allows for the r ecovery of attorn ey’s fees if they are provided for in the

contract. Thus, Raintree claims, Rose’s claim to attorney’s fees under Rule L-6 is untenable.-5-

After review of the statutes, we find that § 29-5-311 and § 66-34-602(b) are not incons istent. Rather, § 29-5-31 1 effec tively re states pa

rt of the l anguage

in Rule L-6

which, c onsistent with Tennessee case law, provides that attorney’s fees a re av a ilable in arbitration proceedings if such recovery “is authorized by . . . the arbitration agreement.” “Contractual terms should be given the ir ordinary meaning . . . and should be construed harmoniously to give effect to all provisions and to avoid creating internal conflicts.” Wilson v. Mo ore , 929 S.W.2d 367, 373 (Tenn. Ct. App. 1996). Therefore, giving effect to § 29-5-311 is consistent with the terms of the contract an d does no t operate to negate the effect of § 66-34-602(b).

Under Rule L-6, we must now determine whether the recove ry of attorney’s fees in this cas e was “authorized by law” an d, thus, allowable under the contract. This Cour

t has rec ognized t

hat § 66-34-602(b) of the Pro mpt Pay Ac t “speci fically p rovides for [attorney’s fees] against the nonprevailing party in a

dispute of

this kind.” Wasco , 1994 WL 706663, at*3. Wasco involved an arbitration proceeding over payments for construction work. Wasco held that § 66-34-602 was a part of the origin al contr

act, and that th e prevai ling party was entitled to fees under that statute. The Courtreasoned that “[l]aws affecting either the construction, enforcement or discharge of a contract which subsist at the time and place of the making of a contract and where it is to be per formed, enter into and form

a part of it as fully as if the y had bee n expres sly refe

rred to o r incorp orated i n its terms.” Id. The arbitrator’s award of fee s was therefore upheld under the Act, e ven though there
was no explicit finding of bad faith. The Wasco court stated tha t, in light of t he deference to be afforded an arbitration award, it should be pr es umed that the arbitrator had found that the nonprevailing party had acted in bad faith. Id.
Thus, since the arbitration panel in this case expressly found that Raintree acted in bad faith, Rose is in a stronger position to recover under the Act than the preva iling party in Wasco . After a thorough review of

the record, we must conclude that the pane l’s findin g of bad f

aith was n ot clear

ly
errone ous. Theref

ore, Rose ’s reco very for

attorne y’s fee s is a

uthori zed by law under § 66-34-602(b). The parties contractually agreed that attorney’ s fees could be awar ded if such recovery was authorized

by law. Con sequentl

y, the ar bitration panel did

not exce ed its authority in in cluding attorney’s fees in its award.

The trial cou

rt found t hat the Pr ompt Pay Act was inap

plicable because actions under the Act
can only be br

ought in a c

hancer y court. Se

ction 66- 34-602(a

)(3) pr ovides tha

t th e party s e eking recovery under the

Act “ may , in additio n to all other remedies available at law or in equity, sue for equitabl e relief, including injunctive relief, for continuing violations of this chapter, in the chancery court of the county in which the r eal p roperty is located.” Tenn. Code Ann. § 66-34-602(a)(3) (emphas is added). T hus , the language is pe rmissive r

ather th an manda

tory. Thisis in contr

ast to Vanderheyden v. Ajay, Inc. , No. 02A01-9803-CH-00070, 1999 WL 562716 (Tenn. Ct. App. Aug. 2, 1999), in

which thisCourt held

that an agreement to arbitrate disputes over the owne r’s refusal to pay the retainage was unenforce able. The statute at issue in that case mandated that “the contractor

. . . shall seek any remedy in a court of proper jurisdiction.” Vanderheyden , 1999 WL 562716, at *4 (quoting Tenn. Code Ann. § 66-11-144(d) (emphasis added)). I n the instant case, the Prompt Payment Act states merely that an aggrieved party “may” sue for relief in chanc ery cour

t.2 A contrary fi nding on this i ssue would requir e this court t o also fi nd that t he entir e a rbitratio n proceedi ng below was effect ively “pre empted” by the Prompt Pay Act, because s uits for reco very of payments on const

ruct ion

con tracts wo uld h ave to be bro ugh t in cha nce ry co urt, the cou rt o f excl us ive ju risdictio n. N either party takes th is posit ion, beca use th e resu lt wo uld b e that a rbitr ation agre em ents in al l cons truc ti on contr acts would ess enti all y be unenforceable. For t his additional reas on, we reject the posi tion of Rai ntree and the tri al court that s uits to recover under the P rom pt Pa y A ct m ust be bro ugh t in cha nce ry co urt.

3 Raint ree devot

es a s igni fic ant pa rt of

it s bri ef ar guing that

the t ria l cour t er

red i n st aying t

he court proceedi ngs pending arbi tra ti on. Thi s cour t has twic e rej ecte d appeal s bas ed on tha t ar gument, f irs t i n an order

date d August 21, 1998, and again in an order dated Aug ust 24, 2000. In both or ders, we recogni zed t hat a n order compelli ng arbi tra ti on is not a ppe alable as of

right , and we dec li ned to e nter tai n Raint ree’ s appea l of

that issu e. See Tenn. Code Ann. § 29-5- 319; see als o Southeast Dri lli ng and Blasting Ser vs., Inc. v. BRS Constr . Co. , No

. 01 A0 1- 97 06

- CH

- 00 27 2, 19 97 WL 399387, at *2 n.4 ( Tenn. Ct . App. J uly 16, 1997) (r ecogniz ing that a n order compelli ng arbi tra ti on is not appealable as of right). Th erefo re, w e dec line to a ddr ess the pro priety of the trial cou rt’ s rul ing compel li ng arbi tra ti on under t he circu ms tance s of this c ase. -6- See Williams v. McMinn Cou nty , 352 S.W.2d 430, 433 (Tenn. 1961) (recognizing that the term “may” in a statute connotes discreti on or per mission); Gabel v. Lerma , 812 S.W.2d 580, 582 (Tenn. Ct. App. 1990 ) (noting

that “sha

ll” in a sta

tute mean s mandato

ry); see als o Board of Co unty Comm’rs v. T

aylor , No. 93-1490-I, 1994 WL 420922, at *4 (Tenn. Ct. App. Aug. 12, 1994) (comparing the different meanings of “may” and “sha ll” in statutes). Thus, a suit in chancery court is not the e

xclusive remedy f or reco very of a

ttorney’ s fees under the A ct. 2

The trial cou

rt also fo und that Ra

intree’ s due proc ess rights w ere violated. Assuming arguendo that due process considerations are implicated in a dispute between private parties, we must conclude

that any d

ue proce ss rights of

Raintree in these p

roceed ings were well p rotected

. Almost two weeks prior to the arbitration proceeding, Rose sent Raintree a certifi ed letter

stating its intention to seek fees under the Prompt Payment Act. Raintree was also notified bythe arbitration panel that Rose sought attorney’s fees under the Act when the panel agreed to hear evidence from Rose on the issue. From a review of the transcript of the proceedings, Raintree was put on sufficient notice that Rose would be offering proof of its expenses but that the arbitration panel would defer ruling on t

he issue o f whethe

r it would a

ward tho se amounts. The arbitration panel found that the notice Rose gave

was ade quate, a

nd that finding is not c learly e rroneou s. Raintree never requested
a continuance to prepare a defe nse on this issue, and it stipulated that it was not prejudiced by any failure to receive earlier notice. Under these circumstances, the trial court’s finding on this issue must be reversed.
Finally, we note that the facts in th is case are distinguishable from those in D & E Construction

. In that case, the contr act cle arly precluded a

n award of attorn ey’s fe es in

arbitration procee dings. D & E Constr. , 38 S.W.3d at 519. In the instant case, however, because the contract incorporates by reference Rule L-6, the arbitra tion pane l is authori zed by the contract to award attorney’s fees. Therefore, w e need not reach the issue of severa bility. 3
Therefore, the order of the trial court vacating the arb itr ation award is reversed. The arbitration award must be confirmed in its entirety, and the cause is remanded for this purpose.-7-

The decision of the trial court is reversed and remanded for fur ther proceedings consistent withthis Opinion. Costs are taxedto Appellee, Raintree Development Company, LLC, for which execution may issue if necessary.



### _________________ _________________

_ HOLLY K. LILLARD, JUDGE