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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