# FILED
November 2, 1998 Cecil Crowson, Jr. Appellate C ourt Clerk IN THE C OURT O F APPE ALS AT KNO XVILLE

FRIZZELL

CONSTRUCTION COMPANY, ) SEVIER CHANCERY INC., ) C.A. NO. 03A01-9805-CH-00161 ) Plaintiff-Appella

nt ) ) ) ) ) ) vs. ) HON. TELFOR D E. FOGERTY, JR. ) CHANCELLOR ) ) ) ) ) GATLINBURG, L.L

.C. ) AFFIRMED AND REMANDED ) Defendant-Appellee )

C. PAUL HARRI

SON, Long, Ra

gsdale & Water

s, P.C., Knoxville, for

Appellant.
BERNARD

E. BERNSTEIN & CELESTE H. HERBERT, B ern stein, Stair & McAdams, L.L.P., Knoxville, for Appellee.
O P I N I O N

McMurr ay, J.

The facts of this case, as material to this appeal, are relatively simple. The parties entered into a contract for the

construction of a hotel in Gatlinburg, Tennessee. The contract was a standard2

Associate d General Contractors Construction M anager contract styled "Standard F orm of Agreement Between Owner and Construction Manager." The agreemen t cont ains two provisions that are germane to the issues under consideration here.

ARTICLE 14 Assignment and Governing Law 14.1
... 14.2 This Agreement shall be governed by the law of the place where the project is located.

ARTICLE 16 Arbitration 16.1 All claims, disputes and other matters in questions arising out of, or relating to, this Agreement o

r the breach the

reof, except with r

espect to the Arc

hitect/ Engineer 's decision on matter s relating to ar

tistic effect, a

nd except for clai

ms which have bee n waived b y the making or acceptance of final pay ment shall be de cided by arbitration in accordance with the Construction Industry Ar bitration Rule s of the AmericanArbitration Association then obtaining unless theparties mutually agree otherwise. This a

greement to ar

bitrate shall be sp

ecifically enforceable under the prevailing arbitration law.

We will first note that the "place where the project is located" is Gatlinburg, Tennes s ee, thereforeparagraph 14.2, Article 14, if e ffective, mak es Tennessee law the governing law concerning the contract. If this provision is ineffective, then, in any eve nt, Tennessee law governs since the contract was entered into here and the project is located here.

A dispute, relating to the contract, arose between the parties. The dispute gave rise to a complaint in the Chancery Court for Sevier County by Frizzell for the purpose of enforci ng a mech anic's li en and for brea ch of contract. F

rizzell, the appella

nt here, specifi

cally char ged in its1 Though not raised as an issue in this case, it is not beyond the realm of

reason to find that this action constitutes a waiver of arbitration. See e.g., Worldsource Coil Coating, Inc., et al v. McGraw Construction Company, Inc. , 946 F.2d 473 (6th Circuit 1991). 3 complaint , (styled "Complaint to Enforce Mechanic's L ien and for Breach of Contract") that the defendant,

Gatlinburg, L.L.C., appellee here, "br eached the construction management contract by failing to pay the amount owed under the construction contract." A judgme nt for damages over and above the amount claimed to be subject to the mechanic's lien

was also sought. Gatlinburg, L.L.C., filed its answer, a counterclaim and a third party action. Thereafter, Frizzell submitted a demand for arbitration. 1 In its answer Gatlinburg deni

ed that it owed Frizzell as alleged in the complaint but on the other hand, in its counterclaim, sought damages from

Frizzell. Frizzell filed a motion to stay the
co urt proceedings pending arbitration based on the contract provision. Gatlinburg opp osed th e motion and amended the counterclaim to allege that Frizzell fraudulently induced G atlinbu rg to enter into the contract

. It is this claim

that constitutes the

basis of this appea

l.

The court heard the motion to stay. The court noted i n its order that the

"issue presente

d to the court is whether the arbitration proceeding should go forward or whether this court should take jurisdiction of all or some issues as between Frizzell and Gatlinbur g." The c ourt chose to reta in jurisdiction to consider the legal issue of fraud

in the inducement of the contract entered into by the parties in the primary case and ordered the parties not to submit this issue t o the arbitrat ors. The court further determined that the arbitrators in the pri mar y c ase should resolve the construction disputes between

those parties and

render a decisi

on to the court.2 I t appears that the judgment of the trial court may not be final since other

issues have been reserved by the trial court for later disposition. However, we, in our discretion and in accordance with Rule 2, T ennesse e Rules of Appellate Procedure, will entertain the appeal for the purpose of expediting a decision on the issues before us. 4 This appeal resulted

from this judgmen

t of the trial cour

t. 2 The appellant presen ts the following issues for our consideration:

I. Whether

the tria l cour t erred in failing to find that the contract between Frizzell and Gatlinburg i

nvolved interstat

e com merce as defined under the Federal Arbitr

ation Act? II. Whether

the trial court erred in holding tha t even if t he contract between Frizzell and Gatlinbu r g involved interstate commerce that the Federal Arb itr ati on A ct d id n ot a ppl y.

The issue of whether

the arbitration pr

ovisions of a contr

act require tha

t a claim for fra

ud in the inducement of the

contract be submi

tted to arbitration has been addressed and resolved in this jurisdiction. See City of Blaine v. John Coleman Hayes & Assoc. , 818 S.W.2d 33 (Tenn. App. 1991), infra. The court resolved the issue against requiring the issue to be arbitrated. We, therefore, a gree with the result re

ached by th

e trial court.

The Uniform Arbitration Act was passed by our Leg islature in 1983 and is now codified as T.C.A. § 29-5-301 - § 29-5-320. The provisions of the act pertinent to th

e controversy

before us are T.C.A. § 29-5-302 w

hich provides in pe

rtinent part as fo

llows:
29-5-302. Agreements to submit to arbitra tion - Ju risdiction. - (a) A written agreement

to submit any exist

ing controvers

y to arbitra

tion or a provision i

n a written contract to submit to arbitr

ation any cont

roversy thereafter arising betwee n the parties is valid, enforceable and irrevocable save upo n such grounds as e

xist at law or in equity for the revocation of any contract; ...5

City of Blaine v. John Coleman Hayes & Assoc. , 818 S.W.2d 33 (Tenn. App. 1991), is a veritable treat ise on the su bject of whe ther " fraud in th e indu cemen t" is s ubjec t to ar bitra tion . In Blain , Judge Crawford compa red and contrasted the various resolutions of the issue in other jurisdictions inclu

ding the position a

dvanced by

the United States Su

preme Court.

In Blain , Judge Crawford speaking for this court noted:

In 1983, when the Tennessee legislature passed the Uniform Arbitr ation Act, they had full knowledge of the long established right of a person to seek

rescission of a contract procured by fraud. With this knowledge, we find it logical f or the legislature to intend to except actions for rescission from a decision by arbitrators and giving the language of

the statute its usual and ordinary meaning, the leg

islature did just that. This legislative intent is exemplified byJustice Black in the Prima [ Prima Paint Corp. v. Flood and Conklin Mfg. Co. , 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967)] dissent. "Fraud, of course, is one of the mos t com mon grounds for revoking a contract. If the contract was procured by fraud, then, unless the defrauded party elects to affirm

it, there is absolutely no contract, nothing to be arbitrated." 87 S.Ct. at 1810. It would be difficult to improve on this language. Blaine , at page 38.

It is well-settled in Tennes see con tract law that fr aud in the induceme

nt renders contr

acts voidable at the instance of

the party upon whom fraud was perpetrated. It is clear that an individual induced by fraud to enter into a contract may elect between two remedies. He may treat the contract
as voidable and sue for theequitable remedy of rescission or he may treat the contract as existing and
sue for damages at law. Vance v. Schulder , 547 S.W.2d 927, 931 (Tenn. 1977); Derryber ry v. Hill , 745 S.W.2d 2 8 7, 291 (Tenn. App. 1987); Graham v. First Am. Nat'l Bank , 594 S.W.2d 723, 726 (Tenn. App. 19 79). Thus, when a party to a contract seeks rescission in a court of compe tent jurisdiction and alleges facts, which if proved to

the requisite degree, would justify rescission of a contract, the very exis

tence of the con

tract is in limbo until

the issue is r

esolve d. To require6

arbitration pursuant to

the terms of a con

tract concerni

ng the validity

or very existence of the contract is to presuppose the validity and existence of the contract at least for some purpos es. We do not understandthis to be the law in Tennessee. It has been held that fraud vitiates every contract ab initio
. Samuel v. King , 158 Tenn. 546, 14 S.W.2d 963 (1929) . Theref ore, if there is n

o contract, there is no arbitration clause.

As to the issues as fra

med by the ap

pellant, unless an

d until it is establishe

d that there is a contract in existence, a consideration of whether the contract is controlled by or subject to the Federal A rbitration Act is premature. Whether the contract should be rescinded and voided i s a question that can b

e answered only

after a trial on t

he merits. If

it is rescinded, the

re is nothing to arbitrate. On the other hand, if the contract is found to be valid and binding, the disputes between the appellant and the appellee are subject to arbitration.

We affirm the judgment of the trial court in reserving the issue of fraud in

the inducement as a question to be determined by the court. Costs of this a

ppeal are asses sed to the appellant and thi s cau se i s re man ded to t he t ria l co urt for suc h ot her a nd f urt her a cti on a s ma y be n eces sar y.

________________________________ Don T. M cMurr ay, J.
CONCUR:

___________________________________ Houston M. Goddard, P residing J udge

___________________________________ William H . Inman, Seni or JudgeIN THE C OURT O F APPE ALS AT KNO XVILLE

FRIZZELL

CONSTRUCTION COMPANY, ) SEVIER CHANCERY INC., ) C.A. NO. 03A01-9805-CH-00161 ) Plaintiff-Appella

nt ) ) ) ) vs. ) HON. TELFOR D E. FOGERTY, JR. ) CHANCELLOR ) ) ) GATLINBURG, L.L

.C. ) AFFIRMED AND REMANDED ) Defendant-Appellee )
JUDGMENT This appeal came on to be heard upon the reco rd f rom the Cha ncer y Cou rt o f Se vie r Co unt y, briefs and argument of

counsel. Upon consideration thereof, this Court is of opinion that there was no reversible er

ror in the trial co

urt. We affirm the judgment of the trial court in reserving the issue of

fraud in the inducement as a question to be d

etermined by

the court. Costs of this appeal are assessed to theappellant and thi s cau se i s re man ded to t he t ria l co urt for suc h ot her a nd f urt her a cti on a s ma y be n eces sar y.

PER CURIAM