Opinion ID: 901341
Heading Depth: 1
Heading Rank: 5

Heading: Arbitrability and Who Should Determine It

Text: [¶ 8.] If a valid agreement to arbitrate exists, the court shall order the parties to proceed with arbitration. SDCL 21-25A-5. Both parties agree that there is an agreement to arbitrate but it is subject to an exception for [c]laims relating to aesthetic effect. Notwithstanding the aesthetic effect exception, Johnson argues that Flandreau's claim is subject to arbitration and that the arbitrator, rather than the court, should have initially determined the arbitrability of this dispute. Johnson supports his arguments by asserting that this dispute actually involves a number of non-aesthetic issues, namely: the arbitrability of this claim, and the issues of substandard material and poor workmanship. Johnson points out that the latter issues raise further non-aesthetic issues of breach of contract and compliance with industry standards. [¶ 9.] Johnson's arguments require us to more precisely define the nature of this dispute and the rules governing a court's review of each disputed issue. As the Supreme Court has explained, this kind of case really involves three issues that require different types of judicial review. First Options, 514 U.S. at 942, 115 S.Ct. at 1923, 131 L.Ed.2d at 992. First, there is a disagreement about the merits of the dispute; i.e. aesthetics and allegations of substandard material, poor workmanship, breach of contract, and compliance with industry standards. Second, there is a disagreement about whether the parties agreed to arbitrate the merits. That is an issue about the arbitrability of the dispute. Third, there is a disagreement about who should have the primary power to determine the second matter. Does that power belong primarily to the arbitrators (because the court reviews their arbitrability decision deferentially) or to the court (because the court makes up its mind about arbitrability independently)? Id. Because the questions of arbitrability and who decides it are threshold issues, we address them first. But, before addressing them, we must clarify how a court decides each question. [¶ 10.] All arbitration analysis begins with recognition of the underlying principle 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. AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648, 655 (1986) (citations omitted). This axiom recognizes the fact that arbitrators derive their authority to resolve disputes only because the parties have agreed in advance to submit such grievances to arbitration. Id. at 648-49, 106 S.Ct. at 1418, 89 L.Ed.2d at 655 (citation omitted). [¶ 11.]Therefore, in determining the question of whether a dispute should be arbitrated, there is a general presumption of arbitrability if there is an arbitration agreement: there is a presumption of arbitrability in the sense that [a]n order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage. Id. at 650, 106 S.Ct. at 1419, 89 L.Ed.2d at 656 (citations omitted). See also Rossi Fine Jewelers, Inc. v. Gunderson, 2002 SD 82, ¶ 13, 648 N.W.2d 812, 816. That presumption applies when a broad arbitration clause is reviewed, such as one agreeing to arbitrate any differences arising with respect to the interpretation of this contract or the performance of any obligation hereunder.. . . AT & T, 475 U.S. at 650, 106 S.Ct. at 1419, 89 L.Ed.2d at 657 (citation omitted). However, the presumption is inapplicable in the presence of an express provision excluding a particular grievance from arbitration or forceful evidence of a purpose to exclude the claim from arbitration.. . . Id. (citation omitted). [¶ 12.] The next question of who initially determines whether a dispute should be arbitrated is also governed by contract principles, but it is reviewed utilizing a different presumption. Contractually: [T]he answer to the who question ... is fairly simple. Just as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, see, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57, 115 S.Ct. 1212, 1216, 131 L.Ed.2d 76 (1995); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985), so the question who has the primary power to decide arbitrability turns upon what the parties agreed about that matter. First Options, 514 U.S. at 943, 115 S.Ct. at 1923, 131 L.Ed.2d at 992-93. However, the presumption is different. Who determines whether the agreement creates a duty to arbitrate the particular grievance is a question for judicial determination unless the parties clearly and unmistakably provide otherwise. AT & T, 475 U.S. at 649, 106 S.Ct. at 1418, 89 L.Ed.2d at 656. The Supreme Court explained: whether or not the company was bound to arbitrate, as well as what issues it must arbitrate, is a matter to be determined by the Court on the basis of the contract entered into by the parties.... The duty to arbitrate being of contractual origin, a compulsory submission to arbitration cannot precede judicial determination that the ... agreement does in fact create such a duty. AT & T, 475 U.S. at 649, 106 S.Ct. at 1419, 89 L.Ed.2d at 656 (citation omitted). Therefore, [c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is `clea[r] and unmistakabl[e]' evidence that they did so. First Options, 514 U.S. at 944, 115 S.Ct. at 1924, 131 L.Ed.2d at 994 (citation omitted). [¶ 13.] We now turn to Johnson's first argument that an arbitrator, rather than the circuit court, should have determined arbitrability in this case. Johnson contends that the Flandreau-Johnson agreement clearly expressed the parties' intent to have an arbitrator determine arbitrability. Johnson relies on Johnson v. Polaris Sales, Inc., 257 F.Supp.2d 300 (D.Me.2003). Johnson argues that Polaris held that an identical arbitration provision clearly and unmistakably evinced the parties' intent `to submit questions regarding the scope of the ... arbitration clause [arbitrability] to the arbitrator.' [¶ 14.] Polaris did find a clear and unmistakable intent on the part of the parties to submit questions regarding the scope of [that] Dealer Agreement arbitration clause to the arbitrator. Id. at 309 (emphasis added). However, the arbitration clause in that Agreement was significantly different than the one before us. Unlike this case, the parties in Polaris specifically agreed to arbitrate arbitrability. Id. at 308. The Dealer Agreement stated: that [a]ll disputes, controversies and claims arising out of or in connection with the ... interpretation ... of this Agreement, or of any provision of this Agreement ( including without limitation this arbitration provision and the arbitrability of any issue ) ... shall be solely and finally settled by arbitration .... Id. (emphasis added). Considering this specific agreement to arbitrate the arbitrability of any issue, the Polaris court understandably concluded that the parties intended that the arbitrator would initially determine arbitrability. [¶ 15.]However, the Polaris finding of intent to arbitrate arbitrability is inapplicable to the Flandreau-Johnson construction agreement, which is silent on this subject. [5] Because the Flandreau-Johnson agreement contains no language agreeing to arbitrate arbitrability, [6] and because there is no clear and unmistakable evidence of intent to arbitrate arbitrability, the arbitrability of this dispute was not an issue for the arbitrator in the first instance, and the trial court properly decided this issue. First Options, 514 U.S. at 944, 115 S.Ct. at 1924, 131 L.Ed.2d at 994. [¶ 16.] We next consider the whether question; i.e. whether Johnson's remaining issues (workmanship, quality of materials, breach of contract, and failure to comply with industry standards) are arbitrable or whether they relate to aesthetic effect. On this question we believe that the reasoning of the Arkansas Supreme Court in May, 320 Ark. 147, 895 S.W.2d 521, demonstrates that none of these underlying issues are arbitrable. [¶ 17.] May is instructive because it involved a similar arbitration agreement and a remarkably similar dispute over an aesthetic claim. In May, a school contended that newly constructed floors had an unacceptable appearance. Like the case before us, that school alleged that the unacceptable appearance was caused by breach of contract and the failure to comply with the plans and specifications. The school specifically alleged that the construction company had: negligently failed to properly apply the substituted product, negligently failed to properly clean the pre-finished floors, negligently supplied a defective product, breached its implied warranty of merchantability, and breached its express warranty of fitness for a particular purpose. Id. at 522. Relying upon these issues, that contractor contended that the claim really involved breach of contract and negligence, which were not issues of aesthetic effect. However, the Arkansas Supreme Court concluded that the complaint [was] based upon a question concerning `aesthetic effect' despite the underlying issues of failure to comply with plans and specifications, breach of contract, and defective products. Id. at 523. The Arkansas Court reasoned: If the appearance of the concrete floors was not totally unacceptable as the plaintiff contends, then there would be no claim. Granted, the plaintiff's complaint refers to May Construction's negligently supplying a defective product and breach of warranties. However, if the aesthetic effect of the floors was not unacceptable, the product would not be defective and the warranties would not be breached. The plaintiff does not contend that the floor has cracked or been damaged due to defective sealer. Rather, the plaintiff contends the floors began experiencing unsightly scuff marks. The contract provides controversies or Claims relating to aesthetic effect are not subject to arbitration. Id. [¶ 18.] This reasoning also applies to the Flandreau-Johnson dispute. [7] Like the case in May, a review of Flandreau's complaint and the undisputed facts reveal that Johnson's issues of breach of contract and failure to comply with industry standards are nothing more than the underlying reasons why Flandreau has an aesthetic claim. Paragraph nine of the complaint reflects that the claim relates to the finish of the interior. Furthermore, paragraph seventeen only sought damages for the appearance of plaintiff's building. Therefore, this claim was plainly one for the aesthetic effect of Johnson's work. [¶ 19.] This fact is confirmed by the uncontested affidavit of the school board president. The school board president stated: The masonry cement block walls of the building look terrible. The primary complaint is the poor appearance of the finished product. The problems with the appearance include but are not limited to an uneven variation of the texture of the block surfaces; chipped blocks, holes in surface texture, flaws in the block, conspicuous patches and apparent efforts to cover up chips and holes in the block; inconsistent tooling joints and poor tooling; variation in the width of tooling joints, some very narrow and some very wide; misalignment of joints and misalignment of the surface of adjacent blocks; joint cracking, inconsistent joint tooling with variations in the joint tooling including joints in the shape of a V to concaved tool joints to some joints that appear to have been tooled digitally. In addition, the contractor appears to have used different quality block creating an inconsistent and ugly appearance and, in the gym, changed in the middle of the wall the pattern of laying block from stacked bond to running bond. All of this creates a very poor appearance and appears to be very inferior workmanship. On two locations within the school building, the new addition attaches to the older structure. It is very easy to stand in those two hallways and compare the quality of workmanship and appearance of those halls in the old building with the new. Clearly, the appearance of the new building is significantly inferior to the originally constructed high school building. All of this has a substantial negative impact on the aesthetic effect of the building. (Emphasis added.) And, like the school board president, Flandreau's expert confirmed that this claim only related to aesthetics. The expert's proposals for repair involved nothing more than painting, tuckpointing, or the installation of alternative surfaces to make the walls of the building appear differently. [¶ 20.] We conclude that this evidence, the complaint, and the aesthetic exclusion are clear and unmistakable evidence that this dispute was not subject to arbitration. Furthermore, it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. See AT & T, 475 U.S. at 650, 106 S.Ct. at 1419, 89 L.Ed.2d at 656 (citation omitted). Therefore, this dispute was not subject to arbitration and the circuit court was the proper forum to determine whether the parties had agreed to arbitrate. See id. at 652, 106 S.Ct. at 1420, 89 L.Ed.2d at 657-58 (noting that when there is an express exclusion or other forceful evidence, [a] dispute over the interpretation of [the agreement] ... is not subject to the arbitration clause. [If such evidence is present, t]hat issue should [be] decided by the [courts] and ... it should not [be] referred to the arbitrator.).