CINCINNATI GAS AND ELECTRIC COMPANY v. APPALACHIAN FUELS, LLC.
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RENDERED: JULY 29, 2005; 2:00 p.m.
NOT TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2004-CA-001252-MR
CINCINNATI GAS AND ELECTRIC COMPANY
v.
APPELLANT
APPEAL FROM BOYD CIRCUIT COURT
HONORABLE C. DAVID HAGERMAN, JUDGE
ACTION NO. 04-CI-00227
APPALACHIAN FUELS, LLC.
APPELLEE
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE:
DYCHE, SCHRODER, AND VANMETER, JUDGES.
SCHRODER, JUDGE: This is an appeal from an order denying
appellant’s motion to compel arbitration, granting appellee’s
motion to stay arbitration, and converting a restraining order
staying arbitration deadlines into a temporary injunction.
Because the issue of arbitrability in this case – whether
appellant’s availing itself of the self-help remedy of set-off
precluded arbitration under the contract – is considered
procedural as a waiver issue, the issue must be decided by the
arbitrator pursuant to the dictates of Howsam v. Dean Witter
Reynolds, Inc., 537 U.S. 79, 123 S. Ct. 588, 154 L. Ed. 2d 491
(2002).
Accordingly, we reverse the lower court and remand for
further proceedings consistent with this opinion.
Appellant, Cincinnati Gas & Electric Company (“CG&E”),
and appellee, Appalachian Fuels, LLC (“Appalachian”) entered
into two three-year coal supply agreements on March 1, 2002, and
April 1, 2002.
The contracts required Appalachian to sell and
deliver specific quantities and quality of coal to CG&E from
specifically designated source mines.
The quantities were
measured in annual tonnage with monthly minimums.
The contracts
also contained a provision stating that Appalachian’s obligation
to deliver the coal would be excused in the event of force
majeure conditions at those designated mines.
Appalachian’s deliveries of coal were spotty
throughout 2002 and stopped altogether in August of 2003.
Appalachian claimed that events of force majeure – 1) depletion
of reserves in the designated source mines and 2) the
unavailability of new permits to mine the additional reserves prevented it from making any further deliveries to CG&E.
On
September 24, 2003, CG&E advised Appalachian that it would begin
to exercise its right to withhold monies it owed Appalachian to
offset the cost of replacement coal pursuant to Sections 2.4.1
and 8.3 of the contracts.
From September of 2003 to January of
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2004, CG&E held back over $1,000,000 in funds owed to
Appalachian, $400,000 of which it still has never paid.
During
this time, the parties met periodically and attempted to
negotiate how to restructure the contracts to allow Appalachian
to perform using different coal sources.
agreement was never reached.
However, a new
On February 16, 2004, CG&E gave
notice to Appalachian of its intent to invoke the arbitration
clause (Section 11.11) of the contracts.
Section 11.11 provided
in pertinent part:
If a dispute arises between the Parties
relating to this Agreement, the Parties
agree to use the following procedure prior
to either Party pursuing other available
remedies:
(A) A meeting shall be held promptly
between the Parties, attended by individuals
with decision-making authority regarding the
dispute, to attempt in good faith to
negotiate a resolution of the dispute.
(B) If within thirty (30) days after such
meeting, the Parties have not succeeded in
negotiating a resolution of the dispute,
then, upon fifteen (15) days written notice
to the other party, either Party may request
that the matter be referred to binding
arbitration before three arbitrators, one of
whom shall be named by Buyer, one by Seller,
and a third of whom shall be named by the
two arbitrators appointed by the Buyer and
Seller, respectively. (emphasis added.)
On February 20, 2004, CG&E selected its arbitrator
pursuant to the above provision of the contract.
On March 4,
2004, Appalachian filed its complaint in the Boyd Circuit Court
requesting a stay of the arbitration sought by CG&E and seeking
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judicial resolution of the parties’ force majeure dispute.
Appalachian also filed a motion for a temporary restraining
order pursuant to CR 65.03 requesting a continuance of the
deadline for selecting an arbitrator until the circuit court had
the opportunity to rule on the motion to stay the arbitration
proceedings.
The court granted Appalachian’s motion for a
temporary restraining order.
CG&E then filed a motion to
dissolve the restraining order, to compel arbitration, and to
stay the state court action.
was held on May 6, 2004.
A hearing on the competing motions
On June 2, 2004, the court denied
CG&E’s motion to compel arbitration, granted Appalachian’s
motion to stay arbitration, and converted the restraining order
into a temporary injunction, thereby enjoining all further
arbitration deadlines.
The basis of the court’s ruling was that
CG&E had waived the right to arbitrate the dispute when it
pursued “other available remedies” by withholding funds owed to
Appalachian to cover the cost of replacement coal – the selfhelp remedy of set-off.
This appeal by CG&E followed.
CG&E’s first argument is that the Federal Arbitration
Act (“FAA”), 9 U.S.C. § 1 et seq. (2005), preempts the Kentucky
Arbitration Act (“KAA”), KRS 417.045-240, and governs this case.
Section 2 of the FAA, 9 U.S.C. § 2 (2005), provides in part that
a written agreement to arbitrate “a contract evidencing a
transaction involving commerce
. . . shall be valid,
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irrevocable, and enforceable.”
The analogous section of the
KAA, KRS 417.050, provides in pertinent part:
A written agreement to submit any existing
controversy to arbitration or a provision in
written contract to submit to arbitration
any controversy thereafter arising between
the parties is valid, enforceable and
irrevocable, save upon such grounds as exist
at law for the revocation of any contract.
The lower court did not state which law it applied in
deciding this case.
It has been held that the FAA governs
issues of arbitrability in state and federal courts if the case
involves interstate commerce.
Saneii v. Robards, 289 F.Supp.2d
855 (W.D. Ky. 2003); 9 U.S.C. § 1 (2005).
Here the parties
agree that the contracts at issue involve interstate commerce
because they provide for the sale and delivery of coal mined in
West Virginia and Kentucky to Ohio.
applicable and would preempt the KAA.
Hence the FAA would be
See Fazio v. Lehman
Brothers, Inc., 340 F.3d 386 (6th Cir. 2003).
CG&E next argues that the FAA mandates that the
arbitrator decide whether the case is subject to arbitration
under the facts of this case, citing 9 U.S.C. § 3 (2005) and
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 123 S. Ct.
588, 154 L. Ed. 2d 491 (2002).
9 U.S.C. § 3 (2005) provides:
If any suit or proceeding be brought in any
of the courts of the United States upon any
issue referable to arbitration under an
agreement in writing for such arbitration,
the court in which such suit is pending,
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upon being satisfied that the issue involved
in such suit or proceeding is referable to
arbitration under such an agreement, shall
on application of one of the parties stay
the trial of the action until such
arbitration has been had in accordance with
the terms of the agreement, providing the
applicant for the stay is not in default in
proceeding with such arbitration.
In Howsam, the question before the Supreme Court was
whether the lower court or the arbitrator should decide if
arbitration was time-barred under the NASD arbitration time
limit rule.
The Supreme Court held that such gateway procedural
questions are for the arbitrator, not the courts:
“‘[P]rocedural’ questions which grow out of
the dispute and bear on its final
disposition” are presumptively not for the
judge, but for an arbitrator, to decide.
John Wiley [& Sons, Inc. v. Livingston, 376
U.S. 543,] 557, 84 S. Ct. 909, [11 L Ed.2d
898 (1964)] . . . So, too, the presumption
is that the arbitrator should decide
“allegation[s] of waiver, delay, or a like
defense to arbitrability.”
Moses H. Cone
Memorial Hospital [v. Mercury Construction
Corp., 460 U.S. 1,] 24-25, 103 S. Ct. 927[,
74 L. Ed.2d 765 (1983)]. Indeed, the
Revised Uniform Arbitration Act of 2000
(RUAA), seeking to “incorporate the holdings
of the vast majority of state courts and the
law that has developed under [Federal
Arbitration Act],” states that an
“arbitrator shall decide whether a condition
precedent to arbitrability has been
fulfilled.” RUAA § 6(c), and comment 2, 7
U.L.A. 12-13 (Supp.2002).
And the comments
add that “in the absence of an agreement to
the contrary, issues of substantive
arbitrability . . . are for a court to
decide and issues of procedural
arbitrability, i.e., whether prerequisites
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such as time limits, notice, laches,
estoppel, and other conditions precedent to
an obligation to arbitrate have been met,
are for the arbitrators to decide.” Id., §
6, comment 2, 7 U.L.A., at 13 (emphasis
added).
Howsam, 537 U.S. at 84-85, 123 S. Ct. at 592.
It is CG&E’s position that whether or not it pursued
“other available remedies” under the contracts by withholding
funds owed to Appalachian was a procedural issue to be decided
by the arbitrator and not the court.
Conversely, Appalachian
maintains that such was a substantive question of arbitrability
to be decided by the court.
Appalachian correctly points out
that the Court in Howsam did not overrule its earlier holding in
AT & T Technologies, Inc. v. Communications Workers of America,
475 U.S. 643, 106 S. Ct. 1415, 89 L. Ed. 2d 648 (1986), that the
underlying issue of whether the parties have submitted a
particular issue for arbitration is a substantive issue for the
courts to decide.
The lower court in this case adjudged that the issue
was a substantive one for the court to decide.
Because the
court’s ruling did not include any factual findings, but was
based solely on the interpretation of law and of the contracts,
our review of the ruling will be de novo.
Conseco Finance
Servicing Corp. v. Wilder, 47 S.W.3d 335, 340 (Ky.App. 2001).
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In our view, there is no question that the parties
agreed under the terms of the contracts to arbitrate the type of
dispute underlying this case – whether Appalachian was excused
from performing due to force majeure.
Under the language of
Section 11.11 of the contracts, the arbitration provision
clearly applies to any dispute between the parties “relating
this Agreement.”
Sections 2.4.1, 2.4.2, and 9.1 of the
contracts provide that the duty to perform shall be excused by
force majeure, and the definition of force majeure is set forth
in Section 9.2.
The only question regarding arbitration in this case
is whether CG&E pursued “other available remedies” prior to
invoking the arbitration clause when it set off the cost
difference of replacement coal against the amounts it owed
Appalachian under the contracts.
From our reading of Section
11.11 of the contracts, pursuing other available remedies would
clearly waive the right to invoke the arbitration clause.
See
Conseco Finance Servicing Corp. v. Wilder, 47 S.W.3d at 344345.1
As stated above, under Howsam, that would be considered a
procedural issue to be decided by the arbitrator, not the
courts.
Accordingly, the order denying the motion to compel
arbitration, granting the motion to stay the arbitration, and
1
In Wilder, this Court made a determination of waiver relative to an
arbitration clause. However, there was no challenge to such court
determination in that case, and Wilder was decided in 2001, prior to the
United States Supreme Court’s decision in Howsam.
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converting the restraining order into a temporary injunction
staying all arbitration deadlines is reversed, and the cause
remanded for further proceedings consistent with this opinion.
ALL CONCUR.
BRIEF AND ORAL ARGUMENT FOR
APPELLANT:
BRIEF AND ORAL ARGUMENT FOR
APPELLEE:
Janice Lee Murray
Huntington, West Virginia
Barry D. Hunter
Lexington, Kentucky
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