CONSULTANTS & BUILDERS, INC. VS. PADUCAH FEDERAL CREDIT UNION
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RENDERED: SEPTEMBER 19, 2008; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2007-CA-001874-MR
CONSULTANTS AND BUILDERS, INC.
v.
APPELLANT
APPEAL FROM MCCRACKEN CIRCUIT COURT
HONORABLE ROBERT J. HINES, JUDGE
ACTION NO. 07-CI-00674
PADUCAH FEDERAL CREDIT
UNION
APPELLEE
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE: CAPERTON AND VANMETER, JUDGES; GUIDUGLI,1 SENIOR
JUDGE.
VANMETER, JUDGE: Consultants & Builders, Inc. (CBI) appeals from orders
entered by the McCracken Circuit Court relating to the arbitration provisions of a
terminated construction agreement between CBI and appellee Paducah Federal
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Senior Judge Daniel T. Guidugli sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and Kentucky Revised Statutes
(KRS) 21.580.
Credit Union (PFCU). More specifically, CBI asserts that the trial court erred by
granting the temporary injunctive relief requested by PFCU and restraining CBI
from proceeding with arbitration, and by denying CBI’s motion to compel
arbitration. For the reasons stated hereafter, we reverse the trial court’s orders, and
we remand this matter for the entry of an order dissolving the injunction and
compelling arbitration.
The parties entered into a contract for the design and construction of a
credit union facility in Paducah, and CBI performed engineering and design
activities. A dispute arose over the cost, and PFCU elected not to proceed with the
project. Thereafter, PFCU refused to pay the $57,000 which CBI billed for its
design services.
After PFCU denied CBI’s request for mediation of the dispute, CBI
filed a demand for arbitration with the American Arbitration Association (AAA),
pursuant to the terms of the parties’ contract. On July 20, 2007, the AAA found
that CBI had met the applicable arbitration filing requirements, that arbitration
matters would proceed absent the parties’ agreement or a court stay of the
proceedings, and that by July 27 the parties should advise AAA of their
preferences as to hearing locations. PFCU failed to timely state any hearing
location preference, and the AAA determined that the arbitration hearing would be
conducted in Atlanta. In response, PFCU filed the underlying complaint on June
28, alleging that the contract was void as fraudulently induced or materially
breached, and seeking temporary injunctive relief. The circuit court ordered a stay
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of the arbitration proceedings on August 21, and on August 24, 2007, the court
denied CBI’s motion to dismiss or compel arbitration. This appeal from both
orders followed pursuant to KRS 417.220(1)(a).
As the trial court made no findings of fact but instead evidently based
its ruling on the application of contract law to the arbitration clause, our review is
de novo. Conseco Fin. Serv. Corp. v. Wilder, 47 S.W.3d 335, 340 (Ky.App. 2001).
For purposes of our review the relevant portions of Kentucky’s Uniform
Arbitration Act, as set out in KRS Chapter 417, are “nearly identical to those of”
the Federal Arbitration Act. Louisville Peterbilt, Inc. v. Cox, 132 S.W.3d 850, 854
(Ky. 2004). Thus, it is unnecessary to determine in this proceeding whether state
or federal law is applicable to the arbitration of the parties’ contract, as “[t]he
outcome is the same under both” state and federal arbitration law. Id. at 857.
Contractual agreements to resolve disputes by arbitration are
addressed by KRS 417.050, which 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.
Moreover, KRS 417.060(1) provides:
On application of a party showing an agreement
described in KRS 417.050, and the opposing party’s
refusal to arbitrate, the court shall order the parties to
proceed with arbitration. If the opposing party denies the
existence of the agreement to arbitrate, the court shall
proceed summarily to the determination of the issue so
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raised. The court shall order arbitration if found for the
moving party; otherwise, the application shall be denied.
Contractual arbitration agreements are subject to the rules of contract law,
including the fundamental rule that “absent fraud in the inducement, a written
agreement duly executed by the party to be held, who had an opportunity to read it,
will be enforced according to its terms.” Conseco, 47 S.W.3d at 341. Further, the
doctrine of unconscionability, which “has developed as a narrow exception to this
fundamental rule[,]” is “directed against one-sided, oppressive and unfairly
surprising contracts, and not against the consequences per se of uneven bargaining
power or even a simple old-fashioned bad bargain.” Id. at 341.
More recently, in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S.
440, 444, 126 S.Ct. 1204, 1208, 163 L.Ed.2d 1038 (2006), the United States
Supreme Court addressed legal or equitable “[c]hallenges to the validity of
arbitration agreements[,]” and divided such challenges into two categories:
One type challenges specifically the validity of the
agreement to arbitrate. . . . The other challenges the
contract as a whole, either on a ground that directly
affects the entire agreement (e.g., the agreement was
fraudulently induced), or on the ground that the illegality
of one of the contract’s provisions renders the whole
contract invalid.
The Court concluded that three propositions apply to the issue of whether a
challenge to an arbitration provision should be resolved by a court or by an
arbitrator:
First, as a matter of substantive federal arbitration law, an
arbitration provision is severable from the remainder of
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the contract. Second, unless the challenge is to the
arbitration clause itself, the issue of the contract’s
validity is considered by the arbitrator in the first
instance. Third, this arbitration law applies in state as
well as federal courts.
546 U.S. at 445-46, 126 S.Ct. at 1209. See also Southland Corp. v. Keating, 465
U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984); Prima Paint Corp. v. Flood & Conklin
Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). So that no
misunderstanding would result, the Supreme Court reaffirmed that “regardless of
whether the challenge is brought in federal or state court, a challenge to the validity
of the contract as a whole, and not specifically to the arbitration clause, must go to
the arbitrator.” 546 U.S. at 449, 126 S.Ct. at 1210.
The holding in Buckeye is consistent with the Kentucky Supreme
Court’s earlier holding in Peterbilt that “a claim of fraud in the inducement of the
underlying contract in general is arbitrable, unless the claim goes to the making or
performance of the arbitration agreement itself.” 132 S.W.3d at 852. Indeed, the
court noted that to hold otherwise would in effect
render the arbitration statutes meaningless. In fact, any
party seeking to avoid the agreement to arbitrate could
simply plead fraudulent inducement in the underlying
contract (rather than perhaps a more appropriate action
such as breach of warranty) in order to ensure that a court
and not an arbitrator heard its claim.
Id. at 855-56. Thus, if the party seeking enforcement presents prima facie
evidence of the agreement’s existence, “the burden shifts to the party seeking to
avoid the agreement.” Id. at 857.
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Here, the parties’ representatives signed the AIA Document A191 –
1996, Parts 1 and 2. The first page of both parts included the prominent notation
that “[a]n Additions and Deletions Report that notes added information as well as
revisions to the standard form text is available from the author and should be
reviewed.” Moreover, the Additions and Deletions Report for Part 2, as well as §
14 of Part 2, described various components of the project, including the calculation
of related costs as percentages of other fees. Parts 1 and 2 both included
arbitration terms, which were set out in Part 22 as follows:
§ 10.1 Claims, disputes or other matters in question
between the parties to this Part 2 Agreement arising out
of or relating to this Part 2 Agreement or breach thereof
shall be subject to and decided by mediation or
arbitration. Such mediation or arbitration shall be
conducted in accordance with the Construction Industry
Mediation or Arbitration Rules of the American
Arbitration Association currently in effect.
§ 10.2 In addition to and prior to arbitration, the parties
shall endeavor to settle disputes by mediation. Demand
for mediation shall be filed in writing with the other party
to this Part 2 Agreement and with the American
Arbitration Association. A demand for mediation shall
be made within a reasonable time after the claim, dispute
or other matter in question has arisen. In no event shall
the demand for mediation be made after the date when
institution of legal or equitable proceedings based upon
such claim, dispute or other matter in question would be
barred by the applicable statutes of repose or limitation.
§ 10.3 Demand for arbitration shall be filed in writing
with the other party to this Part 2 Agreement and with the
American Arbitration Association. A demand for
arbitration shall be made within a reasonable time after
the claim, dispute or other matter in question has arisen.
2
Virtually identical terms were set out in §§ 6.1 - 6.3 of Part 1.
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In no event shall the demand for arbitration be made after
the date when institution of legal or equitable
proceedings based on such claim, dispute or other matter
in question would be barred by the applicable statutes of
repose or limitation.
PFCU asserted in its complaint that CBI fraudulently induced PFCU
to enter into a contract which it did not intend to honor, and that CBI materially
breached the contract by refusing to perform for the agreed-upon price. As in
Conseco, however, the arbitration agreement applied even though the dispute was
one “arising out of or relating to” the parties’ contractual agreement “or breach
thereof.” Simply put, despite PFCU’s claims to the contrary, the costs of the
project clearly arose out of or were related to the agreement, including the
Additions and Deletions Report referenced on the front pages of Parts 1 and 2.
Any challenge to the validity of the arbitration agreement on grounds of either
fraud or material breach was a challenge “on a ground that directly affects the
entire agreement (e.g., the agreement was fraudulently induced), or on the ground
that the illegality of one of the contract’s provisions renders the whole contract
invalid[,]” rather than a specific challenge only to the validity of the arbitration
clause. Buckeye, 546 U.S. at 444-46, 126 S.Ct. at 1208-09. Hence, the challenges
to the contract’s validity, on grounds of fraud and material breach, were issues for
consideration by the arbitrator, id., 546 U.S. at 445-46, 126 S.Ct. at 1209, and the
trial court erred by issuing a stay of the arbitration proceedings.
Finally, we note that although PFCU asserts on appeal that conducting
the arbitration process in Atlanta will result in “an exercise in futility” because the
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result will not be enforceable by Kentucky state courts, see Artrip v. Samons
Constr., Inc., 54 S.W.3d 169 (Ky.App. 2001), issues regarding future state or
federal jurisdiction and enforcement procedures are not properly before us in this
appeal. Moreover, the remaining allegations raised in PFCU’s appellee brief are
not properly before us and will not be discussed on appeal.
The orders of the McCracken Circuit Court are reversed, and this
matter is remanded for entry of an order dissolving the injunction and compelling
arbitration.
ALL CONCUR.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEE:
Van F. Sims
Paducah, Kentucky
Stanley K. Spees
Paducah, Kentucky
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