Azcon Const. Co., Inc. v. Golden Hills Resort, Inc.

• Decision Date: 07 April 1993
• Docket Number: No. 18057,18057
• Citation: 498 N.W.2d 630
• Parties: AZCON CONSTRUCTION COMPANY, INC., Plaintiff and Appellee, v. GOLDEN HILLS RESORT, INC., f/k/a Golden Hills Inn, Inc., Defendant and Appellant.
• Court: South Dakota Supreme Court

Page 630

498 N.W.2d 630

AZCON CONSTRUCTION COMPANY, INC., Plaintiff and Appellee, v. GOLDEN HILLS RESORT, INC., f/k/a Golden Hills Inn, Inc. Defendant and Appellant.

No. 18057.

Supreme Court of South Dakota.

Argued Feb. 8, 1993.

Decided April 7, 1993.

Edward C. Carpenter, Costello, Porter, Hill Heisterkamp & Bushnell, Rapid City, for plaintiff and appellee.

Ronald W. Banks, Banks, Johnson & Colbath, Rapid City, for defendant and appellant.

WUEST, Justice.

This is an appeal arising from a circuit court's affirmation of an arbitration panel's award. The trial court ruled that Golden Hills waived its objection to arbitration by participation therein, affirmed the arbitration panel's award and denied a motion to vacate the award. We hold that participation by Golden Hills was not a waiver and reverse the trial court on that issue. However, we affirm the trial court on all other issues.

FACTS

On July 20, 1988, Golden Hills Resort, Inc. (Golden Hills) and Azcon Construction Co., Inc. (Azcon) entered into a single, written contract for the design and construction of a hotel-convention center and a connected recreation center to be built in Lead, South Dakota. The contract did not separate costs for the two facilities.

Eleven months later, the City of Lead contracted with Golden Hills to serve as general contractor for the building of a recreation center for the Northern Hills Young Mens Christian Center (YMCA). The YMCA center was the same recreation facility Azcon was in the process of erecting under its contract with Golden Hills.

During the course of construction, disputes arose between Azcon and Golden Hills. On June 23, 1989, they entered into a settlement agreement in which Azcon released claims for extra work, owner delay, weather delay and other claims accrued as of the date of the agreement. The parties agreed not to sue one another or seek arbitration proceedings against one another for the claims settled in the agreement.

On November 9, 1990, Azcon filed a demand for arbitration seeking damages for breach of contract by Golden Hills. The same day Golden Hills objected to jurisdiction claiming the settlement agreement acted as a complete bar to arbitration. In a subsequent brief, Golden Hills took the position that only the claims and issues addressed in the settlement agreement were foreclosed from arbitration.

The arbitration panel responded to Golden Hills' objection to jurisdiction by ruling claims included in the settlement agreement would not be arbitrated. It deferred ruling on which claims were arbitrable until the hearing and concluded it would entertain Golden Hills' motion to dismiss after it ruled on arbitrability.

On May 24, 1991, the City of Lead filed suit in circuit court against Azcon and Golden Hills as co-Defendants for alleged breach of contract and construction deficiencies in the YMCA recreation center. Golden Hills filed a cross-claim against Azcon seeking indemnity and contribution against any amount eventually awarded to the City in that action.

Golden Hills then filed an amended answer in the arbitration proceeding objecting to the panel's jurisdiction of any claims dealing with the recreation center. Its amended answer also asserted a counterclaim against Azcon for damages relating to the convention center.

Both parties participated in selecting the three-man panel for arbitration which started on January 6, 1992 and concluded on January 24, 1992. Both presented evidence, called witnesses and had an opportunity for cross-examination.

The arbitrators determined they had jurisdiction over the claims: 1) by Azcon that Golden Hills failed to pay the amount due under the contract; 2) by Golden Hills that it was damaged by Azcon's conduct; and 3) by Golden Hills that Azcon built the hotel-convention center in a faulty manner. The panel acknowledged the circuit court had jurisdiction over: 1) claims by City against Azcon and Golden Hills for faulty construction of the recreation center; and 2) Golden Hills' cross-claims against Azcon for faulty construction of the recreation center.

On February 13, 1992, the arbitration panel awarded Azcon $2,049,484 and Golden Hills $417,800. Pursuant to SDCL 21-25A-23, Azcon filed a motion with the circuit court for affirmation of the award. Golden Hills moved the court to vacate the award on the same grounds it asserts in this appeal. The trial court affirmed the arbitration award and Golden Hills appeals. We will address each issue, adding relevant facts where necessary.

ANALYSIS

I. GOLDEN HILLS' PARTICIPATION IN THE ARBITRATION HEARING DID NOT WAIVE ITS OBJECTION TO THE JURISDICTION OF THE ARBITRATION PANEL.

Azcon asserts that Golden Hills' participation in the arbitration proceeding waived its right to raise the issue of arbitrability after the award notwithstanding Golden Hills' participation was under objection the panel was exceeding its jurisdiction. Golden Hills asserts the issue of jurisdiction was preserved by timely objections and its participation in arbitration did not waive its right to raise questions of jurisdiction on appeal.

The trial court determined that Golden Hills' submission of the question of jurisdiction to the arbitration panel, along with its participation in the proceedings without seeking a judicial stay under SDCL 21-25A-8 constituted a waiver. However, the court went ahead and decided the issues on the merits, apparently to avoid further appeals. This court has never decided whether timely objection will preserve the issue of arbitrability if a party participates in a hearing on the merits.

There is a wide split of authority as to when participation in an arbitration proceeding results in waiver of the right to object. See Annotation, Participating In Arbitration Proceeding As Waiver Of Objections To Arbitrability, 33 A.L.R.3d 1242 (1970). In some jurisdictions it is sufficient to raise an objection to arbitrability before or at the beginning of the hearing and the issue is preserved for appeal. A. & E. Plastik Pak Co. v. Monsanto Co., 396 F.2d 710 (9th Cir.1968); Acme Markets, Inc. v. Retail Clerks Int'l Union, 235 F.Supp. 814 (E.D.Pa.1964); United Mine Workers v. Pittston Co., 210 F.Supp. 781 (N.D.W.Va.1962); Hot Springs County Sch. Dist. v. Strube Constr., 715 P.2d 540 (Wyo.1986). Other jurisdictions hold that once the issue of arbitrability is submitted to the arbitration panel it is waived. O'Malley v. Petroleum Maintenance Co., 48 Cal.2d 107, 308 P.2d 9 (1957); Flint Sch. Dist. v. AFL-CIO, 168 Mich.App. 180, 423 N.W.2d 608 (1988) rev'd on other grounds, 431 Mich. 907, 433 N.W.2d 76 (1988); American Motorists Insurance Company v. Llanes, 396 Mich. 113, 240 N.W.2d 203 (1976). Some jurisdictions go so far as to find that when the issue of arbitrability is submitted to the arbitration panel it is waived even if the original agreement did not provide for arbitration of that claim. Collingswood Hosiery Mills Inc. v. American Federation of Hosiery Workers, 28 N.J.Super. 605, 101 A.2d 372, rev'd on other grounds, 31 N.J.Super. 466, 107 A.2d 43 (1953); National Cash Register Co. v. Wilson, 8 N.Y.2d 377, 208 N.Y.S.2d 951, 171 N.E.2d 302 (1960); Aigen v. Giannone, 49 A.D.2d 562, 370 N.Y.S.2d 186 (1975); Messina & Briante, Inc. v. Blitman Constr. Corp., 32 Misc.2d 21, 223 N.Y.S.2d 533 (1961).

We hold the preferable rule is that the right to raise an objection to jurisdiction is preserved if it is made in a timely manner before a hearing on the merits. To hold otherwise would require:

[O]ur adoption of a rule that would require a party disputing the issue to seek an injunction against arbitration before the proceedings commence, or to refrain from participating on that issue, or to seek court action immediately upon an arbitrator's affirmation of his own jurisdiction, at the penalty of waiver.

American Bakery & Confectionery Workers v. National Biscuit Co., 378 F.2d 918, 921 (3rd Cir.1967).

While SDCL 21-25A-8 provides for a judicial stay of arbitration while a court determines whether an issue is arbitrable, the language is permissive, not mandatory. ¹ It would defeat the purpose of creating a system of arbitration to require a party to obtain judicial determination of jurisdiction before proceeding with arbitration. "The purpose of arbitration is to permit a relatively quick and inexpensive resolution of contractual disputes by avoiding the expense and delay of extended court proceedings." L.R. Foy Constr. Co. v. Spearfish Sch. Dist., 341 N.W.2d 383, 388 (S.D.1983) (Henderson, J. specially concurring) (citations omitted). If the parties are satisfied with the results of arbitration, the issue of arbitrability may never be submitted to our overburdened courts.

Arbitrators derive their authority from, and must comply with, the arbitration agreement. Aamot v. Eneboe, 352 N.W.2d 647, 649 (S.D.1984). The question of whether a contract to arbitrate exists is a question for the court. City of Hot Springs v. Gunderson's Inc., 322 N.W.2d 8, 11 (S.D.1982). Further, this court has stated:

The power to construe and define the intent and meaning of plans and specifications made a part of a contract is one thing, and may properly be, as it was in this instance, left to arbiters selected by the parties; the power to construe the contract itself and to determine what is within and what without such contract is a different and independent question, and belongs primarily to the courts.

Kyburz v. State, 79 S.D. 114, 118, 108 N.W.2d 645, 647 (1961) (quoting Tomlinson v. Ashland Cnty., 170 Wis. 58, 173 N.W. 300, 303 (1919)). Reserving to the courts the question of the existence and scope of an arbitration agreement is consistent with SDCL 21-25A-24 ² and 21-25A-28. ³ The statutes set forth the narrow grounds upon which arbitration awards may be modified or vacated. A court may vacate an arbitration award where the arbitrators have exceeded their powers as provided in the agreement. Aamot, 352 N.W.2d at 649. ...