City of Cottonwood v. James L. Fann Contracting, Inc.

• Decision Date: 19 May 1994
• Docket Number: CA-CV,No. 1,1
• Citation: 179 Ariz. 185,877 P.2d 284
• Parties: CITY OF COTTONWOOD, a municipal corporation, Plaintiff-Appellant, v. JAMES L. FANN CONTRACTING, INC., an Arizona corporation, Defendant-Appellee. 92-0111.
• Court: Arizona Court of Appeals

Page 284

877 P.2d 284

179 Ariz. 185

CITY OF COTTONWOOD, a municipal corporation, Plaintiff-Appellant, v. JAMES L. FANN CONTRACTING, INC., an Arizona corporation, Defendant-Appellee.

No. 1 CA-CV 92-0111.

Court of Appeals of Arizona,

Division 1, Department D.

May 19, 1994.

Reconsideration Denied July 27, 1994.

[179 Ariz. 187] Mangum, Wall, Stoops & Warden, P.L.L.C. by Jon W. Thompson and Robert W. Warden, Flagstaff, for plaintiff-appellant.

Jennings & Haug by D. Kim Lough, Phoenix, for defendant-appellee.

OPINION

GERBER, Judge.

Appellant City of Cottonwood (Cottonwood) appeals from the trial court's determination that appellee Fann Contracting (Fann) requested arbitration in a timely manner and the trial court's order that the parties proceed to arbitration. Cottonwood also appeals the trial court's award of attorney's fees to Fann. We hold that the arbitrator is the proper party to consider the issue of timeliness, but because the arbitrator independently determined that Fann's request was timely, the court did not err in sending the parties to arbitration. We further hold that the trial court acted within its discretion in its award of attorney's fees.

BACKGROUND

On or about September 9, 1989, Cottonwood and Fann contracted for the construction by Fann of Wastewater Collection System Lift Station Numbers 1, 2, 3 and 4 in Cottonwood. The agreement included an arbitration clause, which provided in part:

No demand for arbitration of any claim dispute or other matter that is required to be referred to ENGINEER initially for decision in accordance with paragraph 9.11 ¹ will be made until the earlier of (a) the date on which the ENGINEER has rendered a decision or (b) the tenth day after the parties have presented their evidence to the ENGINEER if a written decision has not been rendered by ENGINEER before that date. No demand for arbitration of any such claim, dispute or other matter will be made later than thirty days after the date on which the ENGINEER has rendered a written decision in respect thereof in accordance with paragraph 9.11....

On December 21, 1989, Arthur Beard (Beard), the project engineer, rejected Fann's submittals for pumps for the job. The next day, Fann requested information from Beard regarding his reasons for rejection. Beard sent a letter to Fann dated January 22, 1990, enumerating his reasons for rejecting the pump submittals. Fann immediately submitted to Beard a letter from the pump manufacturer disputing Beard's rejection. Beard again rejected the pumps on January 24, 1990.

The parties met on February 5, 1990, to discuss details regarding the pump submittals. Afterwards, Fann made a claim for an increase in both contract time and price for delivery of new pumps.

On February 26, 1990, Fann requested a 161 day extension for completion of the contract. Fann claimed it needed the extension because of generator delay and because of the difficulty with pump submittals. On March 27, 1990, Beard issued a change order granting the 56 days for the generator delay but denying the 105 days for the pump difficulties. Fann accepted the contract change order the same day. Cottonwood approved the contract change order on April 4, 1990.

Meanwhile, Fann also requested a contract change order in the amount of $3503.40 for additional labor and parts regarding temperature and moisture control sensors on the pumps. On March 28, 1990, Beard responded by forwarding a "self-explanatory" letter dated March 27, 1990, from the project electrical engineer. The electrical engineer's letter recommended that Fann's requested changes be denied because the parts and labor were included in the original contract. Beard's letter of March 28, 1990 did not formally deny Fann's request but implied denial by enclosing the electrical engineer's letter.

On April 19, 1990, Fann requested a formal decision in accord with paragraph 9.11 of the contract from the City Engineer (not Beard, the Project Engineer) on the contract change orders. The letter was forwarded to Beard. On May 16, 1990, Beard sent a letter to Fann stating there were "no changes in the previous decisions." On May 22, 1990, Fann filed a demand for arbitration with the American Arbitration Association (A.A.A.).

By letter dated August 15, 1990, Cottonwood requested that the A.A.A. decide as a preliminary issue that the case was not arbitrable because Fann's arbitration demand of May 22, 1990 was untimely. Cottonwood argued that Fann's request for arbitration was not made within 30 days of the engineer's written decision as required by the arbitration clause. Cottonwood pointed out that Beard submitted his decision to Fann rejecting Fann's pump submittals in his December 21, 1989 letter thereby making Fann's May 22, 1990 request for arbitration untimely. Fann responded that because the parties continued to "negotiate" regarding the pumps, Beard's second letter of May 16, 1990 constituted the final written decision under section 9.11 of the contract, and therefore its demand for arbitration was within 30 days of the engineer's written decision.

Cottonwood argued, further, that if the A.A.A. allowed the arbitrator to decide the issue, Cottonwood desired a hearing on the timeliness matter prior to proceeding to arbitration. The A.A.A. referred the matter to an arbitrator who set a date for a preliminary hearing on arbitrability and timeliness. Before the preliminary hearing, however, the arbitrator decided the case was arbitrable, canceled the preliminary hearing, and set an evidentiary hearing. Cottonwood then moved to stay arbitration arguing that the issue of timeliness was one for the court to decide.

The trial court ordered the parties to proceed to arbitration without indicating whether it had reached that decision because 1) the demand for arbitration was timely and thus did not constitute waiver or 2) the issue of timeliness was one for the arbitrator to decide. The trial court also denied Fann's request for attorney's fees incurred in the judicial proceedings to date.

The parties proceeded to arbitration, which resulted in an award to Fann. In an action to confirm the arbitrator's award, Fann successfully renewed its request for attorney's fees incurred in the prior judicial proceedings. Cottonwood's motion for new trial was denied, with these additional rulings:

2. The Court finds that the issue of timeliness of any request for arbitration is an issue for the Court.

3. The Court further finds that without waiver, Fann made a timely demand for arbitration on May 22, 1990.

Apparently, both the trial court and the arbitrator decided that the demand for arbitration was timely. ²

Cottonwood raises a number of issues on appeal regarding whether the trial court's determination of timeliness was proper. If we decide that Fann's demand for arbitration was untimely, then the decision of Cottonwood's engineer would be final pursuant to the contract and thus Fann should not have been entitled to any relief in the proceedings below. Before we can review the trial court's decision, we first must address the jurisdictional issue: who properly hears the issue of timeliness--the arbitrator or the trial court?

DISCUSSION

The Arizona Legislature has adopted the Uniform Arbitration Act, ³ Arizona Revised Statutes Annotated ("A.R.S.") sections 12-1501 to 12-1518, which greatly limits judicial review of an agreement to arbitrate. Smitty's Super-Valu, 22 Ariz.App. at 180, 525 P.2d at 311; Einhorn v. Valley Medical Specialists, P.C., 172 Ariz. 571, 572-73, 838 P.2d 1332, 1333-34 (App.1992). Moreover, the public policy of Arizona favors arbitration. Id. Because of the public policy favoring arbitration, arbitration clauses are construed liberally and any doubts about whether a matter is subject to arbitration are resolved in favor of arbitration. U.S. Insulation, Inc. v. Hilro Constr. Co., 146 Ariz. 250, 258, 705 P.2d 490, 498 (App.1985).

The issue of timeliness is complicated. An untimely demand could constitute repudiation/waiver of the arbitration clause, failure of a procedural condition, or failure of a condition precedent to activation of the clause. While appellant raises the "condition precedent" argument in passing, the analysis does not apply in the present case. ⁴

Untimeliness may constitute repudiation of the arbitration agreement if the repudiating party has acted so inconsistently with the arbitration agreement as to waive its right to proceed under the agreement. Repudiation is a voluntary relinquishment of a known right that usually entails prejudice to the other party. Because repudiation calls into question the existence of the arbitration agreement, repudiation is an issue for the court.

On the other hand, whether a procedural condition has been met does not call into question the existence of the agreement but, instead, affects how that agreement will be interpreted and, as discussed below, is therefore an issue for the arbitrator. We now apply these principles to the arbitration agreement in question.

Existence of the Arbitration Agreement

The trial court's review on a motion to compel arbitration is limited to the determination whether an arbitration agreement truly exists. A.R.S. § 12-1502(C) (1982). In Hilro we found two methods to challenge a motion to compel arbitration: 1) legal or equitable defenses or 2) repudiation. 146 Ariz. at 256, 705 P.2d at 496.

Legal or Equitable Defenses

First, the challenging party could prove that there exist grounds "in law or in equity for the revocation of any contract." Id. (citing Prima Paint v. Flood & Conklin Mfg., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967) and Ariz.Rev.Stat.Ann. § 12-1501). The list of legal or equitable grounds includes allegations that the contract is void for lack of mutual consent, consideration, or capacity, or voidable for fraud, duress, lack of capacity, mistake, or violation of a public purpose. Hilro, 146 Ariz. at 253, 705 P.2d at 493. Timeliness is not...