City of Cut Bank v. Tom Patrick Const., Inc.

• Decision Date: 03 September 1998
• Docket Number: No. 97-718,97-718
• Citation: 963 P.2d 1283,290 Mont. 470
• Parties: , 1998 MT 219 CITY OF CUT BANK, State of Montana, Plaintiff and Appellant, v. TOM PATRICK CONSTRUCTION, INC., Defendant and Respondent.
• Court: Montana Supreme Court

Page 1283

963 P.2d 1283

290 Mont. 470, 1998 MT 219

CITY OF CUT BANK, State of Montana, Plaintiff and Appellant, v. TOM PATRICK CONSTRUCTION, INC., Defendant and Respondent.

No. 97-718.

Supreme Court of Montana.

Submitted on Briefs May 28, 1998.

Decided Sept. 3, 1998.

Robert G. Olson; Frisbee, Moore & Olson, Cut Bank, for Plaintiff and Appellant.

Brian Lilletvedt; Bosch, Kuhr, Dugdale, Martin & Kaze, Havre, for Defendant and Respondent.

LEAPHART, Justice.

¶1 City of Cut Bank (Cut Bank) appeals from the decision of the Ninth Judicial District Court, Glacier County, dismissing with prejudice Cut Bank's complaint based upon the United States Supreme Court's decision in Doctor's Associates, Inc. v. Casarotto (1996), 517 U.S. 681, 116 S.Ct. 1652, 134 L.Ed.2d 902 (Casarotto). More specifically, the District Court determined that the transaction between Cut Bank and Tom Patrick Construction (Tom Patrick), which is the basis of the current action, involved interstate commerce and thus must be arbitrated pursuant to the Federal Arbitration Act (FAA). We reverse and remand.

Factual and Procedural Background

¶2 Cut Bank entered into a construction contract with Tom Patrick on November 16, 1993. The contract required Tom Patrick to replace a water line in Bum Coulee, construct an access road and stabilize the surrounding coulee and ditch areas. Tom Patrick completed the first two stages--replacing the water line and constructing the access road. Cut Bank, however, contends that the riprap materials used by Tom Patrick in the stabilization stage of the construction were insufficient to complete the project to specifications.

¶3 Cut Bank made several requests that Tom Patrick complete the project in accordance with the contract but eventually hired the services of another contractor to complete the project according to specifications. Completion of the project was more costly than the original contract price. Cut Bank refused to the make final payment due to Tom Patrick under the contract and refused to surrender Tom Patrick's bond and performance bond.

¶4 As a result, Tom Patrick served Cut Bank with a notice of intent to arbitrate the dispute. Cut Bank objected to arbitration proceedings, asserting that no valid contract for arbitration existed because the construction contract did not comply with § 27-5-114(4), MCA (1993), which required that notice that a contract is subject to arbitration be typed in underlined capital letters on the front page of the contract. Cut Bank filed a complaint in District Court seeking a stay of arbitration. Tom Patrick dismissed the arbitration proceedings and requested that the District Court stay further proceedings pending the resolution of the challenge to § 27-5-114, MCA, in Casarotto. The District Court granted the stay.

¶5 The United States Supreme Court issued its decision in Casarotto (1996), 517 U.S. 681, 116 S.Ct. 1652, 134 L.Ed.2d 902, determining that § 27-5-114(4), MCA, was preempted by the FAA. Thereafter, Tom Patrick moved to dismiss Cut Bank's complaint for failure to state a cause of action. Cut Bank responded that the FAA was not applicable to the construction contract because the contract did not involve interstate commerce. The District Court, citing Casarotto, dismissed Cut Bank's complaint with prejudice. Cut Bank appeals to this Court presenting three issues for review. We determine that the issue of whether the complaint alleges an underlying contract involving interstate commerce is dispositive and therefore do not reach the remaining issues.

Standard of Review

¶6 Our standard of review of district court rulings on motions to dismiss under Rule 12(b)(6), M.R.Civ.P., is set forth in Willson v. Taylor (1981), 194 Mont. 123, 634 P.2d 1180:

A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. A motion to dismiss under Rule 12(b)(6), M.R.Civ.P., has the effect of admitting all well-pleaded allegations in the complaint. In considering the motion, the complaint is construed in the light most favorable to the plaintiff, and all allegations of fact contained therein are taken as true.

Willson, 194 Mont. at 126, 634 P.2d at 1182 (citations omitted). The District Court's determination that Cut Bank's complaint failed to state a claim is a conclusion of law. Our standard of review of the trial court's conclusions of law is whether the tribunal's interpretation of the law is correct. Steer, Inc. v. Department of Revenue (1990), 245 Mont. 470, 474-75, 803 P.2d 601, 603.

Discussion

¶7 Congress, in enacting the FAA, sought to foreclose state legislative attempts to undercut the enforceability of arbitration agreements. The United States Supreme Court has explained that § 2 of the FAA reflects a strong national policy favoring arbitration agreements. Perry v. Thomas (1987), 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426. As a result of this strong policy, agreements to arbitrate will be upheld under the FAA unless the agreement is not part of a contract evidencing interstate commerce or is revocable "upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2.

¶8 Recognizing that many contracts provide little warning to parties that a contract is subject to arbitration, the Montana legislature enacted § 27-5-114(4), MCA. That section required that notice that a contract was subject to arbitration be printed in capitalized underlined print on the front of the contract. In so providing, the legislature sought to ensure that parties to a contract were aware, when they signed a contract subject to an arbitration clause, that they were waiving their constitutional right to access the courts. The legislature sought to prevent parties from waiving that right without their full knowledge.

¶9 Specifically, § 27-5-114(4), MCA, stated that "notice that a contract is subject to arbitration pursuant to this chapter shall be typed in underlined capital letters on the first page of the contract; and unless such notice is displayed thereon, the contract may not be subject to arbitration." This section (since repealed) was in effect in November 1993, at the time that Cut Bank entered into the construction contract with Tom Patrick. The construction contract did not comply with the notice requirement of § 27-5-114(4), MCA. Rather, Section 16.1, located in the Standard General Conditions on page 110 of the Contract Documents, stated that "[a]ll claims, disputes and other matters in question between [Cut Bank] and [Tom Patrick]arising out of or relating to the Contract Documents or the breach thereof ... will be decided by arbitration...." At the District Court, Cut Bank contended that this provision does not comply with the requirements of § 27-5-114(4), MCA, therefore that the agreement to arbitrate is not enforceable. Tom Patrick, on the other hand, maintained that this action is controlled by the United States Supreme Court's decision in Casarotto.

¶10 The United States Supreme Court, in Casarotto, held that Montana's first-page notice requirement found at § 27-5-114(4), MCA, conflicted with the FAA and was therefore preempted by the federal law. Specifically, the Supreme Court explained that "[c]ourts may not ... invalidate arbitration agreements under state laws applicable only to arbitration provisions." Casarotto, 116 S.Ct. at 1656. Instead, the arbitration provisions must be treated like any other contract and may only be invalidated "upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2.

¶11 Cut Bank asserts that this action is distinguishable from Casarotto because the transaction in this case does not involve interstate commerce. Specifically, Cut Bank maintains that this case is purely local, that it does not involve interstate commerce, and therefore that the FAA does not apply. Accordingly, the sole issue presented to this Court is whether the complaint alleges a contract involving interstate commerce, thereby invoking the FAA, or whether the contract is purely local and outside the purview of the FAA.

¶12 The District Court stated, in its order dismissing Cut Bank's complaint, that "from a review of the undisputed facts, ... this matter ... involve[s] interstate commerce." As explained above, a motion to dismiss the complaint for failure to state a claim has the effect of admitting all well-pleaded allegations in the complaint. The complaint is construed in the light most favorable to the plaintiff and all allegations of fact contained in the complaint are taken as true. Willson, 194 Mont. at 126, 634 P.2d at 1182.

¶13 Cut Bank's complaint alleges that it is a municipal corporation created and existing pursuant to the laws of the State of Montana, that Tom Patrick is a corporation organized and doing business in Montana, and that the contract entered into by the parties involved work to be performed in Montana. Since the District Court's order does not specify the basis for its conclusion that the matter involved interstate commerce, we cannot determine the District Court's underlying rationale. In any event, we review a district court's conclusions of law to determine whether the court correctly interpreted the law. A review of the complaint, when viewed in the light most favorable to Cut Bank, reveals that the construction contract as alleged in the complaint was a local transaction that did not involve interstate commerce. The District Court incorrectly dismissed Cut Bank's complaint pursuant toCasarotto.

¶14 Pursuant to the Commerce Clause of the United States Constitution, Congress has the power to regulate commerce among the states. U.S. Const. art. I, § 8, cl. 3. In United States v. Lopez (1995), 514 U.S. 549, 115 S.Ct. 1624, 131 L.Ed.2d 626, the United States Supreme Court explained that there are three broad categories of...