F.L. Crane & Sons v. Malouf Constr. Corp.

• Decision Date: 01 September 2006
• Docket Number: 1050206.
• Citation: 953 So.2d 366
• Parties: F.L. CRANE & SONS, INC. v. MALOUF CONSTRUCTION CORPORATION, et al.
• Court: Alabama Supreme Court

953 So.2d 366

F.L. CRANE & SONS, INC. v. MALOUF CONSTRUCTION CORPORATION, et al.

1050206.

Supreme Court of Alabama.

September 1, 2006.

Charles J. Potts and Benjamin C. Heinz of Alford, Clausen & McDonald, LLC, Mobile, for appellant.

L. Bratton Rainey III and D. Trice Stabler of Luther, Oldenburg & Rainey, P.C., Mobile, for appellee Malouf Construction Corporation.

SEE, Justice.

F.L. Crane & Sons, Inc. ("Crane"), appeals the trial court's order denying its motion to compel arbitration and mediation, see Rule 4(d), Ala. R.App. P.; Crane purports also to appeal the trial court's order denying its motion to dismiss for improper venue. We affirm the trial court's denial of Crane's motion to compel arbitration. Insofar as Crane's appeal challenges the trial court's denial of its motion to dismiss, we treat it as a petition for the writ of mandamus, and we deny the petition.

Facts and Procedural History

Malouf Construction Corporation ("Malouf"), a Mississippi corporation, entered into a contract with Palm Beach Condominiums, LLC ("Palm Beach"), for the construction of the Palm Beach Condominiums in Orange Beach ("the prime contract"). Malouf then entered into a subcontract with Crane, in which Crane agreed to furnish and install an exterior insulation-and-finish system on the condominiums ("the subcontract").¹

The subcontract contains a choice-of-law provision, which says that Mississippi law will govern any dispute arising between Malouf and Crane. That provision reads as follows:

"The Subcontract is deemed to have been made in the State of Mississippi regardless of the place of actual negotiation, execution, and performance, and the parties hereby agree that the laws of the State of Mississippi shall govern the interpretation, effect, enforcement, and all other aspects of both this Subcontract and the rights and obligations of Contractor and Subcontractor hereunder. This consensual choice of law shall apply irrespective of principles of conflict of laws, envoi, forum non conveniens, or other considerations."

The subcontract also contains a forum-selection clause, which states that any dispute between Crane and Malouf will be litigated either in Madison County, Mississippi, or in the Southern District of Mississippi. The forum-selection clause reads as follows:

"Any dispute between the parties shall be resolved by litigation in a court of competent jurisdiction located either in Madison County, Mississippi, if a state court action, or in the Southern District of Mississippi, if a federal court action .... By execution of this Subcontract, Subcontractor irrevocably waives any objection, now or in the future, to such venue and agrees not to assert in any such court that any action or proceeding has been brought in an inconvenient or inappropriate forum."

The subcontract also incorporates into the subcontract the terms of the prime contract between Malouf and Palm Beach:

"The Subcontractor [Crane] shall be bound to the Contractor [Malouf] by all terms and conditions of this Subcontract and by all terms and conditions of the Prime Contract between the Owner [Palm Beach] and Contractor [Malouf], which is incorporated by reference into this Subcontract and is an integral part of this Subcontract."

However, the alternative-dispute-resolution ("ADR") provisions of the subcontract and the prime contract appear to conflict. Paragraph 4.5.1 of the prime contract provides for mandatory mediation; it states:

"Any Claim arising out of or related to the [Prime] Contract ... shall ... be subject to mediation as a condition precedent to arbitration or the institution of legal or equitable proceedings by either party."

Similarly, paragraph 4.6.1 of the prime contract provides for mandatory arbitration; it states:

"Any Claim arising out of or related to the [Prime] Contract ... shall ... be subject to arbitration. Prior to arbitration, the parties shall endeavor to resolve disputes by mediation in accordance with the provisions of Paragraph 4.5."

In contrast, the subcontract provides for permissive ADR procedures and provides that no ADR procedures shall be mandatory. Paragraph 27.1 of the subcontract purports to govern

"all claims, disputes, and other matters in controversy or question between the Contractor and the Subcontractor arising out of or relating to th[e] Subcontract...."

Paragraph 27.2 of the subcontract states that, in the event of a dispute,

"the parties shall consider alternative dispute resolution (ADR) ... but no such ADR procedure shall be mandatory unless both contractor and subcontractor enter into a separate agreement to submit their disputes to ADR."

The prime contract outlines a detailed ADR procedure, requiring the contractor and the owner (here, Palm Beach) to submit any disputes to the architect. After the architect renders a decision in the dispute, the parties must proceed to mediation and then to arbitration. However, the prime contract in paragraph 4.4.1 limits the application of these provisions: "The Architect will not decide disputes between [Malouf] and persons or entities other than [Palm Beach]."

After the condominiums were built, Palm Beach Owner's Association, Inc. ("the Association"), whose membership comprises all record owners of the units in the Palm Beach Condominiums, sued Malouf and Palm Beach in the Baldwin Circuit Court, alleging defects in the construction. Malouf filed a third-party complaint against Crane and several other subcontractors, alleging breach of contract, breach of warranty, and negligent performance.

Crane answered Malouf's third-party complaint, asserting as a defense that Malouf's claims against it were subject to resolution by mandatory binding arbitration. In its amended answer, Crane also asserted as a defense that the forum-selection clause in the subcontract required the claims to be litigated, if at all, in a state court in Madison County, Mississippi, or in the United States District Court for the Southern District of Mississippi. Crane moved the trial court to compel arbitration and to stay the proceedings or, in the alternative, to dismiss the case without prejudice on the basis that venue in the Baldwin Circuit Court was improper under the forum-selection clause.

Malouf responded that the trial court should enforce the permissive arbitration and mediation provisions of the subcontract instead of the mandatory provisions in the prime contract. Malouf also argued that the forum-selection clause in the subcontract should not be enforced because trying the case in Mississippi would result in serious inconvenience to Malouf.

After a hearing, the trial court, in separate orders, denied Crane's motion to compel mediation and arbitration and denied Crane's motion to dismiss the action based on improper venue. Crane appeals both orders.

Standard of Review

The parties agree that Mississippi law governs the substantive issues of this case. They also agree that Alabama law governs the procedural issues, including the standard of review. Alabama courts apply a de novo standard of review to the denial of a motion to compel arbitration. See Leeman v. Cook's Pest Control, Inc., 902 So.2d 641, 644 (Ala. 2004) ("`"[T]he standard of review of a trial court's ruling on a motion to compel arbitration at the instance of either party is a de novo determination of whether the trial judge erred on a factual or legal issue to the substantial prejudice of the party seeking review."'" (quoting other cases)). When reviewing the enforcement of, or the refusal to enforce, a forum-selection clause, however, Alabama courts must determine whether the trial court exceeded its discretion. See Ex parte Procom Servs., 884 So.2d 827, 830 (Ala. 2003).

Analysis

I. Crane's Motion to Compel Arbitration and Mediation

This Court has held that, when determining whether parties agreed to arbitrate a particular dispute, the court must apply "`"ordinary state-law principles that govern the formation of contracts."'" AmSouth Bank v. Dees, 847 So.2d 923, 933 (Ala. 2002) (quoting Ex parte Messer, 797 So.2d 1079, 1082 (Ala. 2001), quoting in turn First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995)). Because this contract is governed by the substantive law of Mississippi, we use Mississippi contract principles to construe the arbitration and mediation provisions.

Under Mississippi law, a court must consider three factors when ruling on a motion to compel arbitration: (1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether any defense available under Mississippi contract law, such as fraud, duress, or unconscionability, applies to invalidate the arbitration agreement. East Ford v. Taylor, 826 So.2d 709, 713 (Miss. 2002). The parties agree that this appeal hinges on the first prong: whether the prime contract and the subcontract created an agreement requiring Malouf to arbitrate its claims against Crane.

The parties disagree as to which clauses of which contract should apply. Crane argues that the requirement in the prime contract of mediation and arbitration applies to this dispute because the subcontract incorporates the provisions of the prime contract. Thus, it asserts, "the mandatory, binding mediation and arbitration clauses in Paragraphs 4.5 and 4.6 of the Prime Contract control to the exclusion of the voluntary dispute resolution clauses in Paragraph 27.2 of the Subcontract." (Crane's brief, p. 23.) Malouf contends that the prime contract is irrelevant to the dispute between it and Crane because it governs only the relationship between Palm Beach and Malouf; Malouf argues that the subcontract governs the relationship between Malouf, the contractor, and Crane, the subcontractor. Thus, Malouf argues, this Court should look to the terms of the subcontract and under the subcontract "it is very clear that arbitration and mediation are voluntary." (Malouf's brief, p. 17....