FLANDREAU PUBLIC SCH. DIST. v. Johnson

Decision Date13 July 2005
Docket NumberNo. 23419.,23419.
Citation701 N.W.2d 430,2005 SD 87
PartiesFLANDREAU PUBLIC SCHOOL DISTRICT # 50-3, Plaintiff and Appellee, v. G.A. JOHNSON CONSTRUCTION, INC., Defendant, Third Party Plaintiff and Appellant, Williams Brothers Masonry Joint Venture, LLC, Third Party Defendant.
CourtSouth Dakota Supreme Court

Wilson M. Kleibacker of Lammers, Kleibacker & Brown, LLP, Madison, South Dakota Attorneys for appellee.

William G. Beck, Mary Ellen Dirksen of Woods, Fuller, Shultz and Smith, Sioux Falls, South Dakota, Attorneys for appellants.

ZINTER, Justice.

[¶ 1.] Flandreau School District and G.A. Johnson Construction entered into an agreement for the construction of an elementary school. The agreement included a provision requiring alternative dispute resolution (arbitration).1 A dispute subsequently arose over the appearance of the interior walls of the building, and Flandreau brought suit against Johnson in circuit court. Johnson moved to dismiss or compel arbitration. The trial court denied the motion. Johnson appeals and we affirm.

Facts and Procedural History

[¶ 2.] On April 19, 2002, the Flandreau School District (Flandreau) and G.A. Johnson Construction (Johnson) entered into an agreement for the construction of an elementary school. This agreement provided that if a dispute arose, "an initial decision by the Architect shall be required as a condition precedent to mediation, arbitration or litigation of all claims...." The agreement further provided that, after the architect's decision, "[a]ny claim arising out of or related to the Contract, except Claims relating to aesthetic effect ... shall be subject to mediation as a condition precedent to arbitration or the institution of legal or equitable proceedings by either party." (Emphasis added). Any claim remaining after mediation, except one involving aesthetics, was then subject to arbitration. The agreement finally provided that mediation and arbitration were to be conducted in compliance with the Construction Industry Arbitration Rules of the American Arbitration Association (AAA). Those arbitration rules provided that the arbitrator had "the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement." AAA Rule R-8(a).

[¶ 3.] Dissatisfied with the appearance of the masonry walls in the school, Flandreau met with the architect and the legal representatives of Johnson. Flandreau subsequently filed a complaint in circuit court alleging substandard material and poor workmanship (allegedly falling below industry standards and violating project specifications). Because the parties had not arbitrated, Johnson moved to dismiss or compel arbitration. Johnson's motion incorporated evidence outside the pleadings (the agreement between owner and contractor, and the general conditions of the contract for construction). Flandreau opposed the motion contending that arbitration was not required for claims relating to aesthetic effect. Flandreau also submitted evidence outside the pleadings (an affidavit of the Flandreau School Board President and a report from an engineering consultant describing the alleged defects and suggested repairs).

[¶ 4.] Following a hearing, the trial court denied the motion to dismiss or compel arbitration. It found that "the reason necessitating the complaint of [Flandreau] is the unacceptable aesthetic quality of the workmanship and not any major structural defects...." The court further observed that "any time you have a complaint founded on [aesthetics] you are going to have negligence, poor workmanship, or improper construction complaints. . . ." Because the trial court found that the complaint was "primarily related to aesthetics," it concluded that the aesthetic effect exception in the parties' arbitration agreement was applicable and arbitration was not required.

[¶ 5.] Johnson appealed under SDCL 21-25A-35(1),2 which permits an appeal from the circuit court's denial of an application to compel arbitration. Johnson contends that the trial court erred in not allowing the arbitrator to initially determine whether this dispute was subject to arbitration. Johnson also contends that the trial court erred in failing to compel arbitration. Johnson argues that some of the issues in this dispute did not involve aesthetics, and when arbitrable issues cannot be separated from non-arbitrable issues, the entire claim should be submitted to arbitration.

Standard of Review
Conversion of a Motion to Dismiss to a Motion for Summary Judgment

[¶ 6.] In determining our standard of review, we observe that although this matter is before us on a motion to dismiss, both parties submitted matters outside the pleadings, and the trial court did not explicitly exclude them.3 However, we also observe that neither party objected to the trial court's consideration of those matters and neither party raised the issue on appeal. Therefore, we review the trial court's ruling as a motion for summary judgment. Tibke v. McDougall, 479 N.W.2d 898, 903-04 (S.D.1992) (stating that when the record indicates that matters outside of the pleadings were considered by the trial court, motions to dismiss are reviewed and disposed of as motions for summary judgment).4

[¶ 7.]Because we review this matter as a summary judgment, we "restrict our review to determining whether the record before us discloses any genuine issues of material fact and, if not, whether the ... court committed any errors of law." Switlik v. Hardwicke Co., Inc., 651 F.2d 852, 857-58 (3dCir.1981) (assuming that the trial court had converted a motion to dismiss to a motion for summary judgment). In performing that review, "the construction and legal effect of a written [arbitration] contract are to be determined by the court as a question of law except where the meaning of the language depends upon disputed extrinsic evidence." May Const. Co., Inc. v. Benton School Dist. No. 8, 320 Ark. 147, 895 S.W.2d 521, 523 (1995) (citing Duvall v. Massachusetts Indem. & Life Ins. Co., 295 Ark. 412, 748 S.W.2d 650 (1988)). We review legal questions concerning arbitration agreements de novo. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947-48, 115 S.Ct. 1920, 1926, 131 L.Ed.2d 985, 996 (1995).

Decision
Arbitrability and Who Should Determine It

[¶ 8.] If a valid agreement to arbitrate exists, the "court shall order the parties to proceed with arbitration." SDCL 21-25A-5. Both parties agree that there is an agreement to arbitrate but it is subject to an exception for "[c]laims relating to aesthetic effect." Notwithstanding the aesthetic effect exception, Johnson argues that Flandreau's claim is subject to arbitration and that the arbitrator, rather than the court, should have initially determined the arbitrability of this dispute. Johnson supports his arguments by asserting that this dispute actually involves a number of non-aesthetic issues, namely: the arbitrability of this claim, and the issues of substandard material and poor workmanship. Johnson points out that the latter issues raise further non-aesthetic issues of breach of contract and compliance with industry standards.

[¶ 9.] Johnson's arguments require us to more precisely define the nature of this dispute and the rules governing a court's review of each disputed issue. As the Supreme Court has explained, this kind of case really involves three issues that require different types of judicial review. First Options, 514 U.S. at 942, 115 S.Ct. at 1923, 131 L.Ed.2d at 992. First, there is a disagreement about the merits of the dispute; i.e. aesthetics and allegations of substandard material, poor workmanship, breach of contract, and compliance with industry standards. Second, there is a disagreement about whether the parties agreed to arbitrate the merits. That is an issue about the arbitrability of the dispute. Third, there is a disagreement about who should have the primary power to determine the second matter. "Does that power belong primarily to the arbitrators (because the court reviews their arbitrability decision deferentially) or to the court (because the court makes up its mind about arbitrability independently)?" Id. Because the questions of arbitrability and who decides it are threshold issues, we address them first. But, before addressing them, we must clarify how a court decides each question.

[¶ 10.] All arbitration analysis begins with recognition of the underlying principle that "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643, 648, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648, 655 (1986) (citations omitted). "This axiom recognizes the fact that arbitrators derive their authority to resolve disputes only because the parties have agreed in advance to submit such grievances to arbitration." Id. at 648-49, 106 S.Ct. at 1418, 89 L.Ed.2d at 655 (citation omitted).

[¶ 11.]Therefore, in determining the question of whether a dispute should be arbitrated, there is a general presumption of arbitrability if there is an arbitration agreement:

there is a presumption of arbitrability in the sense that "[a]n order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage."

Id. at 650, 106 S.Ct. at 1419, 89 L.Ed.2d at 656 (citations omitted). See also Rossi Fine Jewelers, Inc. v. Gunderson, 2002 SD 82, ¶ 13, 648 N.W.2d 812, 816

. That presumption applies when a broad arbitration clause is reviewed, such as one agreeing to arbitrate "any differences arising with respect to the interpretation of this contract or the performance of any obligation hereunder.. . ." AT...

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