HPD, LLC v. Tetra Techs., Inc.

• Decision Date: 01 November 2012
• Docket Number: No. 11–1299.,11–1299.
• Parties: HPD, LLC, Appellant v. TETRA TECHNOLOGIES, INC., Appellee.
• Court: Arkansas Supreme Court

2012 Ark. 408

424 S.W.3d 304

HPD, LLC, Appellant

v.TETRA TECHNOLOGIES, INC., Appellee.

No. 11–1299.

Supreme Court of Arkansas.

Nov. 1, 2012.

Stein Rey LLP, by: Steven G.M. Stein, Carl L. Popovsky, and Alexander M. Kipnis; and Shackleford, Phillips & Ratcliff, P.A., El Dorado, by: Brian H. Ratcliff, for appellant.

Fulbright & Jaworski L.L.P., by: E. Lee Haag, Joy M. Soloway, and Carter Dugan; Friday, Eldredge & Clark, by: Jeff Moore; and Thomas & Hickey LLP, El Dorado, by: Floyd M. Thomas, Jr., for appellee.

COURTNEY HUDSON GOODSON, Justice.

Appellant HPD, LLC (HPD) appeals the order entered by the Union County Circuit Court denying its motion to compel arbitration of claims brought against it by appellee TETRA Technologies, Inc. (TETRA). For reversal, HPD contends that the circuit court erred in ruling that threshold issues of arbitrability would be decided by the court, rather than through arbitration. On cross-appeal, TETRA asserts that the circuit court erred by not yet deciding the gateway issues. We reverse and remand for the entry of an order compelling arbitration of all issues. Accordingly, this disposition renders the cross-appeal moot.

As shown by the pleadings in this case, HPD is in the business of designing and selling specialized industrial equipment for use in chemical processing plants, water treatment facilities, and other large-scale industrial settings. TETRA is a producer, marketer, and distributer of chemicals, chiefly calcium chloride. Both are Delaware corporations, but HPD has its headquartersin Plainfield, Illinois, while TETRA's principal place of business is in The Woodlands, Texas. In late 2006, the parties began negotiations regarding TETRA's plans to construct a chemical processing plant near El Dorado, Arkansas, to produce calcium chloride, sodium chloride, and magnesium oxide from brine. After pilot testing by HPD produced satisfactory results, the parties entered into a “Transparent Execution Engineering & Equipment Supply Agreement” (contract) in November 2007 for HPD to supply equipment to be used in TETRA's proposed facility in El Dorado. The contract contains a provision for binding arbitration. Construction of the plant began in 2008 and has been completed. TETRA paid HPD in full for its services, a total of $34,540,000.

In March 2011, TETRA filed its initial complaint against HPD in Union County Circuit Court, alleging that the equipment designed by HPD did not perform to expectations. In lieu of filing an answer, HPD moved to dismiss and to compel arbitration in accordance with the arbitration provisions contained in the contract. By its second amended complaint, TETRA asserted causes of action in negligence, gross negligence, professional malpractice, constructive fraud, and breach of fiduciary duty. For these alleged wrongs, it sought both direct and consequential damages. TETRA also sought a declaratory judgment that the contract and the embedded arbitration clause were illegal and thus void because HPD performed engineering services without obtaining a certificate of authorization as allegedly required by Arkansas Code Annotated section 17–30–303 (Supp.2011).

In support of its motion to compel arbitration, HPD asserted that the arbitration clause required arbitration of “[a]ll claims, disputes or other controversies arising out of, or relating to, this Agreement.” It also pointed out that the arbitration clause incorporated by reference the Construction Industry Arbitration Rules of the American Arbitration Association (AAA Rules), which grants an arbitrator “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” and “the power to determine the existence or validity of a contract of which an arbitration clause forms a part.” Based on the “broad” language of the arbitration clause and the terms of the AAA Rules, HPD argued that all claims and issues, including questions of arbitrability, were to be decided in arbitration.

In resisting arbitration, TETRA maintained that the contract was illegal and unenforceable because HPD had provided engineering services without a certificate of authorization. Citing Sarkco v. Edwards, 252 Ark. 1082, 1086, 482 S.W.2d 623, 625 (1972), it argued that the arbitration clause itself was invalid because it was “auxiliary to, or promotive of” an illegal contract. TETRA also contended that, because HPD did not have a certificate of authority, it lacked the capacity to enter into a valid contract. Further, it asserted that the severability clause of the contract, which states that “[i]f any part, term, or provision of this Agreement is held by a court of competent jurisdiction to be illegal, invalid or unenforceable, the ... remaining parts ... shall not be affected,” contemplates that a court of competent jurisdiction is to determine whether any term of the contract is illegal, invalid, or unenforceable. TETRA stressed that the “Default and remedies” provision of the contract also contemplated court action by allowing either party, where the other commits a material breach of contract, to “avail itself of any and all rights and remedies available at law or in equity.” It also noted that the arbitration clause prohibitedthe arbitrators from awarding punitive and consequential damages and from amending the contract, and it argued that the provision's reference to “all” disputes must be tempered by the express limitation on the arbitrators' authority. TETRA took the position that these preliminary issues of arbitrability must be determined by the circuit court.

Following briefing of the arbitration issue, TETRA filed a motion for partial summary judgment on the declaratory aspect of the amended complaint in which it sought a determination that the contract and arbitration clause were void for illegality. It maintained that there was no dispute as to material fact that HPD provided engineering services without a certificate of authority and argued that, as a matter of law, the contract and the arbitration clause itself, as promotive and auxiliary to an illegal contract, were void. It also urged that HPD lacked the capacity to enter into the contract without a certificate of authority.

On September 27, 2011, the circuit court held a hearing on the motion to compel arbitration. After the parties' oral presentations, the court took the matter under advisement and subsequently issued an order on November 4, 2011. The circuit court ruled in TETRA's favor that it would determine the threshold issues of arbitrability before deciding whether the case must proceed to arbitration. The court directed HPD to file an answer to the amended complaint and a response to TETRA's motion for summary judgment. From the circuit court's order, HPD filed a timely notice of appeal, and TETRA filed a timely notice of cross-appeal.

Before this court, HPD argues that the circuit court erred by not compelling arbitration of TETRA's tort claims and the issues TETRA raised regarding arbitrability. It contends that the scope of the arbitration clause is expansive to include all claims, disputes, and controversies arising out of or relating to the contract. Citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995), it asserts that the incorporation of the AAA Rules manifests the parties' “clear and unmistakable” intent for arbitrators to rule on issues of arbitrability, including TETRA's arguments concerning the existence, validity, and scope of the arbitration agreement. TETRA responds that the severability clause, the limitation on the arbitrators' authority, and the default clause combine to negate the notion that the parties agreed to arbitrate issues of arbitrability.

An order denying a motion to compel arbitration is an immediately appealable order. Ark. R.App. P.-Civil 2(a)(12); Ark.Code Ann. § 16–108–228(1) (Supp.2011); see IGF Ins. Co. v. Hat Creek P'ship, 349 Ark. 133, 76 S.W.3d 859 (2002). We review a circuit court's order denying a motion to compel arbitration de novo on the record. S. Pioneer Life Ins. Co. v. Thomas, 2011 Ark. 490, 385 S.W.3d 770.

The parties in this case agree that the Federal Arbitration Act (FAA) applies to this dispute. Congress enacted the FAA, 9 U.S.C. §§ 1–16, to overcome judicial resistance to arbitration. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006). The Act establishes a national policy favoring arbitration when the parties contract for that mode of dispute resolution. Preston v. Ferrer, 552 U.S. 346, 128 S.Ct. 978, 169 L.Ed.2d 917 (2008) (citing Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984)). The FAA, which rests on Congress's authority under the Commerce Clause, does not simply supply a procedural framework applicable in federal courts; it also calls for the application, in state as well as federal courts, of federal substantive law regarding arbitration. Id.

Section 2, the “primary substantive provision of the Act,” Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), provides,

A written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

The FAA thereby places arbitration agreements on equal footing with other contracts, and requires courts to enforce them according to their terms. Rent–A–Center, West, Inc. v. Jackson, 561 U.S. 63, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010).

In deciding whether to grant a motion to compel arbitration, two threshold questions must be answered. First, is there a valid agreement to arbitrate between the parties? Second, if such an agreement exists, does the dispute fall within...