Osteen v. T.E. Cuttino Const. Co.

• Decision Date: 12 July 1993
• Docket Number: No. 23904,23904
• Citation: 434 S.E.2d 281,315 S.C. 422
• Court: South Carolina Supreme Court
• Parties: H. Graham OSTEEN, II and Julia R. Osteen, Respondents, v. T.E. CUTTINO CONSTRUCTION COMPANY, Appellant.

Page 281

434 S.E.2d 281

315 S.C. 422

H. Graham OSTEEN, II and Julia R. Osteen, Respondents, v. T.E. CUTTINO CONSTRUCTION COMPANY, Appellant.

No. 23904.

Supreme Court of South Carolina.

Submitted June 11, 1993.

Decided July 12, 1993.

Charles E. Carpenter, Jr., Francis M. Mack, and Deborah L. Harrison, all of Richardson, Plowden, Grier & Howser, P.A., Columbia, for appellant.

M.M. Weinberg, III, of Weinberg, Brown & McDougall, Sumter, for respondents.

HARWELL, Chief Justice.

We are asked to determine the enforceability of an arbitration clause contained in a standard form construction contract. The trial judge found that the arbitration clause was invalid under South Carolina law, and that the parties should proceed with their dispute in a judicial forum. We reverse.

I. FACTS

The underlying dispute arises out of the alleged breach of a contract entered into by appellant T.E. Cuttino Construction Company (Cuttino) and predecessors to respondents H. Graham Osteen, II and Julia R. Osteen (the Osteens) for the construction of a residence. ¹ The Osteens filed suit in the court of common pleas, alleging numerous defects in construction and contending that Cuttino had failed to build a habitable dwelling. Cuttino moved to dismiss the action on the grounds that the contract between the parties contained an arbitration provision, and that the Osteens' remedy was to demand arbitration.

The contract between the parties is comprised of AIA Document A101 (Standard Form of Agreement Between Owner and Contractor 1977 Edition) and AIA Document A201 (General Conditions of the Contract for Construction 1976 Edition). AIA Document A201 contains the following language:

ARTICLE 7

MISCELLANEOUS PROVISIONS

7.1 Governing Law

7.1.1 The Contract shall be governed by the law of the place where the Project is located.

. . . . .

7.9 Arbitration

7.9.1 All claims, disputes and other matters in question between the Contractor and the Owner arising out of, or relating to, the Contract Documents or the breach thereof ... shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then obtaining unless the parties mutually agree otherwise.... The foregoing agreement to arbitrate and any other agreement to arbitrate with an additional person or persons duly consented to by the parties to the Owner-Contractor Agreement shall be specifically enforceable under the prevailing arbitration law. The award tendered by the arbitrators shall be final, and judgment may be entered upon it in accordance with the applicable law in any court having jurisdiction thereof.

At the motion hearing, the Osteens took the position that section 7.1 indicates the law of South Carolina should determine all of the rights and responsibilities of the parties, including the parties' right to enforce arbitration in accordance with South Carolina law. According to the Osteens, the arbitration clause was rendered unenforceable because the contract failed to comply with S.C.Code Ann. § 15-48-10(a) (Supp.1992). Section 15-48-10(a) provides that "[n]otice that a contract is subject to arbitration pursuant to this chapter [Uniform Arbitration Act, S.C.Code Ann. § 15-48-10 to -15-48-240 (Supp.1992) ] shall be typed in underlined capital letters, or rubber stamped prominently, on the first page of the contract and unless such notice is displayed thereon the contract shall not be subject to arbitration." It is undisputed that the contract does not conform to the requirements of section 15-48-10(a).

Cuttino asserted that the less technical requirements of the Federal Arbitration Act (FAA) superseded section 15-48-10(a) because the construction project involved interstate commerce. ² The trial judge found that South Carolina law regulated arbitration under the contract, and ruled that because the formal requirements of section 15-48-10(a) had not been met, the dispute was not subject to arbitration.

II. DISCUSSION

Cuttino contends that the trial judge erred in holding that the parties contractually agreed that the provisions of section 15-48-10(a) would supersede the countervailing provisions of the FAA. According to Cuttino, the formal notice requirements of section 15-48-10(a) are preempted by the FAA, which mandates only that the arbitration agreement be in writing.

Section 2 of the FAA provides:

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

9 U.S.C.A. § 2 (1970). Section 2 reflects a national policy favoring arbitration and withdrawing the power of the States to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration. Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 858, 79 L.Ed.2d 1, 12 (1984).

We have held that where, as here, a contract involves interstate commerce, state law regarding arbitration is supplanted by federal substantive law. Trident Technical College v. Lucas & Stubbs, Ltd., 286 S.C. 98, 333 S.E.2d 781 (1985), cert. denied, 474 U.S. 1060, 106 S.Ct. 803, 88 L.Ed.2d 779 (1986); Episcopal Housing Corp. v. Federal Ins. Co., 269 S.C. 631, 239 S.E.2d 647 (1977). However, our decisions have been modified by the United States Supreme Court to the extent that they rest upon the assumption that federal arbitration law must be applied whenever interstate commerce is implicated, regardless of the intent of the parties. See Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989). In Volt, the High Court specifically noted that "[t]he FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration." Id. at 477, 109 S.Ct. at 1255, 103 L.Ed.2d at 499. Thus, the FAA does not prevent enforcement of agreements to arbitrate under different rules than those set forth in the FAA itself, as long as the rules do not undermine the goals and policies of the FAA to ensure the enforceability, according to their terms, of private agreements to arbitrate. Id. at 476-79, 109 S.Ct. at 1254-55, 103 L.Ed.2d at 498-500.

In our view, the trial judge correctly ascertained that the dispositive question is whether the parties intended to be bound by federal or state arbitration law. However, we disagree with the trial judge's construction of the "governing law" provision contained in AIA Document A201. In so doing, we have found the reasoning of the court in Barbier v. Shearson Lehman Hutton, Inc., 752 F.Supp. 151 (S.D.N.Y.1990), modified, 948 F.2d 117 (2d Cir.1991), to be persuasive.

The Barbier court reviewed an agreement by which the plaintiffs opened an account for the purchase and sale of securities. The agreement contained an arbitration provision and stated that the agreement was to be governed by the laws of the State of New York. The Barbiers became dissatisfied with the services provided by Shearson Lehman and submitted their complaint to arbitration.

The issue on appeal was whether federal or New York arbitration law with regard to the award of punitive damages should apply. The Barbier court discerned that Volt:

does not stand for the proposition that any time a choice-of-law provision is included in an arbitration agreement, such a provision necessarily requires the application of state, rather than federal,...