Southern Constructors v. Loudon County Bd.

• Decision Date: 26 October 2001
• Citation: 58 S.W.3d 706
• Parties: SOUTHERN CONSTRUCTORS, INC. v. LOUDON COUNTY BOARD OF EDUCATION.
• Court: Tennessee Supreme Court

58 S.W.3d 706

SOUTHERN CONSTRUCTORS, INC. v. LOUDON COUNTY BOARD OF EDUCATION.

Supreme Court of Tennessee, at Knoxville.

October 26, 2001.

COPYRIGHT MATERIAL OMITTED

R. Loy Waldrop, Linda J. Hamilton Mowles, and Maranee L. Petersen, Knoxville, TN, for the appellant, Loudon County Board of Education.

Monty L. Walton and Stephanie K. Hunt, Knoxville, TN, for the appellee, Southern Constructors, Inc.

OPINION

WILLIAM M. BARKER, J., delivered the opinion of the court, in which FRANK F. DROWOTA, III, C.J., and E. RILEY ANDERSON, ADOLPHO A. BIRCH, Jr., and JANICE M. HOLDER, JJ., joined.

The issue in this case is whether a county board of education has the authority to arbitrate a dispute arising out of a school construction contract. After the parties completed arbitration, the plaintiff filed suit to vacate the award, arguing that the defendant, a county board of education, lacked the statutory authority to agree to arbitration. The defendant unsuccessfully moved for summary judgment, and it sought interlocutory appeal with the trial court's permission. The intermediate court, however, denied the interlocutory appeal, finding that the trial court's decision was consistent with prior cases from the Eastern Section Court of Appeals. We granted permission to appeal and hold that the rule of strict construction of local governmental powers should be retained. We also hold, though, that the power to arbitrate construction contract disputes is fairly implied from the express authority to enter into construction contracts. We therefore reverse the trial court's denial of summary judgment and dismiss the case.

FACTUAL BACKGROUND

On April 24, 1997, the Loudon County Board of Education ("Board") contracted with Southern Constructors, Inc. ("SCI"), for additions and renovations to two county school buildings. Shortly after construction began, a subcontractor for SCI ruptured an electrical cable at one of the sites, damaging electrical switchgear at the school and disrupting power to another building. The subcontractor subsequently repaired the damaged lines and equipment at no cost to the Board.

Although SCI supplied power to parts of the building during the repair of the electrical equipment, most of the school building remained without electricity. On July 17, a Board employee discovered mold and mildew growth in a part of the school building without electrical power, and the Board requested that SCI remove the growth. SCI declined to do so, however, claiming that it was not contractually responsible for such expenses. The Board then hired outside contractors to remove the growth at a cost of $115,248.22, and it withheld this amount from the balance owed to SCI under the construction contract.

SCI then demanded that Board pay the withheld amount, and after a failed attempt to mediate the dispute, SCI requested that the Board agree to arbitration. Although the parties had removed the arbitration clause from their original contract, both parties executed a written arbitration agreement in March 1999, and two months later, a hearing was held before a mutually selected arbitrator. On May 26, 1999, the arbitrator rendered a decision in favor of the Board, but he awarded $10,000 of the withheld amount to SCI in addition to interest and administrative expenses.¹ Thereafter, the Board issued a check to SCI for $12,988.25, which SCI deposited on June 7.

Less than two months later, SCI filed a complaint in the Loudon County Chancery Court seeking to set aside the arbitration award. SCI claimed that after the issuance of the arbitration award, it learned that the Board, "as a governmental entity, had no authority to enter into an agreement to arbitrate and its act in doing so was ultra vires." More specifically, SCI alleged that the Board lacked the power to enter into arbitration agreements because the General Assembly did not expressly give that power to county school boards and because other express legislative grants of power did not imply that county school boards possessed any such authority.

On September 29, 1999, the Board filed a motion for summary judgment, asserting that the chancery court lacked subject matter jurisdiction over the dispute. The Board claimed that because SCI agreed to arbitrate the dispute, and because the arbitration award had already been rendered and satisfied, state and federal law prevented SCI from seeking a de novo hearing of that award in court. However, the court denied the Board's motion, agreeing with Chattanooga Area Regional Hamilton County Transp. Authority v. Parks Construction Co.,² that local governments do not have the implied power to arbitrate disputes.

Pursuant to Tennessee Rule of Appellate Procedure 9, the Board then requested permission to seek interlocutory appeal, which the chancery court granted. The court cited two reasons for granting permission: (1) the presence of conflicting decisions from the Court of Appeals evidenced a need to develop a uniform body of law as to whether a governmental entity may arbitrate an existing dispute; and (2) a decision in favor of the Board would prevent needless, expensive, and protracted litigation. The Board then petitioned the intermediate court for interlocutory appeal.

The Court of Appeals denied the Board's petition for interlocutory appeal, but it did so based upon its view that the Board's case lacked merit. In its order, the court noted the presence of conflicting decisions between the Eastern and Western sections of the Court of Appeals on this issue, but it felt constrained to follow the opinion of its own section and to deny the motion. However, the panel further suggested in its order that the Board seek permission to appeal from this Court.

We then granted the Board's application for permission to appeal on the issue of whether county boards of education have the authority to arbitrate contract disputes concerning the construction and renovation of school buildings. For the reasons given herein, we hold that the county boards of education do have authority to arbitrate construction contract disputes, and although we decline to abolish the rule of strict construction known as "Dillon's Rule," we conclude that this authority is fairly implied from the express power to enter into construction contracts. Therefore, because the Loudon County School Board is entitled to summary judgment, we reverse the judgment of the Court of Appeals and dismiss the case.

ANALYSIS

The question before the Court is whether the Loudon County Board of Education possesses the authority under the laws of the State of Tennessee to arbitrate disputes arising out of a school construction contract. If the Board possesses no such authority, then its agreement to arbitrate the dispute in this case, along with the ultimate award, are void as ultra vires. The Board urges this Court, under several legal theories, to find that it possesses the authority to enter into such arbitration agreements, and SCI urges this Court to apply Dillon's Rule and to strictly construe the statutory powers of county school boards against having any such authority. Any question regarding the scope of local governmental authority is a question of law, and as such, we review the issue in this case under a pure de novo standard of review, according no deference to the conclusions of law made by the lower courts. See, e.g., Daron v. Department of Corr., 44 S.W.3d 478, 480 (Tenn.2001); Johnson v. Johnson, 37 S.W.3d 892, 894 (Tenn.2001).

I. DILLON'S RULE AND THE SCOPE OF LOCAL GOVERNMENTAL AUTHORITY IN TENNESSEE

At its most basic level, Dillon's Rule is a canon of statutory construction that calls for the strict and narrow construction of local governmental authority. As originally articulated by its author, then Chief Justice John F. Dillon of the Iowa Supreme Court, Dillon's Rule provides the following regarding the nature and scope of municipal government authority:

In determining the question now made, it must be taken for settled law, that a municipal corporation possesses and can exercise the following powers and no others: First, those granted in express words; second, those necessarily implied or necessarily incident to the powers expressly granted; third, those absolutely essential to the declared objects and purposes of the corporation—not simply convenient, but indispensable; fourth, any fair doubt as to the existence of a power is resolved by the courts against the corporation—against the existence of the power.

Merriam v. Moody's Ex'r, 25 Iowa 163, 170 (1868).

As in many jurisdictions throughout the nation, Dillon's Rule has been applied in this state for more than a century to determine the scope of local governmental authority. Beginning with Mayor & City Council v. Linck, 80 Tenn. (12 Lea) 499 (1883), this Court has recognized that municipal governments in Tennessee derive the whole of their authority solely from the General Assembly and that courts may reasonably presume that the General Assembly "has granted in clear and unmistakable terms all power that it has designed to grant...." Id. at 505 (citation omitted). To this end, the Linck Court held that municipal governmental authority should be strictly construed, and it stated that a municipal government may exercise a particular power only when one of the following three conditions is satisfied: (1) the power is granted in the "express words" of the statute, private act, or charter creating the municipal corporation; (2) the power is "necessarily or fairly implied in, or incident to, the powers expressly granted"; or (3) the power is one that is neither expressly granted nor fairly implied from the express grants of power, but is otherwise implied as "essential to the declared objects and purposes of the corporation." See id. at 504 (emphases in original). Consistent with other articulations of Dillon's Rule, we also stated that "`any fair, reasonable doubt concerning the existence of the power...