Stevens/Leinweber/Sullens, Inc. v. Holm Development and Management, Inc.

• Decision Date: 07 August 1990
• Docket Number: CA-CV,E-E,No. 1,1
• Citation: Stevens/Leinweber/Sullens, Inc. v. Holm Development and Management, Inc., 795 P.2d 1308, 165 Ariz. 25 (Ariz. App. 1990)
• Parties: STEVENS/LEINWEBER/SULLENS, INC., Plaintiff-Appellee,lectric Company, Inc., an Arizona corporation, Counterclaimant, Crossclaimant-Appellee, v. HOLM DEVELOPMENT AND MANAGEMENT, INC., an Arizona corporation; Arthur Holm, a married man; and Schwenn & Associates, Ltd., an Arizona corporation, Defendants-Appellants. 88-548.
• Court: Arizona Court of Appeals

Page 1308

795 P.2d 1308

165 Ariz. 25

STEVENS/LEINWEBER/SULLENS, INC., Plaintiff-Appellee E-Electric Company, Inc., an Arizona corporation, Counterclaimant, Crossclaimant-Appellee, v. HOLM DEVELOPMENT AND MANAGEMENT, INC., an Arizona corporation; Arthur Holm, a married man; and Schwenn & Associates, Ltd., an Arizona corporation, Defendants-Appellants.

No. 1 CA-CV 88-548.

Court of Appeals of Arizona, Division 1, Department A.

Aug. 7, 1990.

[165 Ariz. 26] Mariscal, Weeks, McIntyre & Friedlander, P.A. by Michael P. West, Phoenix, for plaintiff-appellee.

Ridenour, Swenson, Cleere & Evans by John T. Moshier, Beth J. Shapiro, Phoenix, for defendants-appellants.

OPINION

CONTRERAS, Judge.

This appeal is brought from an order denying appellant's motion to compel arbitration. On appeal, we consider the question whether, pursuant to A.R.S. § 12-1501, the validity of an arbitration provision is to be separately determined when there is no challenge to the underlying contract. We conclude that the enforceability of an arbitration provision is to be determined by considering the provision as an independent agreement, separate from the underlying contract, regardless of any challenge to the principal contract. We further conclude that the arbitration provision in question is void for lack of consideration. Therefore, we affirm the order of the trial court.

Generally speaking, the claims asserted in the complaint filed by appellee Stevens/Leinweber/Sullens, Inc. ("SLS"), arose out of circumstances surrounding the construction of a retail shopping center in Paradise Valley. Appellant Holm Development and Management, Inc. ("Holm Development"), owned the construction project. Appellant Arthur H. Holm ("Holm") was the president of Holm Development. Appellant Schwenn & Associates, Ltd. ("Schwenn") was the architectural firm on the project. Appellee SLS was the general contractor on the project. ¹

In May, 1988, SLS filed a three-count complaint against appellants and various fictitious defendants. Count I sought damages for Holm Development's alleged breach of its contractual obligation to pay SLS for labor and materials used in construction of the retail shopping center. Count II sought foreclosure of a mechanics' and materialmen's lien against Holm Development's interest in the subject property. Count III sought money damages for specific acts by appellants which allegedly constituted "racketeering" under A.R.S. §§ 13-2301 to 13-2317.

In response to SLS's complaint, appellants filed a motion to compel arbitration and to dismiss or stay proceedings. In filing the motion to compel arbitration, appellants relied on A.R.S. § 12-1502 and specific arbitration provisions contained in the construction contract.

Holm Development and SLS had executed a construction contract utilizing American Institute of Architects standardized forms which set forth the general terms and conditions. Section 4.5.1 pertained to "Controversies and Claims Subject to Arbitration." It provided in pertinent part that "[a]ny controversy or Claim arising out of or related to the Contract, or the breach thereof, shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association...."

Holm Development and SLS also executed a document entitled "Addendum to Standard Form of Agreement Between Owner and Contractor." This non-standardized form was drafted by attorneys for Holm Development. Section 15.7 of the addendum provided Holm Development with the unilateral option of selecting either arbitration or litigation as the means of dispute resolution. According to Section 15.7:

If a claim or dispute arises between the parties to this Contract, or between the Owner and any other person or entity related to or connected with the project, or between any other parties when the resolution of the dispute would substantially affect the interests of the Owner, and if any of the parties do not accept the decision of the Architect rendered pursuant to the General Conditions, the Owner shall have the option of (i) submitting the dispute to arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then obtaining, or (ii) foregoing arbitration and filing a lawsuit or filing a claim in an existing lawsuit before any court of competent jurisdiction, submitting the dispute for decision by the the [sic] court. [Emphasis added.]

The addendum additionally granted Holm Development the right to reconsider its choice of dispute resolution, even after having exercised its option.

The option can be exercised before or after any other party files a notice of demand for arbitration with the American Arbitration Association or files a petition or claim in any legal proceeding. The election made by the Owner shall be binding upon all other parties to the dispute. Any one election made by the Owner shall not be a waiver of the right to make further elections in connection with the same dispute; and the Owner shall not relinguish the option, but shall reserve and retain the option throughout any proceedings which may be instituted, for further election at any time, prior to a final judgment in the ongoing proceeding. [Emphasis added.]

In the trial court, SLS set forth four arguments in opposition to appellants' motion to compel arbitration. First, SLS argued that, under the doctrine of separability, the unilateral arbitration option contained in the construction contract was void for lack of consideration. Secondly, SLS contended that appellants did not make a proper demand for arbitration, as required by the terms of the unilateral arbitration option. SLS's third argument was that appellants Holm and Schwenn did not have standing to demand arbitration because the claims against them did not relate to the general contract. Lastly, SLS contended that dismissing its mechanics' and materialmen's lien claim pending arbitration would jeopardize SLS's property rights. ²

By signed minute entry dated September 7, 1988, the trial court denied appellants' motion to compel arbitration of SLS's claims. Based on this court's holding in U.S. Insulation, Inc. v. Hilro Construction Company, Inc., 146 Ariz. 250, 705 P.2d 490 (App.1985), the trial court found, as a matter of law, the arbitration provision in the general construction contract was unenforceable because it lacked mutuality. The trial court further concluded, under the doctrine of separability, it was prohibited from looking beyond the arbitration agreement itself to find consideration for the arbitration provision in the underlying contract. This appeal followed.

Appellants argue that their unilateral arbitration option is enforceable as a matter of general contract law. They contend that an arbitration provision, like any other individual provision within a contract, must be construed within the context of the entire contract. Therefore, they assert that where the entire contract is supported by adequate consideration, it is sufficient to support an arbitration provision, albeit a unilateral option, contained therein.

General principles of contract law do, in fact, control a court's determination of whether a valid arbitration provision exists. However, implementation of these principles is secondary to any relevant statutory or case law. The Arizona Supreme Court has repeatedly stated that the Restatement of Law will be followed in the absence of a controlling statute or precedent. See, e.g., Bank of America v. J. & S. Auto Repairs, 143 Ariz. 416, 418, 694 P.2d 246, 248 (1985); Keck v. Jackson, 122 Ariz. 114, 115, 593 P.2d 668, 669 (1979); Southern Pacific Transportation Company v. Lueck, 111 Ariz. 560, 574, 535 P.2d 599, 613 (1975). Arizona has enacted legislation relating to the enforceability of arbitration provisions. See A.R.S. §§ 12-1501 and 12-1502. This court has also previously considered the scope of a court's review of an arbitration provision pursuant to A.R.S. §§ 12-1501 and 12-1502. See U.S. Insulation, Inc. v. Hilro Construction Company, Inc., 146 Ariz. 250, 705 P.2d 490 (App.1985). Accordingly, A.R.S. §§ 12-1501 and 12-1502 and Arizona case law provide the framework for our analysis regarding the enforceability of the unilateral arbitration option which is at issue in the case presently before us.

As an initial matter, it should be noted that A.R.S. § 12-1502 restricts judicial review to a determination of whether a valid arbitration provision exists. A.R.S. § 12-1502 provides that:

On application of a party showing [a valid agreement to arbitrate] and the opposing party's refusal to arbitrate, the court shall order the parties to proceed with arbitration, but if the opposing party denies the existence of the agreement to arbitrate, the court shall proceed summarily to the determination of the issue so raised and shall order arbitration if found for the moving party. Otherwise, the application shall be denied.

This limitation on the scope of judicial review promotes the strong public policy favoring arbitration. The result is that a court will intervene only when the existence of the arbitration agreement is placed in issue. ³

A.R.S. § 12-1501 sets forth the grounds upon which the validity of an arbitration provision may be challenged:

A written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract. [Emphasis added.]

The statute provides for invalidation of an arbitration provision on the same basis as any other contract. Legal or equitable grounds for revoking any contract include allegations that "the contract is void for lack of mutual consent, consideration or capacity or voidable for fraud, duress, lack of capacity, mistake, or...