Storey Const. Inc. v. Hanks

• Decision Date: 30 September 2009
• Docket Number: No. 35459-2008.,35459-2008.
• Citation: 224 P.3d 468
• Parties: STOREY CONSTRUCTION INC., Plaintiff-Respondent, v. Tom HANKS and Rita Wilson, husband and wife; and Lily Reeves, Defendants-Appellants.
• Court: Idaho Supreme Court

224 P.3d 468

STOREY CONSTRUCTION INC., Plaintiff-Respondent, v. Tom HANKS and Rita Wilson, husband and wife; and Lily Reeves, Defendants-Appellants.

No. 35459-2008.

Supreme Court of Idaho, Boise, August 2009 Term.

September 30, 2009.

Opinion Denying Rehearing December 31, 2009.

Danielson Harrigan Leyh & Tollefson, LLP, Seattle; Clements, Brown & McNichols, Lewiston; and Edward Simon, Ketchum, for appellants. Arthur W. Harrigan, Jr., argued.

Stanislaw Ashbaugh, LLC, Seattle, and Christopher A. Wright, Seattle, for respondent. R. Miles Stanislaw argued.

EISMANN, Chief Justice.

This is an appeal from an order permanently enjoining arbitration regarding a construction contract on the ground that the claims alleged in the arbitration were barred by res judicata. The party seeking arbitration had asserted a counterclaim for construction defects in a prior arbitration and that counterclaim had been denied by the arbitrators. The district court held that the award barred all future claims for construction defects, even if they were unknown at the time of the prior arbitration and could not reasonably have been discovered. Because that holding is not consistent with the terms of the parties' arbitration agreement, we reverse.

I. FACTS AND PROCEDURAL HISTORY

Lily Reeves (Trustee) is the trustee of the Sun Valley Trust (Trust), and beneficiaries are Tom Hanks and Rita Wilson (Beneficiaries). The Trustee entered into a contract dated July 21, 2000, with Storey Construction, Inc., (Contractor) to build a single family residence and other improvements on certain real property located near Sun Valley. The contract included an arbitration clause.

A dispute arose between the Contractor and Trustee in late 2002, when construction was almost complete. The Contractor requested arbitration of the dispute, asserting claims against the Trustee and the Beneficiaries. The Trustee and Wilson asserted counterclaims in the arbitration proceeding, which included an allegation that the Contractor had "breached the Construction Contract by performing substandard and defective work." At that time, they allegedly had no knowledge of any such substandard or defective work and did not offer any evidence on that counterclaim.

The arbitration hearing was held on nine days in September and October of 2003. On January 27, 2004, the arbitrators issued their final award. They awarded the Contractor $1,218,820 against the Trust and Trustee, plus interest, costs, attorney fees, and arbitrators' compensation and expenses; they dismissed the Contractor's claims against the Beneficiaries and awarded the Beneficiaries costs and attorney fees against the Contractor; and they dismissed the Trustee and Wilson's counterclaims against the Contractor.

During the winter of 2005-2006, the Beneficiaries allege that they experienced water intruding into the house and other problems. When the Trustee's experts removed portions of the structures to determine the source of the problems, they allegedly discovered additional construction defects that were previously unknown. On November 7, 2007, the Trustee filed a demand to arbitrate these defects.

On December 20, 2007, the Contractor responded by filing an action against the Beneficiaries and the Trustee seeking to stay the arbitration proceedings and to recover damages for abuse of process. On February 15, 2008, the Beneficiaries and Trustee filed a motion to dismiss the complaint or, in the alternative, to compel arbitration or stay the court proceedings. On February 19, 2008, the Contractor filed a motion to confirm the prior arbitration award and a motion to stay the arbitration based upon the defense of res judicata.

The motions were heard on March 4, 2008. The district court granted the motion to confirm the arbitration award. It then ruled that the Contractor's defense of res judicata was not subject to arbitration and that it would stay the arbitration until the court decided the merits of that defense. Finally, it denied the motion to dismiss the complaint, but ruled that the abuse of process claim would be stayed until the court decided the issue of res judicata. On March 10, 2008, the district court entered an order staying the arbitration until it decided the res judicata issue. On the same date, it also entered an order denying the Trustee and Beneficiaries' motions to dismiss the claim for abuse of process, but it did grant their motion to stay that claim until resolution of the Trustee's demand for arbitration.

On June 19, 2008, the district court held a hearing on the issue of whether the construction defect claims in the Trustee's demand for arbitration were barred by the doctrine of res judicata. The court viewed the issue as whether, as a matter of law, any claim for latent construction defects was barred by res judicata because the Trustee had alleged in the prior arbitration a breach of contract claim seeking damages for "substandard and defective work." The district court held that where the Trustee had asserted a breach of contract claim for construction defects in the prior arbitration, all future claims for construction defects under the same contract were barred by res judicata, even if the future claims had not been asserted in the prior arbitration, were unknown at that time, and could not reasonably have been known. On June 27, 2008, the district court issued an order permanently staying the demand for arbitration and lifting the stay on the claim for abuse of process. The order was not entered until July 2, 2008.

On June 30, 2008, the Trustee and Beneficiaries filed a notice of appeal from the order staying arbitration issued on June 27, 2008. They also filed a motion for reconsideration of that order. On July 18, 2008, they filed an amended notice of appeal from the order issued on June 27, 2008, even though their motion for reconsideration had not yet been heard. The motion for reconsideration was heard on September 22, 2008, and on October 1, 2008, the district court entered an order denying it.

II. ANALYSIS

In Deeds v. Regence Blueshield of Idaho, 143 Idaho 210, 212, 141 P.3d 1079, 1081 (2006), this Court held that an order denying a motion to compel arbitration "is final for the purposes of our rules and is therefore appealable as a matter of right." In this case, the district court entered two orders staying arbitration.

On February 19, 2008, the Contractor filed a "Motion to Temporarily Stay Arbitration Pending Hearing Re: Res Judicata," pursuant to Idaho Code § 7-902(b). In support of its motion, the Contractor contended that under its contract with the Trustee, the parties had not agreed to arbitrate the issue of res judicata. In making that argument, the Contractor relied primarily upon Waterfront Marine Const., Inc. v. North End 49ers Sandbridge Bulkhead Groups A, B and C, 251 Va. 417, 468 S.E.2d 894 (1996). Relying primarily upon Chiron Corp. v. Ortho Diagnostic Systems, Inc., 207 F.3d 1126 (9th Cir. 2000), the Trustee argued that the issue of res judicata was subject to arbitration under the parties' agreement.

The motion was argued on March 4, 2008, and on March 10, 2008, the district court entered an "Order Staying Arbitration." The court ordered, "The above-referenced arbitration proceeding shall be and is hereby ordered STAYED in all respects until further order of this Court and the completion of a summary trial as provided for in I.C. 7-902(b)." As will be shown, by this order the district court, in effect, held that the defense of res judicata was not arbitrable.

On June 19, 2008, the district court held a hearing on the merits of the Contractor's res judicata defense to the 2007 demand for arbitration. At the conclusion of that hearing, the district court held that the Trustee's claims alleged in the 2007 demand for arbitration were barred by res judicata. The district court ruled:

I think this current claim made by defendants is the same claim under res judicata analysis that's made in the first arbitration. It's based on the operative set of facts of construction of the buildings and that operative set of facts ended when the construction ended. The damages were felt at different times and under different circumstances, but to me that doesn't affect the application of res judicata.

The procedure employed by the district court reflects a misunderstanding of Idaho Code § 7-902(b). That statute provides:

(b) On application, the court may stay an arbitration proceeding commenced or threatened on a showing that there is no agreement to arbitrate. Such an issue, when in substantial and bona fide dispute, shall be forthwith and summarily tried and the stay ordered if found for the moving party. If found for the opposing party, the court shall order the parties to proceed to arbitration.

If a party opposing arbitration makes a showing that there is no agreement to arbitrate the matter in dispute, the court may stay the arbitration proceeding. The statute then provides, "Such an issue, when in substantial and bona fide dispute, shall be forthwith and summarily tried." (Emphasis added.) The issue to be summarily tried is the issue of whether the parties had agreed to arbitrate the matter in dispute, not the merits of the matter in dispute. The statute's last sentence states, "If found for the opposing party, the court shall order the parties to proceed to arbitration." If the issue summarily tried was the merits of the matter in dispute, the court would be deciding the merits of the matter before ordering the parties to arbitrate it. That is clearly not the correct interpretation of the statute. The court is only to summarily try the issue of whether or not the matter in dispute is arbitrable.

Under Idaho Code § 7-902(b), the court can stay arbitration until it summarily tries the arbitrability of the matter in dispute. In this case, however, after holding that res judicata was not arbitrable, the district court stayed the arbitration until "the...