Tejas Development Co. v. McGough Bros.

• Decision Date: 07 February 1948
• Docket Number: No. 11955.,11955.
• Citation: 165 F.2d 276
• Parties: TEJAS DEVELOPMENT CO. et al. v. McGOUGH BROS. et al.
• Court: U.S. Court of Appeals — Fifth Circuit

165 F.2d 276 (1947)

TEJAS DEVELOPMENT CO. et al. v. McGOUGH BROS. et al.

No. 11955.

Circuit Court of Appeals, Fifth Circuit.

December 30, 1947.

Rehearing Denied February 7, 1948.

Arthur J. Mandell and Elias Gatoura, both of Houston, Tex., for appellants.

J. C. Hutcheson, III, and Fred R. Switzer, both of Houston, Tex., for appellees.

Before SIBLEY, HOLMES, and McCORD, Circuit Judges.

SIBLEY, Circuit Judge.

The 136 printed pages of pleadings for the purposes of this decision may be summarized thus: The original petition to the district court was brought by McGough Brothers, citizens of Minnesota, against Tejas Development Company of Texas, with more than $3,000 involved; and it alleged that on November 16, 1943, two contracts for construction of 150 buildings and the grading and paving of some streets in Texas were made between plaintiffs as contractors and defendant as owner, which contained an arbitration clause, hereafter quoted; that under it on Aug. 31, 1944, a submission to arbitration of certain disputes was had, resulting on March 31, 1945, in a final net money award against the Company of $54,598, with $2,030 costs and fees of arbitration. The prayers were for judgment on the award and that a portion of the contract for paving be reformed for mistake so as to increase the amount to be recovered by $1,400. This petition was answered on May 19, 1945, attacking the award on the grounds that during the arbitration the Company had receded from it, thereby blocking a final award, and that in any case the final award was based on information in a report to the arbitrators by an outside party appointed by the arbitrators without the knowledge or consent of the Company, who had made his investigation without notice to the Company and without opportunity afforded to it to present data and information, contrary to right and justice and due process. Third party defendants were then brought in by the Company, the contentions with whom we need not notice. On September 27, 1945, an amended complaint was filed which repeated in substance the original, and added a claim for a contractor's lien against the real estate for plaintiffs' work and materials, and a claim on a bond signed by the Company and one Kennedy as surety, given to secure plaintiffs. Kennedy was made a party, and the prayers were enlarged to include a judgment foreclosing the contractor's lien and a recovery against Kennedy, "and such other and further relief, general and special, at law and in equity, to which they may show themselves justly entitled." On January 7, 1946, a second complaint was filed which alleged that disputes under the same construction contracts had arisen after the first arbitration, and that on March 6, 1945, the plaintiffs made another demand for arbitration and that the Company refused to appoint an arbitrator or participate in any arbitration, and that ex parte appointments and proceedings were had whereby an award was made Sept. 27, 1945, against the Company in a net amount of $24,942, and $1,226.51 costs and fees. The prayers were enlarged to cover these sums also. An amended answer was filed by the Company and Kennedy in which the right to stop the first arbitration, or in any event to attack the final award, because of misconduct of the arbitrators was reasserted and amplified; and also the second award was asserted to be void because the arbitration was repudiated from the beginning and consistently, the agreement to arbitrate being capable of revocation before award, and being an attempt to oust the courts of jurisdiction was voidable as contrary to public policy. Much evidence was heard, and the court made findings of fact and conclusions of law favorable to McGough Brothers, and granted reformation of the contract and enforcement of both awards as prayed. The judge held the federal Arbitration Act, 9 U.S.C.A. § 1 to 15, to be controlling, but if not, that taking part in the first arbitration committed the Company to arbitration of all disputes arising under the contracts so that it was bound by all that was done in both arbitrations, it being found as a fact that the proceedings were fair and in conformity to the arbitration clause of the contracts.

1. We do not think the federal Arbitration Act, 9 U.S.C.A. § 1 to 15, governs this case. Section 2, which undertakes to make agreements to arbitrate irrevocable and enforceable, expressly limits itself to contracts in maritime transactions and in commerce interstate and foreign. The regulation of those subjects is within the competence of Congress, and as to them the public policy is that which Congress has established. The validity and policy of contracts respecting the grading of streets and the building of houses in Texas are regulable by the State of Texas; and Section 2 has no application to or effect on such contracts. But it is argued that the enforcement sections which follow are in broader terms and cover all controversies involving arbitrations of which a federal court may obtain jurisdiction, though only because of diversity of citizenship, as here. This may be true to the extent that the summary procedures by motion can be resorted to as a federal procedural matter; but that does not help here, for the question is not as to the method of enforcement of a valid award, but of the validity of the awards and the binding effect of the agreement to arbitrate, both of which are matters of State substantive law, since contract and arbitrament arose under State law. The awards can become no better by going into a federal court to enforce them than they would be in the State Courts. Erie R. R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487, and cases following it. Moreover, this is not a proceeding under those sections of the Act, but is a full scale plenary suit expressly brought under the Rules of Civil Procedure, with equitable remedies prayed for and granted.

2. What then is the pertinent law of Texas? The common law was by statute made the law of Texas in 1840. That act appears now as Article 1 in Vernon's Annotated Civil Statutes: "The common law * * * shall * * * be the rule of decision, and shall continue in force until altered or repealed by the Legislature." The common law meant is that declared by the courts of the different States of the United States as suited to our condition. Great Southern Life Ins. Co. v. Austin, 112 Tex. 1, 243 S.W. 778; Grigsby v. Reib, 105 Tex. 597, 153 S.W. 1124, L.R. A. 1915E, 1, Ann.Cas.1915C, 1011. The Legislature has altered the common law by establishing in 1895, Vernon's Ann.Civ.St. art. 239 et seq., a mode of arbitration between employer and employees with which we have no concern here. Much older legislation is found in Vernon's Ann.Civ. Stats., Arts. 224 to 238, which applies generally, and provides for the parties to go into a court and there appoint arbitrators, with a submission under an order of court, the award to be made the judgment of the court. But this procedure is optional, the last Section, Art. 238, providing, "Nothing herein shall be construed as effecting the existing right of parties to arbitrate their differences in such mode as they may select." The parties here have not adopted this statutory mode, so that the effect of their general agreement to arbitrate, their submissions of the particular disputes, and the awards, stand under the common law as generally applied in the United States, with special reference of course to the decisions in Texas. We have specially to consider (1) the enforceability of a general agreement to arbitrate; and (2) the revocability before award of a submission of a dispute to chosen arbitrators.

In 5 C.J., Arbitration and Award, § 7, we read: "The general principle that courts favor arbitrations and will indulge every reasonable presumption to uphold arbitration proceedings is strictly limited to proceedings which have resulted in an award; in consequence of which submissions to arbitration cannot be specifically enforced and the parties to it may revoke it at any time before the award is made." And in § 92: "At common law as regards the power of the arbitrators to render an award which will be binding on the parties the general rule is well settled that either can revoke the submission at any time before an award has been made. The remedy of the party aggrieved is an action for a breach of the agreement to submit to recover damages, if any, caused by the revocation of the other party. The rule has at times been severely criticised, but it is too well settled to admit of doubt." See, also, 6 C.J.S., Arbitration and Award, § 33. Scores of cases are cited, and for Texas is cited Houston & T. C. R. Co. v. Newman, 2 Willson, Civ.Cas. Ct.App., § 349, to which we have not had access. However, in Ferguson v. Ferguson, Tex.Civ. App., 110 S.W.2d 1016, stipulated damages were allowed to be recovered for a refusal to abide an award, and in Memphis Cotton Hull & Fiber Co. v. Wilson Grain Co., Tex. Civ.App., 244 S.W. 1062, a suit to enforce an award or in the alternative for damages, was upheld as stating a cause of action. In Florida Athletic Club v. Hope Lumber Co., 18 Tex.Civ.App. 161, 44 S.W. 10, 14, we read: "It has been held that an agreement in an executory contract to refer all matters of dispute that may arise under the contract to arbitration will not oust the courts of jurisdiction (citing American Cent. Ins. Co. v. Bass, 90 Tex. 380, 38 S.W. 1119, and other State and general authorities). The true rule seems to be that such a clause cannot oust the courts of jurisdiction, and, when invoked for that purpose, will be held void; yet, if the parties have, before the suit is instituted, proceeded with the arbitration under the contract, and an award, in the absence of fraud or mistake, has been made, suit must be on the award, and not on the contract." These principles are restated in 6 C.J.S., Arbitration and Award, § 33. In 3 American...