Opinion
No. WD 61578
May 4, 2004
Appeal from the Circuit Court of Jackson County, Missouri The Honorable Richard E. Standridge, Judge.
David A. Kraft, Art J. Neuhedel, and Susan Eisenbraun Kansas City, MO, Attorneys for Appellant.
James L. Baker, Kansas City, MO, Attorney for Respondent.
Before Smith, P.J., and Holliger and Hardwick, JJ.
Triarch Industries, Inc., a Texas corporation, appeals from the order of the Circuit Court of Jackson County denying its motion to compel arbitration. The appellant, in the underlying lawsuit against the respondent, Paul A. Crabtree, d/b/a Crabtree Painting, sought payment of $4,481.66 on an open account. The account was created pursuant to a written agreement between the parties, which contained an arbitration provision.
In its sole point on appeal, the appellant claims that the trial court erred in denying its motion to compel arbitration, on the basis that it had waived arbitration by initially choosing to litigate, because the respondent failed to rebut the presumption, under the Federal Arbitration Act (FAA), 9 U.S.C. § 1-16, favoring arbitration, in that the respondent failed to show that enforcing the appellant's right to arbitration under the contract, after initially choosing litigation, would result in prejudice to the respondent.
We reverse and remand
Facts
On June 29, 2000, the appellant and the respondent entered into a "Qualified Installer Agreement" (the contract), pursuant to which the respondent was certified as a "factory qualified applicator" of the respondent's paint products. The agreement provided that the respondent would pay the appellant for paint "in accordance with [the appellant's] written conditions of sale and credit terms by check or credit card." The conditions included an arbitration provision:
ARBITRATION OF DISPUTES: Any controversy or claim arising out of this contract or the breach thereof may, at Seller's option, be referred to non-binding mediation under rules of Seller's choice. If mediation does not result in settlement of the dispute, (or if Seller does not elect to pursue mediation), Seller shall have the right to refer the dispute to binding arbitration under rules of its choice, or to commence litigation.
On August 22, 2000, October 10, 2000, and January 2, 2001, the appellant invoiced the respondent for a total of $4,481.66 in paint products that had been delivered. The invoices went unpaid, and on August 7, 2001, the appellant filed a petition in the Circuit Court of Jackson County seeking payment of the $4,481.66. On October 18, 2001, the respondent filed an answer, which alleged, inter alia, that the appellant's product was non-conforming, defective and unusable, and that the product had been returned and accepted by the appellant, so that there was a failure of consideration.
On April 2, 2002, the respondent filed a motion seeking leave from the trial court to file a counterclaim, alleging that he had purchased a total of $26,619.02 in non-conforming and defective products from the appellant, for which he had not been reimbursed, and seeking recovery of that amount. Contemporaneously with the motion, the respondent served the appellant with a request for admissions. The trial court granted the respondent's motion for leave to file a counterclaim, which he filed on April 12, 2002.
On April 22, 2002, the respondent served the appellant with interrogatories and a request for production. On May 4, 2002, the appellant filed a motion to compel arbitration and a motion to stay further proceedings pending arbitration. On June 17, 2002, the trial court overruled the appellant's motion to compel arbitration, and on September 4, 2002, overruled its motion to stay the proceedings.
This appeal followed.
Appellate Jurisdiction
As in every case, we first must decide, sua sponte, whether we have jurisdiction to proceed. Getz Recycling, Inc. v. Watts , 71 S.W.3d 224, 228 n. 1 (Mo.App. 2002). In that regard, both the Missouri Uniform Arbitration Act, § 435.440.1, and the FAA, 9 U.S.C. § 16 (a)(1)(B), provide for the appeal of an order denying a motion to compel arbitration. Thus, the appellant could appeal under either act, as long as the act applies to the circumstances of this case. Mueller v. Hopkins Howard, P.C. , 5 S.W.3d 182, 187 (Mo.App. 1999). In its brief, the appellant asserts that it is appealing pursuant to the FAA.
The FAA applies to contracts "involving [interstate] commerce," which has been interpreted by the United States Supreme Court as being the functional equivalent of "affecting commerce." McIntosh v. Tenet Health Sys. Hosps. , 48 S.W.3d 85, 88 (Mo.App. 2001). This standard has been liberally interpreted to apply the "FAA in cases where the contract simply relates to interstate commerce even when the relationship [is] less than substantial." Id. There can be no dispute, here, that the contract between the appellant and the respondent relates to interstate commerce in that the appellant is a Texas corporation which sold and delivered paint products to the respondent in Missouri. Consequently, the FAA applies such that we have jurisdiction to review the trial court's denial of the appellant's motion to compel arbitration under that act.
Standard of Review
Our review of the trial court's denial of the appellant's motion to compel arbitration is de novo. Dunn Indus. Group v. City of Sugar Creek , 112 S.W.3d 421, 428 (Mo. banc 2003). Thus, although we are to consider the record below, we review both the evidence and the law without deference being paid to the trial court's conclusions. Kinzenbaw v. Dir. of Revenue , 62 S.W.3d 49, 52 (Mo. banc 2001).
I.
In its sole point on appeal, the appellant claims that the trial court erred in denying its motion to compel arbitration, on the basis that it had waived its right to arbitration, because the respondent failed to rebut the presumption, under the FAA, 9 U.S.C. § 1-16, favoring arbitration, in that the respondent failed to show that enforcing the appellant's right to arbitration under the parties' contract would result in prejudice to the respondent. We agree.
To compel arbitration under the FAA, the trial court "must determine whether a valid agreement to arbitrate exists between the parties and whether the specific dispute falls within the substantive scope of that agreement." Dunn Indus. Group , 112 S.W.3d at 427-28. The record would reflect and the respondent essentially concedes that both these two requirements are met here. In that regard, the parties' contract provided, in pertinent part, that the respondent "shall have the right to refer [any dispute arising out of the contract] to binding arbitration under rules of its choice." And, the underlying dispute involved parties of separate states in which the respondent accepted goods delivered to him on an open account in Missouri, at the respondent's request, which obviously involves or affects interstate commerce.
While there is no dispute that the appellant had a right to compel arbitration under the contract, the respondent successfully argued below that it waived that right by choosing to commence litigation instead. The appellant contends on appeal that enforcing its right to arbitration under the contract would not result in prejudice to the respondent sufficient to outweigh the presumption, under the FAA, favoring arbitration. The issue on appeal then is whether the trial court was correct in denying the appellant's motion to compel arbitration on the basis that the appellant had waived its right in that regard.
The trial court "must compel arbitration if it determines that the parties agreed to arbitrate the dispute." Id. at 428. However, a party may waive the right to arbitration if it: "1) had knowledge of the existing right to arbitrate, 2) acted inconsistently with that right, and 3) prejudiced the party opposing arbitration." Getz Recycling, Inc. , 71 S.W.3d at 229; McIntosh , 48 S.W.3d at 89; Mueller , 5 S.W.3d at 187. "Waiver results from a party's substantial participation in litigation to a point inconsistent with an intent to arbitrate which results in prejudice to the other party." McIntosh , 48 S.W.3d at 90. There is a strong presumption against waiver. Id. at 89. Any doubt as to whether a party has waived arbitration is to be resolved in favor of arbitration. Id.
In this case, there is no dispute that the appellant had knowledge of its right to arbitrate and that it acted inconsistent with its right to arbitrate given the fact that it initiated suit against the respondent below. However, for a waiver to be sufficient to waive arbitration and rebut the presumption favoring arbitration, the proponent of the waiver, the respondent in our case, has the burden of showing that he was prejudiced by the other party's actions that were inconsistent with arbitration. Getz Recycling, Inc. , 71 S.W.3d at 229. Thus, here, to support his claim of waiver, the respondent had the burden of rebutting the presumption favoring arbitration by showing that he was prejudiced by the appellant's participation in the litigation it instituted against the respondent below. The issue then in determining whether the trial court erred in denying the appellant's motion to compel arbitration is whether the record supports the fact that the respondent was prejudiced by the appellant's participation in the litigation below.
Prejudice, for purposes of waiver in the context of a motion to compel arbitration, is determined on a case-by-case basis. Id. Prejudice is not demonstrated by mere delay in a party's attempt to compel arbitration; but delay and the moving party's trial-oriented activity are material factors in assessing prejudice. Id. As this court stated in Getz :
Prejudice may also result from lost evidence, duplication of efforts, use of discovery methods unavailable in arbitration, or litigation of substantial issues going to the merits. Prejudice can also be established where a party lost a motion on the merits and then attempted to invoke arbitration or where a party has postponed arbitration causing his adversary unnecessary delay or expense.
Id. (citations omitted). For the purpose of evaluating a claim of waiver in this context, prejudice has been found to result where there was substantial pre-trial activity and a two-year delay in seeking arbitration, Reis v. Peabody Coal Co. , 935 S.W.2d 625, 631 (Mo.App. 1996), but not to result where there was limited discovery and only a nine-month period between the filing of the initial petition and the filing of the motion seeking arbitration, Nettleton v. Edward D. Jones Co. , 904 S.W.2d 409, 410-11 (Mo.App. 1995), or a seven-month period between the filing of the petition and the filing of the motion seeking arbitration. Mueller , 5 S.W.3d at 188.
In this case, the nine-month period which elapsed between the appellant's filing of its petition and its filing of its motion to compel arbitration was comparable to periods which Nettleton and Mueller found to not result in prejudice. Moreover, we cannot say that the respondent was prejudiced by substantial pre-trial activity on the part of the appellant. The bulk of such activity consisted of pre-trial discovery conducted by the respondent. It is also significant that the appellant's motion to compel arbitration was filed in the wake of the respondent's filing of his counterclaim, which alleged additional instances of non-conforming and defective product supplied by the appellant, for which the respondent sought to recover. While our research has not uncovered any Missouri cases which address the impact of a counterclaim on the issue of a plaintiff's waiver of a right to arbitrate, federal case law has held that such an event can significantly alter the nature of the litigation so as to rejuvenate a plaintiff's right to demand arbitration. Design Benefit Plans, Inc. v. Enright , 940 F. Supp. 200, 203 (N.D. Ill. 1996).
The respondent attempts to distinguish this case from other waiver cases on the basis that arbitration was not mandated under the contract, but was at the sole option of the appellant. The respondent does not elaborate on how this distinction would or should change the analysis of waiver and cites no cases in support of its position that this case should be treated differently. We fail to see any logic in the respondent's position.
The respondent also argues that the appellant should be bound by its choice to litigate on the basis that the agreement should be construed against it as the drafter such that under the parties' contract, its election to litigate precluded any "subsequent attempt to invoke the optional arbitration provision." In support of its argument, the respondent cites Transit Casualty Co. in Receivership v. Certain Underwriters at Lloyd's of London , 963 S.W.2d 392 (Mo.App. 1998). In Transit , this court found an ambiguity existed between the service of suit and arbitration clauses of the reinsurance contract in question. Id. at 398. In that regard, the court found that while the service of suit clause permitted Transit to litigate a failure to pay any amount claimed to be due under the agreement, the arbitration clause mandated arbitration as to all disputes or differences arising out of the agreement. Accepting the specific, the service of suit clause, over the general, the arbitration clause, and construing the contract against the drafter, the court found that Transit had the option of arbitrating or litigating under the terms of the agreement. Id. at 399. The issue in Transit was whether it had the option to arbitrate or litigate under the agreement, not whether it could exercise its option to require arbitration after it initially chose litigation — the issue here. Thus, we fail to see how Transit would support the respondent's position in this case.
The dissent contends, inter alia, that the arbitration provision of the parties' contract is unenforceable because it is lacking in mutuality of obligation in that it provided that the right to arbitrate was vested solely in the appellant. In other words, the dissent would have us hold, as a matter of law, that pursuant to the doctrine of mutuality of obligation, parties cannot contract to provide arbitration at the election of one party alone. In so contending, the dissent misunderstands the concept of mutuality of obligation.
As a general proposition, parties are free to contract as they see fit. Christeson v. Burba , 714 S.W.2d 183, 195 (Mo.App. 1986). And, a contract will be upheld, as agreed, unless it violates the law or public policy. Marshall v. Northern Assurance Co. of America , 854 S.W.2d 608, 611 (Mo.App. 1993). In this regard, § 435.350 provides that:
[a] written agreement to submit any exiting controversy to arbitration or a provision in a written contract, except contracts of insurance and contracts of adhesion, 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.
The dissent cites no authority, and we can find none, that stands for the proposition that a contractual provision authorizing arbitration at the sole option of one of the parties violates the law or is against public policy. More importantly, it cites no authority holding that such a provision violates the doctrine of mutuality of obligation.
In contending as it does, the dissent makes the mistake of looking at the arbitration provision in isolation, reasoning that without a corresponding right of the respondent to elect arbitration there can be no mutuality of obligation. However,
mutuality of obligation . . . only means that one party agrees to do one thing and the other some other thing. It does not mean that the respective undertakings, or obligations, shall be equal to, or commensurate with one another. If it did, then every contract where one party agreed to do less than the other would be called unilateral, merely because one obligation upon one party was not as great as upon the other.
Warren v. Ray County Coal Co. , 207 S.W. 883, 885 (Mo.App. 1919). Thus, in determining whether there is mutuality of obligation, we must look at the contract as a whole. Schweig v. Maryland Plaza Redevelopment Corp. , 676 S.W.2d 249, 257 (Mo.App. 1984). The dissent makes no argument that the contract, when taken as a whole, lacks mutuality of obligation, and our review does not convince us that it does.
The dissent also contends that the arbitration provision is unenforceable because it is too vague in that it does not address the "selection of arbitrators, payment of costs, rules to be followed, scope of issues, choice of law and venue, among others." It cites no authority for that proposition.
For a contract to be valid and enforceable, the nature and extent of its obligations must be certain. Prenger v. Baumhoer , 914 S.W.2d 413, 415 (Mo.App. 1996). Generally, there is no contract where the terms and conditions are subject to future negotiations and agreement. Id. However, "when the parties have written down an agreement in terms to which they both have acceded, the courts are reluctant to hold the agreement ineffectual for indefiniteness." Maupin v. Hallmark Cards, Inc. , 894 S.W.2d 688, 695 (Mo.App. 1995).
The parties here agreed that binding arbitration would be at the option of the appellant concerning "any controversy" arising out of the contract and under the rules of appellant's choice. Consequently, there is nothing indefinite as to what was agreed by the parties with respect to arbitration being an option and its rules. The respondent agreed that the appellant could opt for binding arbitration under rules of its choice. Hence, in that regard, there was nothing left for further negotiation or agreement by the parties. As to the selection and payment of arbitrators, §§ 435.360 and 435.395 provide, respectively, that the trial court can determine those issues where the agreement is silent. Consequently, we fail to see how the arbitration provision in the parties' contract is so vague as to overcome the presumption of its enforceability.
For the reasons stated, we find that the arbitration provision of the parties' contract is enforceable and that the record does not support the trial court's determination that the respondent carried his burden of demonstrating that the appellant's trial activity below prejudiced the respondent to the extent necessary to waive the appellant's right to arbitration under the parties' contract. Hence, the trial court erred in denying the appellant's motion to compel arbitration.
Conclusion
The judgment of the Circuit Court of Jackson County denying the appellant's motion to compel arbitration is reversed, and the case is remanded to the circuit court for further proceedings consistent with this opinion.
Hardwick, J., concurs.
Holliger, J., dissents in separate opinion.