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United States Insulation, Inc. v. Hilro Const. Co., Inc.

Court of Appeals of Arizona, First Division, Department A

August 13, 1985

U.S. INSULATION, INC., an Arizona corporation, Plaintiff-Appellee,
v.
HILRO CONSTRUCTION COMPANY, INC., an Arizona corporation, Defendant-Appellant.

Page 491

Page 492

[146 Ariz. 252] Meyer, Vucichevich & Cimala, P.C. by George R. Ferrin, Phoenix, for plaintiff-appellee.

Watt & Cohen by Melvin C. Cohen, Tucson, for defendant-appellant.

OPINION

CORCORAN, Judge.

The central issue presented by this appeal is whether the trial court erred in refusing to grant appellant Hilro Construction Company, Inc.'s motion to compel arbitration and stay court proceedings pursuant to A.R.S. § 12-1502. We conclude that such refusal was error and reverse.

In July 1981 appellee subcontractor U.S. Insulation, Inc. (USI) agreed to furnish and install batt insulation for appellant general contractor Hilro Construction Company, Inc., (Hilro) on a St. Johns, Arizona, high school construction project. The form contract provided by Hilro contained a provision regarding the arbitration of controversies arising between contractor and subconstractor. [1]

In the fall of 1981, Hilro advised USI in two separate letters that it considered the contract to be "null and void" due to USI's failure to include certain materials (therma studs) in its bid price and USI's alleged violation of a provision prohibiting assignment of the contract. USI filed suit for damages caused by Hilro's alleged repudiation of the contract, and Hilro filed a motion to compel arbitration and stay court proceedings pursuant to A.R.S. § 12-1502. USI opposed the motion, arguing that by its conduct Hilro had either repudiated the entire agreement including the arbitration [146 Ariz. 253]

Page 493

provision or had waived its right to arbitration under the contract. Alternatively, USI argued that the dispute did not fall within the scope of the arbitration provision. The trial court found that by its correspondence Hilro had "repudiated the agreement in its entirety ... thus precluding its right to arbitrate under the agreement" and therefore denied Hilro's motion to compel arbitration and stay proceedings. Hilro appeals this ruling of the trial court.

As a preliminary matter, we dispose of USI's contention that the trial court's denial of Hilro's motion to compel arbitration was an interlocutory order which is not appealable until final judgment in the matter. The denial of a motion to compel arbitration is substantively appealable. A.R.S. § 12-2101.01(A)(1); Rancho Pescado, Inc. v. Northwestern Mut. Life Ins. Co., 140 Ariz. 174, 183, 680 P.2d 1235, 1244 (App.1984). See also Dean Witter Reynolds Inc. v. Byrd. 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). We now turn to the trial court decision denying the motion to compel arbitration and stay court proceedings.

Due to the complexity of the legal issues involved, we begin by establishing a framework for our analysis. A.R.S. § 15-1502 [2] limits the scope of judicial inquiry into the merits of a contract dispute to whether or not there exists an arbitration clause governing the controversy. A.R.S. § 12-1501 sets forth the grounds upon which the existence of an arbitration clause may be challenged:

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.

Grounds in equity or law for revocation of a contract include an allegation that the contract is void for lack of mutual consent, consideration or capacity or voidable for fraud, duress, lack of capacity, mistake, or violation of a public purpose. Cf. Flower World v. Wenzel, 122 Ariz. 319, 594 P.2d 1015 (App.1978).

Read in conjunction, these statutory provisions embody the concept of separability endorsed by the Supreme Court of the United States in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). Under the doctrine of separability, the arbitration clause is considered to be an agreement independent and separate from the principal contract. M. Domke, Law and Practice of Commercial Arbitration § 8:01 (1980). In Prima Paint the Supreme Court explained the doctrine as follows:

... except where the parties otherwise intend--arbitration clauses as a matter of federal law are "separable" from the contracts in which they are embedded, and ... where no claim is made that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud.

388 U.S. at 402, 87 S.Ct. at 1805 (second emphasis added).

The Prima Paint court construed a provision of the Federal Arbitration Act as requiring adoption of the separability doctrine. Section 4 of that Act, very similar in purpose to A.R.S. § 12-1502, provides that a federal court must order arbitration to proceed once it is satisfied that "the making of the agreement for arbitration or the failure to comply [therewith] is not in issue." With respect to the statutory language, the court stated:

Accordingly, if the claim is fraud in the inducement of the arbitration clause itself--an issue which goes to the "making"[146 Ariz. 254]

Page 494

of the agreement to arbitrate--the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally ... therefore ... a federal court may consider only issues relating to the making and performance of the agreement to arbitrate. In so concluding, we not only honor the plain meaning of the statute but also the unmistakably clear congressional purpose that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts.

388 U.S. at 403-04, 87 S.Ct. at 1805-1806.

In light of Prima Paint and the limited role of the courts as set forth in § 12-1502, we think it clear that the language of § 12-1501 stating that an arbitration clause shall be valid, enforceable and irrevocable "save upon such grounds as exist in law or in equity for the revocation of any contract" refers to grounds alleged with respect to the formation of the arbitration agreement itself, not the underlying contract. [3] See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., --- U.S. ----, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985); Quirk v. Data Terminal Sys., Inc., 379 Mass. 762, 400 N.E.2d 858, 861 (1980); Post Tensioned Eng'g Co. v. Fairways Plaza, 412 So.2d 871, 873 (Fla.App.1982).

The arbitration act addressed in Prima Paint permits judicial inquiry only as to whether "the making of the agreement for arbitration ... is not in issue." (Emphasis added.) Conduct not involving the formation of the arbitration agreement is clearly for the arbitrator under this type of statutory language. See, e.g., Gersh v. Concept House, Inc., 291 So.2d 258 (Fla.App.1974). A.R.S. § 12-1501, however, requires that the court determine the existence of a challenged arbitration provision.

Arizona cases make it clear that although an arbitration agreement has validly been made, a party to the contract may waive his right to seek its enforcement. Bolo Corp. v. Homes & Son Constr. Co., 105 Ariz. 343, 464 P.2d 788 (1970), and we have consistently stated that the right to arbitrate may be waived by conduct referable to the arbitration agreement itself. Bolo; Rancho Pescado, Inc. v. Northwestern Mut. Life Ins. Co., supra; EFC Dev. Corp. v. F. F. Baugh Plumbing & Heating, 24 Ariz.App. 566, 540 P.2d 185 (1975) (Baugh).

Bolo presents an example of the type of repudiating conduct that will result in a waiver of the right to arbitrate. There, the subcontractor refused the contractor's request to submit a dispute to arbitration in accordance with their agreement. Rather than compelling arbitration, the contractor initially elected to file a lawsuit seeking damages for breach of contract. Six months after the proceedings had commenced and various pleadings had been filed, the contractor finally sought to compel arbitration. The Supreme Court held that by seeking redress through the court system, rather than seeking arbitration, the contractor had acquiesced in the subcontractor's rejection of the arbitration clause and had thereby waived its right to compel arbitration under the contract. While a repudiation of the arbitration clause itself will be held to constitute a waiver of the right to arbitrate, a repudiation of any other obligation under the contract will not. This distinction is theoretically consistent with the principle of separability and is furthermore required by common sense. The reason a repudiation of any other obligation should not affect the validity of an arbitration clause was [146 Ariz. 255]

Page 495

most succinctly expressed in the leading House of Lords case of Heyman v. Darwins, Ltd., [1942] A.C. 356:

Repudiation, then, in the sense of a refusal by one of the parties to a contract to perform his obligations thereunder, does not of itself abrogate the contract. The contract is not rescinded. It obviously cannot be rescinded by the action of one of the parties alone. But, even if the so-called repudiation is acquiesced in or accepted by the other party, that does not end the contract. The wronged party has still his right of action for damages under the contract which has been broken, and the contract provides the measure of those damages. It is inaccurate to speak in such cases of repudiation of the contract. The contract stands, but one of the parties has declined to fulfil his part of it. There has been what is called a total breach or a breach going to the root of the contract and this relieves the other party of any further obligation to perform what he for his part has undertaken. Now, in this state of matters, why should it be said that the arbitration clause, if the contract contains one, is no longer operative or effective? A partial breach leaves the arbitration clause effective. Why should a total ...


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