Union County School District No. 1 v. Valley Inland Pacific Constructors, Inc. , 59 Or. App. 602 ( 1982 )

BUTTLER, J.

In this declaratory judgment proceeding, plaintiff seeks a declaration that it is not required to comply with defendant’s demand to arbitrate certain disputes under their contract, and an injunction prohibiting defendant from pursuing its demand for arbitration. Defendant appeals from a decree granting plaintiff the relief it sought.

Plaintiff and defendant entered into a contract on October 17, 1974, whereby defendant agreed to construct a school building in La Grande. The contract provided that all claims and disputes arising out of the contract, with certain limitations, were to be decided by arbitration in accordance with the rules of the American Arbitration Association. On September 18, 1975, during construction of the school, part of the structure collapsed, causing death to one worker, injury to four others, and a delay in the project. Actions were brought against defendant and its subcontractors for the death and personal injuries; those claims were settled between October, 1977, and May, 1978. No claims were made against plaintiff, and it was not a party to any of the settlements.

Thereafter, defendant completed construction of the building, and it was accepted by plaintiff in August, 1976. All monies due defendant from plaintiff were paid at or about that time, except for a retainage of $4,601.64, which was not paid until after defendant demanded arbitration in November, 1978.

In seeking arbitration, defendant claimed that plaintiff breached the contract by the failure of plaintiffs architect to inspect the work properly and interpret correctly the requirements of the contract, which failures caused the collapse. It sought damages of $1,403,508.64 for delay and repair costs and indemnification for the death and personal injury settlements.

In January, 1979, plaintiff filed this action for declaratory and injunctive relief. A preliminary injunction was granted enjoining defendant from proceeding with its demand for arbitration, and, after various preliminary matters, the case was tried to the court on November 14, 1979. The court granted plaintiff the relief it requested, including a permanent injunction, ruling that this dispute was not referable to arbitration for the following reasons: (1) the demand for arbitration was not made prior to “final payment” as required by the contract; (2) it was not the parties’ intention at the time they entered the contract to arbitrate disputes of this type; (3) the demand was not timely made and is therefore barred by the statute of limitations, laches, and a contract provision requiring that an arbitration demand be made within a “reasonable time,” and (4) defendant’s claim is “frivolous and patently baseless,” because the contract required defendant to indemnify plaintiff for the type of claims which defendant is here asserting.

Although defendant assigns 14 errors, we need only consider whether the court was correct in determining that arbitration was barred for any of the above four reasons. The underlying issue with respect to all of them is whether they should have been decided by the court or should be decided by the arbitrators. Defendant contends that, although this suit is one for declaratory relief, ORS 28.010 et seq, the court’s inquiry is limited to those defenses to an order directing arbitration which it could have considered had the party seeking arbitration filed a petition to compel arbitration pursuant to ORS 33.230.¹ That statute, which was designed to insure expeditious enforcement of a demand for arbitration pursuant to contract, by its terms permits a party resisting arbitration to raise only two issues: (1) that it is not in default, and (2) the contract or submission was not properly made.

We agree with defendant that a party who resists arbitration by seeking a judicial declaration that the dispute is not arbitrable may not expand the scope of the court’s inquiry beyond that permitted by ORS 33.230. Under that statute the court determines only whether there is a contract (or submission) providing for arbitration and whether there is a default; it is contemplated that defenses to the claim, including its arbitrability, be decided by the arbitrator. Given that statutory scheme, a resisting party should not be allowed to circumvent it by taking the initiative to enjoin arbitration. The narrow statutory inquiry effectuates the parties’ presumed desire for a fast, informal, and inexpensive means of resolving their disputes. See Peter Kiewit v. Port of Portland, 291 Or 49, 65, 628 P2d 720 (1981) (Denecke, C. J., concurring).

Although it is not clear what defenses may be considered in a proceeding under ORS 33.230, the statute permits either party to demand a jury to determine whether there was a contract providing for arbitration and whether there is a default, which suggests that only factual questions with respect to those defenses be determined.² However, there are, undoubtedly, cases where the agreement to arbitrate is specifically limited to certain kinds of disputes and a court could conclude as a matter of law that there was no default in the agreement by the party refusing to arbitrate.³ Generally, however, it is this state’s policy to construe arbitration agreements liberally to enhance arbitrability of disputes, Budget Rent-A-Car v. Todd Investment Co., 43 Or App 519, 524, 603 P2d 1199 (1979), and, at least under collective bargaining agreements, to refer the matter to arbitration unless the claim alleged is one which, on its face, is clearly and unambiguously excluded from arbitration. Corvallis Sch. Dist. v. Corvallis Education Assn., 35 Or App 531, 535, 581 P2d 972 (1978).⁴

The narrow inquiry in the judicial proceeding is consistent with the parties’ expressed intent to arbitrate disputes, especially when defenses to arbitration intertwine with the merits of the dispute, requiring the parties to present the same evidence twice in the event the court rules in favor of arbitrability. Wiley & Sons v. Livingston, 376 US 543, 558, 84 S Ct 909, 11 L Ed 2d 898 (1964). In Peter Kiewit v. Port of Portland, supra, the court treated the arbitration statutes (ORS 33.210 et seq) as a whole, whether the question of arbitrability is raised under ORS 33.240 for abatement of a pending lawsuit to abide arbitration or whether it is raised in the independent proceeding provided by ORS 33.230. In Transco Northwest v. Allied Equit., 275 Or 675, 678, 552 P2d 824 (1976), n 2, supra, the question arose under ORS 33.240 for abatement, and we think that it is consistent with Transco to limit, in general, the court’s inquiry to those matters which, like settlement, require a minimal factual inquiry, and would be a complete bar to arbitration, and which the court or jury may decide without delving into the merits of the dispute itself.

With those limitations in mind, we consider the four grounds asserted by plaintiff as bars to arbitration, the first of which is that the demand for arbitration was not made prior to “final payment.” The arbitration clause provides:

“All claims, disputes and other matters in question arising out of, or relating to, this Contract or the breach thereof, except as set forth in Subparagraph 2.2.9 with respect to the Architect’s decisions on matters relating to artistic effect, and except for claims which have been waived by the making or acceptance of final payment as provided by Subparagraphs 9.7.5 and 9.7.6, shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then obtaining unless the parties mutually agree otherwise. This agreement to arbitrate shall be specifically enforceable under the prevailing arbitration law. The award rendered by the arbitrators shall bé final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof.”

On its face, defendant’s claim appears to be arbitrable under that clause. However, by its terms the clause provides that arbitration is not available for claims waived by making or accepting “final payment.” Because the meaning of that term is unclear, the trial court determined, after hearing conflicting testimony, that “final payment” had been made when the $3,000,000 was paid in 1976. It was error for the court to decide that question, because the meaning of “final payment” is arbitrable as a dispute arising under the contract. The arbitrator, rather than the court, should decide whether “final payment” foreclosed arbitration of the merits.

As to plaintiffs second contention that arbitration is not required here because the parties did not intend that disputes of this type be arbitrable, the trial court admitted and considered testimony by plaintiff that, despite the clear language that “all claims, disputes and other matters in question arising out of, or relating to, this contract” are arbitrable, the parties did not intend to arbitrate this dispute. It was error to consider that evidence. The contract clause is unambiguous, and parol evidence is, therefore, inadmissible to contradict it. Knox v. Hanson, 242 Or 114, 120, 408 P2d 76 (1965). Plaintiff contends that, by reading the contract “within all four corners,” giving the clause its plain meaning would contradict other contract provisions and, therefore, parol evidence is admissible to resolve the conflict. In reading the entire contract, we find only that there are numerous other provisions which relate to specific types of disputes which might have arisen. The fact that, as plaintiff argues, none of those provisions deals with the “arbitration of tort claims or claims for personal injuries or property damage from such things as the collapse of the building” does not create an ambiguity. The most that can be said is that the parties did not anticipate a dispute of the type present here. Presumably it was to cover such unanticipated disputes that the arbitration clause was general and all-encompassing (with only specific stated exceptions), rather than expressed in terms of specifically enumerated types of disputes. The contract does not specifically exclude this dispute; its arbitrability is, therefore, arbitrable.

As to the third ground for barring arbitration, defendant contends that the court erred in ruling that its demand for arbitration was barred by a contract provision⁵ requiring notice of a demand for arbitration to be filed within a “reasonable time” after the claim has arisen, but in no event after the claim would be barred by the applicable statute of limitations. Instead, defendant argues, those defenses are arbitrable.

We agree that whether the demand was made within a reasonable time should be decided by the arbitrators. Because the phrase “reasonable time” is a part of the contractual provision here, its meaning in a given case is a matter of contract interpretation and is, therefore, arbitrable. What is a reasonable time presumably will depend on all of the circumstances, including a showing of prejudice to the resisting party, which matters are inevitably intertwined with the merits and involve a weighing of the equities in the context of the particular case. At least one purpose for requiring arbitration is that the parties thought that arbitrators would be more likely to reach an expeditious, satisfactory resolution of their disputes than would a court. Peter Kiewit v. Port of Portland, supra, 291 Or at 65. Having the arbitrators decide whether the claim was asserted within a reasonable time within the meaning of the contract avoids the possibility that evidence must be presented twice.

Whether a claim is barred by the applicable statute of limitations should be decided by the court where the agreement provides that arbitration may not be demanded after the statute has run on the claim, and where it is clear, as a matter of law, that the applicable statute has run.⁶ Here, there is no dispute that the injury occurred September 18, 1975, when the building collapsed; that construction was completed and the building accepted in August, 1976; that the death and personal injury claims arising from the collapse were settled between October, 1977 and May, 1978, and that defendant demanded arbitration in November, 1978. Defendant’s only stated reason for not demanding arbitration earlier is that it wanted to combine the claims in one proceeding.

With respect to defendant’s claims for delay and repair costs, defendant relies on plaintiffs failure to perform as agreed under the contract; therefore, it is contended, the six year statute of limitations (ORS 12.080) applies. Plaintiff, on the other hand, contends that those claims are barred by ORS 12.135(1), which provides:

“(1) An action to recover damages for injuries to a person or to property arising from another person having performed the construction, alteration or repair of any improvement to real property or the supervision or inspection thereof, or from such other person having furnished the design, planning, surveying, architectural or engineering services for such improvement, shall be commenced within two years from the date of such injury to the person or property; provided that such action shall be commenced within 10 years from substantial completion of such construction, alteration or repair of the improvement to real property.”

Although that statute has been the source of confusion, it is clear from Securities-Intermountain v. Sunset Fuel, 289 Or 243, 247, 611 P2d 1158 (1980), that it matters not whether the source of the claim is breach of contract or tort. The determinative factors are the nature of the injury (to person or to property) and its cause (arising from another person having performed the construction of any improvement to real property, or supervision or inspection thereof, or having furnished the design, architectural or engineering services therefor).

Here, the claim is for physical damage to the work and for financial losses incidental, but directly attributable, to that damage. The physical damage claim is clearly injury to property — the statute encompasses what is “commonly meant” by that term. Securities-Intermountain v. Sunset Fuel, supra, 289 Or at 251. Although the statute does not include financial losses incurred to complete or replace satisfactorily the work to be performed when there is no physical injury to existing tangible property, it does include such losses incidental to the physical injury to such property. Securities-Intermountain did not involve physical injury to property; the claim related to a faulty heating, system. Accordingly, the court held that the financial loss incurred by redesigning the system and by delay in construction were not within the statute, but were covered by the six year statute of limitations for actions “upon a contract.” ORS 12.080(1). The court said:

“* * * These [damages] are characteristic financial injuries alleged to result from faulty performance of a business transaction. There is no allegation of any personal injury or injury to tangible property occurring in the course of or in consequence of the faulty performance, in the sense intended by ORS 12.135. Accordingly, that statute does not apply to this case. * * *” 289 Or at 251-52. (Emphasis supplied.)⁷

See also, Beveridge v. King, 292 Or 771, 643 P2d 332 (1982). The type of injury claimed is, therefore, within the ambit of ORS 12.135(1). So, also, is the cause of the injury: as claimed, it arose from the furnishing by plaintiff of the supervision or inspection of the work and the architectural services for the work. Accordingly, those claims are barred by ORS 12.135(1), and defendant’s demand for its arbitration came too late.

We think it is clear, however, that defendant’s claim for indemnity is not time-barred. Although the accident occurred on September 18, 1975, defendant did not make payment on the personal injury and death settlements until between October, 1977, and May, 1978. It is not necessary to decide which of the statutes of limitations applies, because the period did not begin to run until the underlying cases were settled, and the demand for arbitration was made within two years after the earliest date from which it could have commenced. Owings v. Rose’, 262 Or 247, 263, 497 P2d 1183 (1972).⁸ Accordingly, that claim is not barred.

Plaintiffs fourth ground for barring arbitration, is that defendant’s claim is “frivolous and patently baseless” in that the contract required defendant to maintain insurance for the protection of plaintiff against claims such as this one and to indemnify plaintiff for losses plaintiff might suffer due, in any part, to defendant’s negligence. The trial court agreed. It is not for the courts to determine whether contract provisions unrelated to the arbitration clause itself bar the claim, and this defense does not relate to the scope of that clause, but to the merits of the claim. Moreover, we cannot say that the claim for indemnity is frivolous, given the language of ORS 30.140(1),⁹ which defendant contends render the indemnity and insurance provisions unenforceable. Arbitrators are empowered to apply the law, Brewer v. Allstate Insurance Co., 248 Or 558, 561, 436 P2d 547 (1968), and just as they must interpret the contract to determine whether plaintiff’s architects breached their obligation to interpret drawings and to inspect, the arbitrators may interpret the indemnity and. insurance provisions in the light of ORS 30.140(1) to determine whether the contract provisions bar recovery. The claim is arbitrable.

In sum, the trial court erred in not ordering arbitration of defendant’s claim for indemnity.

Affirmed in part, reversed in part, and remanded with instructions to enter a judgment directing plaintiff to arbitrate defendant’s claim for indemnity.

1 ORS 33.230 provides, in relevant part:

“A party aggrieved by the failure, neglect or refusal of another to perform under a contract or submission providing for arbitration, described in ORS 33.220, shall petition the circuit court, or a judge thereof, for an order directing that the arbitration proceed in the manner provided for in the contract or submission. * * * The court or judge shall hear the parties, and if satisfied that the making of the contract or submission or the failure to comply therewith is not an issue, shall make an order directing the parties to proceed to arbitration in accordance with the terms of the contract or submission. If the making of the contract or submission or the default is an issue, the court or the judge shall proceed summarily to the trial thereof. If no jury trial is demanded by either party, the court or judge shall hear and determine such issue. * * * If the jury finds that no written contract providing for arbitration was made or submission entered into, as the case may be, or that there is no default, the proceeding shall be dismissed. If the jury finds that a written contract providing for arbitration was made or submission was entered into and there is a default in the performance thereof, the court or judge shall make an order summarily directing the parties to proceed with the arbitration in accordance with the terms thereof.”

2 The Supreme Court has indicated that the defense of settlement of the underlying claim may be decided by the court in determining whether there is a default. Transco Northwest v. Allied Equit., 275 Or 675, 552 P2d 824 (1976).

3 That was apparently the case in Peter Kiewit u. Port of Portland, supra; the trial court, notwithstanding the Port’s demand for jury trial on the issue of default, held as a matter of law that the dispute was arbitrable. In Holmes v. Anthony, 56 Or App 666, 643 P2d 372 (1982), we indicated that in a proceeding to compel arbitration the court, in determining whether there is an issue related to the making of the contract or whether there is a default, may consider contentions that the contract should be either rescinded or reformed in such a manner that the dispute is not arbitrable. It was unnecessary to decide there how the merits of those issues are to be resolved, but presumably they should be decided separate from, and prior to, the decision in the ORS 33.230 proceeding.

4 In the Corvallis Sch. Dist. case, we recognized a distinction between arbitration clauses in collective bargaining agreements and those in commercial contracts. The latter are closely tied to contract law; the former are not. To treat them the same “* * * ignores the context of the collective bargaining relationship and is inconsistent with the policies embodied in the collective bargaining statutes. * * *” 35 Or App at 534-35. To state it differently, a collective bargaining agreement relates to an ongoing relationship and is more in the nature of a treaty; the purpose of the arbitration clause is to keep the peace by resolving the wide variety of disputes that may arise from time to time. That is not the case with commercial contracts, and there is no reason why the parties to such contracts may not limit the circumstances under which a dispute will be arbitrated. Preparation for commercial arbitration, and particularly under construction contracts, is generally much more complex, expensive and time consuming than is the submission of a dispute under a collective bargaining agreement.

5 Subparagraph 7.10.2 of the contract provides:

“Notice of the demand for arbitration shall be filed in writing with the other party to the Contract and with the American Arbitration Association, and a copy shall be filed with the Architect. The demand for arbitration shall be made within the time limits specified in Subparagraphs 2.2.10 and 2.2.11 where applicable, and in all other cases within a reasonable time after the claim, dispute or other matter in question has arisen, and in no event shall it be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations.”

6 To hold that the question whether the applicable statute of limitations is arbitrable under such a contract provision would be tantamount to saying that the parties to a commercial contract may not limit their agreement to arbitrate; once they agree to arbitrate, everything would be arbitrable, including the arbitrability of everything. Such a rule would discourage agreements to arbitrate.

7 Defendant relies on the following language from Securities-Intermountain v. Sunset Fuel, supra, appearing in the paragraph immediately preceding that in which the language quoted in the body of this opinion appears:

“We conclude that the phrase ‘injuries to persons or property’ was thought to encompass what is commonly meant by ‘personal injuries,’ i.e. bodily injuries including their psychic consequences, and physical damage to existing tangible property, but not financial losses such as a reduced value of the completed project due to the unsatisfactory performance of the work or the added cost of satisfactory completion or replacement. Actions to recover such financial losses remain within statutes of limitation other than ORS 12.135. [Footnote omitted.] With this perspective we turn to an examination of plaintiffs claims in this case.” 289 Or at 251.

In the context of the opinion, it is clear that the court was discussing financial loss suffered where no physical damage to tangible property occurred.

8 Owings v. Rose’, supra, arose before enactment of ORS 12.135(1), and applied the six year statute of limitations.

9 ORS 30.140 provides, in relevant part:

“(1) Any provision in a construction agreement which requires a person to indemnify another against liability for damage arising out of death or bodily injury to persons or damage to property caused or contributed to by the negligence of the indemnitee in the design or by the sole negligence of the indemnitee in the inspection of the work that is the subject of the construction agreement is enforceable only if the indemnitee secures or maintains insurance covering such risks for the protection of the indemnitor.

“(2) In no event shall the indemnification obligation under such provisions be greater than the limits of the insurance secured by the indemnifee.”