Ron Searcy, D/B/A Restoration Contractors v. John Herold ( 2004 )

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
April 16, 2004 Session
RON SEARCY, D/B/A RESTORATION CONTRACTORS v.
JOHN HEROLD
Appeal from the Circuit Court for Sumner County
No. 23960-C C.L. Rogers, Judge
No. M2003-02037-COA-R3-CV - Filed September 28, 2005
This appeal involves a dispute between a homeowner and a contractor over the validity of an
arbitration award. After the arbitrator awarded the contractor $52,725, the contractor filed a
complaint in the Circuit Court for Sumner County to confirm the award and to recover the costs of
the arbitration. The homeowner challenged the award on the ground that he had not been afforded
a hearing. The contractor filed a motion for summary judgment, a motion to dismiss the
homeowner’s counterclaim, and a motion for attorney’s fees under the arbitration agreement. The
trial court, granting the contractor’s motions, confirmed the $52,725 arbitration decision and
awarded the contractor $500 in arbitration expenses and $2,205 in attorney’s fees. The homeowner
has appealed. We have determined that the arbitration award must be vacated because of the
arbitrator’s failure to provide the parties a hearing before rendering his decision.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Vacated
WILLIAM C. KOCH , JR., P.J., M.S., delivered the opinion of the court, in which WILLIAM B. CAIN and
FRANK G. CLEMENT , JR., joined.
Michael W. Edwards and Russell E. Edwards, Hendersonville, Tennessee, for the appellant, John
Herold.
Paula Ogle Blair, Nashville, Tennessee, for the appellee, Ron Searcy.
OPINION
I.
On January 26, 1999, John Herold hired Ron Searcy, doing business as Restoration
Contractors, to perform extensive repairs on his residence in Hendersonville, Tennessee. The total
cost of the work was $227,664. The parties embodied their agreement in a written contract drafted
by Mr. Herold, who is not a lawyer. The contract contained an arbitration provision in the event that
disputes arose regarding the performance of the contract. This provision stated:
In the event contractor and owner cannot agree to the quality of
workmanship, money owed to either party, or any other matter
pertaining to this contract, either party must notify the other party by
certified or registered mail of their desire to settle any disputes by
way of binding arbitration. All costs of binding arbitration shall be
paid by the losing party. Binding arbitration shall consist of each
party selecting a representative with a construction background,
notifying the other party of their representatives [sic] name and
experience and then those representatives selecting an attorney at law
who shall act as a referee and who’s [sic] written decisions shall be
final and bind both parties. The written decision must be in fourteen
days.
Sometime during 2000, a dispute arose regarding the performance of the work. Mr. Herold
was apparently displeased with a “bowed” wall and with delays in completing the work.
Accordingly, he insisted that he was entitled to offsets from the contract price for delay damages and
the cost of repairing the defective wall. Mr. Herold also insisted that he was entitled to a credit for
the overhead and profit that had been allocated to an item that had been deleted from the contract.
Mr. Searcy declined to give Mr. Herold these credits or deductions.
Accordingly, following the “Settlement of Disputes” clause in their contract, both parties
chose representatives for the arbitration, and these representatives selected John M. Cannon, a
Goodlettsville lawyer, to arbitrate the dispute. On December 5, 2002, Mr. Searcy agreed in writing
to the selection of Mr. Cannon as the arbitrator and also agreed to be bound by Mr. Cannon’s
decision. Mr. Herold signed a similar agreement on December 18, 2002.
Both parties’ representatives submitted documents regarding their positions. On January 9,
2003, Mr. Herold emailed Mr. Cannon complaining that he was having problems communicating
with his own representative1 and inquiring when the arbitration hearing would be held. Mr. Cannon
responded on the same day that he had understood that “no testimony . . . [would] be given” but that
he would receive testimony from the parties if agreed to by Messrs. Herold and Searcy. Mr. Cannon
also invited Mr. Herold to submit any further documentation he wished and stated that he would
“suspend review of the material until you advise if there is anything you wish for me to review as
well.”
As far as this record shows, Mr. Herold never responded to Mr. Cannon’s email. He
submitted no additional records, nor did he notify Mr. Cannon that he and Mr. Searcy desired an
opportunity to present testimony in addition to the documentation they had already provided. After
waiting for nineteen days, and mindful that the agreement required a written decision in fourteen
days, Mr. Cannon prepared and mailed a letter to Messrs. Herold and Searcy on January 28, 2003
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Mr. Herold stated that he had “failing trust” in his representative. He complained specifically that he did not
know what materials his representative had provided to Mr. Cannon, that his representative was “working both sides of
the street,” and that he was “kept blind to the arbitration process by rules I don’t understand.” Of course, it was Mr.
Herold himself who devised the rules for this arbitration.
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concluding that Mr. Herold owed Mr. Searcy $52,725, as well as $500 in arbitration costs. He
concluded his letter with the following: “[T]his ruling becomes a binding award and may be enforced
in a court of competent jurisdiction if not paid, plus court costs and attorney’s fees as provided in
the parties [sic] contract.”
Mr. Herold declined to honor the arbitration award. On March 14, 2003, Mr. Searcy filed
suit in the Circuit Court for Sumner County seeking confirmation and enforcement of the arbitration
award. Mr. Herold retained counsel, and filed an answer and counterclaim seeking to vacate the
arbitration award because he had been denied a hearing during the arbitration process. Mr. Searcy
responded to the counterclaim by filing a motion for summary judgment and a motion to dismiss Mr.
Herold’s counterclaim. The trial court granted both of Mr. Searcy’s motions and dismissed Mr.
Herold’s complaint. Later, the trial court also awarded Mr. Searcy a judgment for his legal expenses.
Mr. Herold perfected this appeal.
II.
MR . HEROLD ’S RIGHT TO A HEARING UNDER TENN . CODE ANN . § 29-5-306 (2000)
Mr. Herold’s principal argument on this appeal is that the trial court erred by declining to
vacate the arbitration award because Mr. Cannon had not conducted a hearing before rendering his
decision. Thus, the first question we must address is whether the parties were entitled to a hearing
before Mr. Cannon could have rendered his decision. The answer to this question is found in the
inter-relationship between the arbitration clause Mr. Herold drafted and the statues governing
arbitration procedures.
The debacle in which the parties find themselves is primarily due to the poorly drafted
arbitration clause prepared by Mr. Herold. It is materially deficient in many respects. For example,
it is completely silent regarding the process that will occur between the time the parties’
representatives appoint the arbitrator and the time the arbitrator renders a decision. There is no
specific mention of a hearing of any sort. This oversight is somewhat curious, especially in light of
Mr. Herold’s after-the-fact protestations regarding the critical importance of a hearing.
Parties who agree to arbitrate their disputes may agree upon virtually any procedure they
desire. Team Design v. Gottlieb, 104 S.W.3d 512, 517-18 (Tenn. Ct. App. 2002). State law does
not provide that hearings are indispensable to arbitrations. Therefore, parties may agree to use an
arbitration process that dispenses with live testimony or a hearing entirely. However, when parties
have not waived a hearing or the presentation of live testimony or have not provided for a specific
arbitration procedure that does not envision a hearing, Tenn. Code Ann. § 29-5-306 contains the
hearing procedure that must be followed.
The first question we must address is whether Messrs. Herold and Searcy waived the
statutory default hearing provided in Tenn. Code Ann. § 29-5-306 or whether they provided for
another hearing procedure that dispensed with a hearing or submission of testimony. The arbitration
clause in their contract contains no mention of a hearing. However, simply failing to provide for a
hearing in an arbitration clause does not amount to a waiver of a hearing because Tenn. Code Ann.
§ 29-5-306 requires that the waiver must be “otherwise provided by the agreement.” Accordingly,
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the hearing process contained in Tenn. Code Ann. § 29-5-306 can only be waived in writing – that
is, the parties’ agreement must “otherwise provide” that the arbitration will not involve a hearing.
The parties may explicitly waive a hearing, and an explicit waiver is the most preferable and
reliable way to dispense with a hearing during an arbitration. However, in addition to an explicit
waiver, parties may dispense with a hearing by agreeing on a specific arbitration procedure that
plainly does not envision that a hearing will be held. For example, parties could agree upon an
arbitration clause stating (1) that they will select an arbitrator, (2) that they will submit their
arguments and supporting evidence to the arbitrator in writing, and (3) that the arbitrator will base
the decision on the written submissions. This procedure clearly does not envision live testimony or
a hearing, and thus the parties agreeing to this process have “otherwise provided” and will not be
required to adhere to the hearing procedures in Tenn. Code Ann. § 29-5-306.
The arbitration clause drafted by Mr. Herold does not explicitly waive a hearing or the
presentation of live testimony. Likewise, it contains no procedures for conducting the arbitration
itself. It addresses only the appointment of the parties’ representatives, the selection of an arbitrator,
and the time within which a written decision must be rendered.2 As a practical matter, the parties’
arbitration clause does not contain an arbitration procedure that “otherwise provides.” This
agreement is so incomplete that we cannot construe it to effectively dispense with the hearing
procedure required by Tenn. Code Ann. § 29-5-306. Accordingly, the arbitration in this matter
should have been conducted in accordance with the procedure set out in Tenn. Code Ann. § 29-5-
306.
III.
MR . HEROLD ’S ENTITLEMENT TO RELIEF
The courts’ power to grant relief from arbitration awards is statutorily limited. Millsaps v.
Robertson-Vaughn Constr. Co., 970 S.W.2d 477, 480 (Tenn. Ct. App. 1997). Tenn. Code Ann. §
29-5-313 (2000) identifies five circumstances in which a court may vacate an arbitration award, and
the courts may not vacate an arbitration award on any other ground. Parties seeking to vacate an
arbitration award must apply to the court within ninety days after the delivery of the award. Tenn.
Code Ann. § 29-5-313(b).
Mr. Herold filed an answer and counterclaim in this case on March 26, 2003 – fifty-five days
following his receipt of Mr. Cannon’s January 28, 2003 letter containing his arbitration decision.
In his counterclaim, he asserted that Mr. Cannon’s failure to hold a hearing before rendering his
decision substantially prejudiced his rights. This counterclaim suffices as an application to vacate
the arbitration award, and it was filed within the time limit imposed by Tenn. Code Ann. § 29-5-
313(b).
Mr. Herold’s assertion that he was deprived of a hearing tracks one of the grounds upon
which an arbitration award may be vacated. Tenn. Code Ann. § 29-5-313(a)(4) permits the courts
2
The provision regarding when the written decision must be rendered is ambiguous. W hile the clause requires
the decision to be rendered in fourteen days, it does not state when the fourteen day period begins to run.
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to vacate an arbitration award when the arbitrator has “conducted the hearing, contrary to the
provisions of § 29-5-306, as to prejudice substantially the rights of a party. . . .” In light of our
conclusion in Section II that the arbitration clause in the parties’ contract did not effectively waive
their right to a hearing conducted in accordance with Tenn. Code Ann. § 29-5-306, Mr. Herold has
grounds for vacating the arbitration award if his rights were substantially prejudiced.
We find that Mr. Herold’s right to an arbitration hearing was substantially prejudiced under
the facts of this case. After Mr. Herold pressed the issue of a hearing with Mr. Cannon, Mr. Cannon
responded (1) that he would conduct a hearing if Messrs. Herold and Searcy wanted one and (2) that
he would “suspend review of the material until you advise if there is anything you wish for me to
review as well.” Notwithstanding his representation that he would “suspend review of the material”
until he heard from Mr. Herold, Mr. Cannon proceeded to consider the material and make an award
before Mr. Herold communicated with him or before notifying Messrs. Herold and Searcy that he
was prepared to make an arbitration award based on the materials already submitted. Mr. Cannon’s
failure to provide the parties with timely notice of his intention to proceed calls into question the
fundamental fairness of the arbitration proceeding.
We take little satisfaction in granting relief to a party who chooses to draft his own
ambiguously worded contract and then does so little to further his own legal interests when a conflict
arises under that contract. Mr. Herold’s failure to respond both to Mr. Cannon’s request for
additional information and to the suggestion that he discuss the hearing with Mr. Searcy make it
difficult for us to view Mr. Herold as a victim of anything other than his own neglect. Furthermore,
Mr. Herold has provided this court with no indication as to what, if any, additional evidence or
testimony he might present in the hearing that he requests. Finally, the record contains no evidence
that Mr. Herold expressed any objection to the arbitration award prior to his answer to Mr. Searcy’s
petition for confirmation of the award.
Nevertheless, the law entitles Mr. Herold to be heard, to present evidence, and to cross-
examine witnesses, and Mr. Cannon’s decision to forego a hearing seems to be without any
reasonable basis. This court is not prepared to deny Mr. Herold’s legal right on the basis of
exasperation or prognostications regarding the probable outcome of such a hearing.
IV.
The orders granting Mr. Searcy’s motion to dismiss, motion for summary judgment, and
motion for attorney’s fees are vacated, and the case is remanded to the trial court with directions to
enter an order directing the parties to conduct another arbitration before a new arbitrator in
accordance with their contract as construed by this court. We tax the costs of this appeal in equal
proportions to Ron Searcy and to John Herold and his surety for which execution, if necessary, may
issue.
______________________________
WILLIAM C. KOCH, JR., P.J., M.S.
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