P. R. Post Corp. v. Maryland Casualty Co.

68 Mich. App. 182 (1976) 242 N.W.2d 62

P.R. POST CORPORATION
v.
MARYLAND CASUALTY COMPANY

Docket Nos. 23495, 23496.

Michigan Court of Appeals.

Decided March 24, 1976.

Grant, Schon, Wise & Grant, for plaintiff.

Jenkins, Fortescue, Miller & Nystrom (by Chris Parfitt), for defendant.

Before: BRONSON, P.J., and R.B. BURNS and D.E. HOLBROOK, JR., JJ.

Leave to appeal applied for.

D.E. HOLBROOK, JR., J.

Plaintiff^[1] entered into a contract with McDe Construction in August, 1969, to construct a building which the plaintiff was to lease to the Federal government for use as a post office. Pursuant to the contract, on June 30, 1970, McDe secured a performance bond and a payment bond from the defendant in favor of the plaintiff. The contract also included a provision requiring all disputes between the plaintiff and McDe to be submitted to arbitration.

During late 1969 and early 1970 the City of Roseville stopped work on the project due to a dispute about the elevation of the building. In order to recover some of its additional costs, McDe filed a request for arbitration against the plaintiff pursuant to the contract. Subsequently, the plaintiff filed a counter request for arbitration to recover damages resulting from McDe's delays. After the arbitration hearing was completed, but before the arbitrator rendered his decision, the plaintiff notified the defendant that McDe was in default on the construction contract.^[2] The arbitrator's net award was confirmed by the Macomb County Circuit Court and affirmed by this Court.^[3]

The plaintiff instituted the present suit to recover the damages it suffered when McDe defaulted on the construction contract. The damages the plaintiff seeks to recover specifically include those found by the arbitrator to be due to the plaintiff from McDe. In response the defendant filed a motion to strike any reference to the arbitration proceedings in the plaintiff's complaint. The trial court denied the motion without prejudice, and the defendant filed its answer. Subsequently, the plaintiff filed a motion for summary judgment and the defendant renewed its motion to strike. Following a hearing the trial court granted defendant's motion to strike and denied plaintiff's motion for summary judgment. From this action by the trial court the plaintiff appeals by leave granted.

The resolution of this appeal turns on the amount of weight we determine that the arbitration award is entitled to. If the award is entitled to no weight, the motion to strike was properly granted since any references to the arbitration award in the plaintiff's pleading would be immaterial. GCR 1963, 115.2, accord, Stevens v Stevens, 266 Mich. 446, 450; 254 N.W. 162 (1934), Grist v The Upjohn Co, 1 Mich. App. 72, 86; 134 NW2d 358 (1965), see Forstmann Woolen Co v Murray Sices Corp, 10 FRD 367, 369 (SDNY, 1950). If, on the other hand, the arbitration award is entitled to at least some weight, the trial court improperly granted defendant's motion.

Conversely, the trial court improperly denied the plaintiff's motion for summary judgment if the arbitration award is admissible and either the defendant failed to plead a valid defense or it is determined that no genuine issue of material fact is in dispute. GCR 1963, 117.2(2), 117.2(3). The summary judgment motion was properly denied otherwise.

The parties initially differ on the significance of the fact that the dispute between the plaintiff and McDe was submitted to an arbitrator rather than to a court. We agree with the plaintiff that the award of the arbitrator is equivalent in this case to the judgment of a court. It has long been the policy of this state to encourage the settling of disputes through arbitration rather than through resort to the courts. Detroit v A W Kutsche & Co, 309 Mich. 700, 703; 16 NW2d 128 (1944), The Alpena Lumber Co v Fletcher, 48 Mich. 555, 569; 12 N.W. 849 (1882), Chippewa Valley Schools v Hill, 62 Mich. App. 116, 120; 233 NW2d 208 (1975).

In spite of this the defendant argues that the arbitration award is entitled to no weight because it never agreed to submit any of its claims or defenses to arbitration. MCLA 600.5001(1); MSA 27A.5001(1), Grosse Pointe Farms Police Officers Ass'n v Chairman of the Michigan Employment Relations Commission, 53 Mich. App. 173, 176; 218 NW2d 801 (1974), lv den 392 Mich. 783 (1974). However, both the performance and labor and material payment bonds state that the construction "contract is by reference made a part hereof". Since the bond was written on a form furnished by the defendant we strictly construe any provisions of the bond against the defendant. Stark v Kent Products, Inc, 62 Mich. App. 546, 548; 233 NW2d 143 (1975). We view this provision as the defendant's agreement to be bound by the arbitration clause in the contract between the plaintiff and McDe.

Having eliminated the defendant's secondary arguments in support of its motion to strike, we turn to the defendant's primary argument. The defendant claims that it should not be bound by the arbitration award against McDe because it had no notice of the arbitration hearing. However, in making this argument the defendant misconstrues the rule on what weight the arbitration award is entitled to. The rule only makes the award against McDe prima facie evidence against the defendant in the present suit. Sauer v Detroit Fidelity & Surety Co, 237 Mich. 697, 702; 213 N.W. 98; 51 A.L.R. 1485 (1927), Norris v Mersereau, 74 Mich. 687, 690; 42 N.W. 153 (1889), accord, Restatement Security, § 139(2), p 372. The rule is subject to qualification though, in that there can be no fraud or collusion between the plaintiff and McDe. Sauer v Detroit Fidelity & Surety Co, supra at 701. This procedure specifically reserves for the defendant the opportunity to present any special defenses that it might have as to its liability. Kent Probate Judge v American Employers Insurance Co, 283 Mich. 328, 334-335; 278 N.W. 85 (1938).

The defendant retains the right to prove that it should not be held liable for damages awarded by the arbitrator. The defendant remains free to prove that the damages awarded actually occurred prior to the issuance of the bonds in question. It can also show that certain items of damage included by the arbitrator in the award are not covered by the bonds and therefore the defendant has no liability on those items. Accord, Kent Probate Judge v American Employers Insurance Co, supra at 334.

Even so, the defendant argues that cases such as those cited in the preceding paragraphs do not reflect modern due process thinking. See, e.g., Lindsey v Normet, 405 U.S. 56, 66; 92 S. Ct. 862; 31 L. Ed. 2d 36 (1972), Gonzales v United States, 348 U.S. 407, 412; 75 S. Ct. 409; 99 L. Ed. 467 (1955), Mullane v Central Hanover Bank & Trust Co, 339 U.S. 306, 319; 70 S. Ct. 652; 94 L. Ed. 865 (1950). This argument would be very compelling if the arbitration award rendered against McDe was res judicata against the defendant. But since the arbitration award is only prima facie evidence against the defendant in the present action, we cannot say that the defendant was denied due process by not being notified of the arbitration hearings against McDe. All that happens by making such an award prima facie evidence is to shift the burden of proof to the defendant, which in a civil action does not violate due process. See Dick v New York Life Insurance Co, 359 U.S. 437; 79 S. Ct. 921; 3 L. Ed. 2d 935 (1959).

As a result, unless the defendant is able to prove that a fraud was perpetrated on it, the trial court improperly granted defendant's motion to strike the arbitration award from the plaintiff's pleadings. But for the defendant to successfully invoke the defense of fraud in this case it is necessary that it show that the plaintiff was a party to the fraud. Saginaw Medicine Co v Batey, 179 Mich. 651, 667-670; 146 N.W. 329 (1914). The plaintiff may be a party to the fraud without actually participating if there is a fiduciary relationship between it and the defendant or if the plaintiff possessed such knowledge that it reasonably believed that the defendant could not acquire by other means. Sullivan v Ulrich, 326 Mich. 218, 221; 40 NW2d 126 (1949), Michigan National Bank v Martson, 29 Mich. App. 99, 104; 185 NW2d 47 (1970). The duty imposed on the plaintiff though, absent a fiduciary relationship with the defendant, does not require the plaintiff to make an investigation or to take any unusual steps to see that the defendant is acquainted with facts that the plaintiff may logically assume are known by the defendant from other sources. Restatement Security, § 124, comment B, pp 328-329.

In this case, based on the record before this Court, we cannot say that the defendant has carried its burden of showing that the plaintiff participated in any fraud on it. While the information concerning the delays caused by the City of Roseville was unquestionably material, in our view a reasonable building owner would conclude that the contractor would inform the proposed surety of such problems. The plaintiff was not required to seek out the defendant and detail what it saw to be all the outstanding problems that it was having with McDe when McDe received the bonds.

Having determined that the trial court should have denied the defendant's motion to strike, we now turn to the question of whether the plaintiff's motion for summary judgment should have been granted. Although fraud may be a valid defense in a suit between a beneficiary and a surety, the defendant has failed to establish that the plaintiff had a duty to take any unusual steps to inform the defendant of any problems. GCR 1963, 117.2(3). The trial court should have granted the plaintiff's motion for summary judgment as to the issue of liability. GCR 1963, 117.4.

Reversed and remanded for proceedings consistent with this opinion. Costs to plaintiff.

NOTES

[1] P.R. Post Corporation is the successor in interest to Penner-Ring Co, a partnership. We shall refer to both organizations as the plaintiff.

[2] It is stipulated by the parties that the defendant did not have notice of the arbitration hearing.

[3] McDe Co, Inc v Penner-Ring Co (On Remand) (Docket No. 13788, decided September 28, 1973 [unreported]).