Jones v. Enoree Power Co.

August 12, 1912. The opinion of the Court was delivered by By a contract executed 27 February, 1900, W.H. Jones, the plaintiff, and others conveyed to A.B. Groce, his heirs and assigns, "the right and privilege to raise a dam on the Van Patton Shoals, now owned by the Westmoreland estate and S.H. Calvert, to such height as he may desire." The questions made by this appeal arise under the following stipulation of the contract: "It is further agreed that if the land of the parties above named become in any way injured or damaged by water from said raising of the dam on said Van Patton Shoals on Enoree River, the said A.B. Groce hereby binds himself, his heirs, executors and administrators and assigns to pay the amount of such damage to the said parties above named, their heirs, executors, administrators, and assigns. The amount of such damages shall be derived at and determined in the following manner, to wit: The said Abraham Cook, W.L. Hudson, P.B. Cooper, T.L. Bragg, R.T. Newman, Mrs. M.T. Newman, R.B. Newman, B.F. Newman, W.H. Jones, J. F. King, O.E. Godfrey, M.E. Jones, W.P. Fowler, their heirs, executors, administrators, or assigns are to select one arbitrator, and the said A.B. Groce, his heirs, executors, administrators, or assigns the other; and these two a third, and if these two cannot agree on a third, then such third arbitrator is to be selected by the clerk of Court, and if he will not then the probate judge, and if he will not select then the third arbitrator shall be selected by the sheriff, and if for any reason the arbitrators cannot be chosen or a majority of them cannot agree, then the amount of such damage is to be determined by action at law. The award of said arbitrators shall be final and conclusive."

The defendant, Enoree Power Company, acquired by assignment of the contract the rights of Groce. On July 19, 1907, the plaintiff served on the defendant a notice that he would contest the validity of the contract, and that even if the contract should be declared valid the plaintiff revoked the agreement to arbitrate. Afterwards the plaintiff, disregarding the agreement, brought this action for damages and injunction, alleging in his complaint "That about the 1st of the year 1908, the defendant, Enoree Power Company, erected a dam across Enoree River, at what is known as Van Patton Shoals, of considerable height just below plaintiff's land; thereby impeding the water in said stream and backing it up into the small stream running through plaintiff's land referred to in such manner as to impede its progress and flow and caused said land to be saturated and sobbed with water and become unfit for cultivation, to the plaintiff's great damage.

"That plaintiff is a farmer and is dependent on the products of his farm for a living; and the defendant, by its said unlawful act, has so impeded the water, as it was wont to flow above, over and along his said lands, as to cause mud, sand and debris, in case of even ordinary freshet, to be deposited in the bed of said stream and out upon the cultivated land, to his damage in the sum of five hundred dollars."

The defendant set up as a defense that the action could not be maintained until the plaintiff had submitted the amount of damage, if any, to arbitration. In reply the plaintiff alleged that the contract was without consideration, that it had been obtained by fraud, and that the agreement to arbitrate had been annulled by revocation.

The verdict of the jury was in favor of the defendant. The Circuit Judge instructed the jury: (1) that if the contract was obtained by fraud it was of no effect, the plaintiff should have a verdict for whatever damage he had proved; (2) that if the contract was not obtained by fraud, then the plaintiff was bound by its terms; that he could not revoke the agreement to arbitrate, and could not maintain his action until he had offered to submit to arbitration the amount of the damage. The issue of fraud is out of the case, having been settled by the jury against the plaintiff.

Before considering the real question involved, it may be well to remark that no question under our Constitution or statute law is involved, for the arbitration provided for in this contract is a common law arbitration falling entirely without the statute enacted by the General Assembly under the mandate of the Constitution. The Constitution provides:

"The General Assembly shall pass laws allowing differences to be decided by arbitrators, to be appointed by the parties who may choose that mode of adjustment," article VI, section 1.

Section 2896 of the Civil Code provides for arbitration agreements as required by the Constitution, but the statute contemplates arbitration of differences which have already arisen, and requires as a part of the contract "each party to enter into bond in double the amount involved to faithfully abide the result of the arbitration." Thus on its face the statute shows, without analysis, that it does not cover agreements contained in written contracts made before any difference has arisen to have any specific question of damage, loss, measurement, or the like arising under the contract settled by arbitration; and certainly it could not be contended for a moment that the statute or the Constitution expresses or implies any intention to take away the common law right to make such an agreement. The indisputable right to make such a common law agreement not falling under the statute was expressly recognized in Bishop v.Valley Falls Mfg. Co., 78 S.C. 312.

The exceptions raise two questions: First, was the agreement for arbitration binding on the plaintiff in the absence of fraud? Second, did the plaintiff have the right to revoke the agreement that the amount of damage should be ascertained by arbitration?

We shall not discuss in detail the numerous cases in which the validity of arbitration agreements under the common law and the right to revoke them have been considered. As to the validity of such contracts, the authorities, with entire unanimity, now lay down this rule. An agreement to submit to arbitration all questions of law and fact that may arise under a contract is contrary to the public policy and void, as an attempt to oust the Courts of their jurisdiction and establish in their place a contract tribunal. But an agreement that any particular issues of fact that may arise, such as quality of goods or amount of loss or damage, or the like, shall be submitted to arbitration, leaves the question of ultimate liability open for the decision of the Courts and is valid; and if the contract expressly or by necessary implication makes the ascertainment of such fact by arbitrators a condition precedent to a right of action, it is a good defense to a suit on the contract that the plaintiff has, without such good excuse, failed to arbitrate. Freedom to contract for arbitration to this extent imports no invasion of the province of the Courts, and there is no ground upon which a right so essential to the convenient transaction of modern business affairs can be denied.

It is true that the case of Percival ads. Herbemont, 1 McM. 69, decided in 1840, does lay down in very broad language the general rule that a suit may be brought in disregard of any sort of agreement to arbitrate, though it is important to observe that the Court also held in that case that the terms of the contract were too indefinite for enforcement. The case, however, is no longer authority in this State against the rule we have stated as to the validity of arbitration agreements, for in the case of Maxwell v.Thompson, 15 S.C. 612, decided in 1881, it was held that the agreements to arbitrate are not against public policy. In the still later case of Brooks v. Laurens Milling Co.,78 S.C. 200, 58 S.E. 806; 84 S.C. 299, 66 S.E. 294, the Court held an agreement like that in this case binding on the parties. Since the decisions in Hamilton v. Liverpool etc.Ins. Co., 136 U.S. 242, 34 L.Ed. 419, and Hamilton v.Home Ins. Co., 137 U.S. 370, 34 L.Ed. 704, we think no authority can be found which questions the following summary of the law made in the latter case:

"A provision in a contract for the payment of money upon a contingency, that the amount to be paid shall be submitted to arbitrators, whose award shall be final as to that amount, but, shall not determine the general question of liability, is undoubtedly valid. If the contract further provides that no action on it shall be maintained until after such an award, then, as was adjudged in Hamilton v. Liverpool L. G. Ins. Co., above cited, and in many other cases therein referred to, the award is a condition precedent to the right of action. But where no such condition is expressed in the contract, or necessarily to be implied from its terms, it is equally well settled that the agreement for submitting the amount to arbitration is collateral and independent; and that a breach of this agreement, while it will support a separate action, cannot be pleaded in bar to an action on the principal contract."

Numerous authorities following this rule are cited in 19 Cyc. 873; 2 Am. Eng. Enc. 573; 15 L.R.A. 142; 8 Am. Eng. Ann. Cases 170.

As to the question of revocation, the language just quoted clearly imports that a valid agreement to arbitrate, made by the parties a condition precedent to the right of action, is not revocable. The general rule undoubtedly is that a contract of arbitration entered into after the controversy hasarisen is revocable at will at any time before the award has been made, and many cases will be found holding that in general arbitration agreements are revocable even when entered into before any controversy has arisen, but we have found no authority holding an agreement to be revocable when made by the parties before any issue has come between them, that any issue of fact, that may in the future arise, as to a specific point, such as valuation, quality, damage, and the like, shall be determined by arbitration before suit shall be brought. If on any such matters the parties have agreed that arbitration shall be a condition precedent to the right of action, there is no principle of law which warrants the Courts in dispensing with the condition. The rules we have set out and the principles on which they rest were stated with such convincing clearness and force by Mr. Justice Lamar, now Associate Justice of the Supreme Court of the United States, in Parsons v. Ambos, (Ga.)48 S.E. 696, that we quote at length:

"Courts favor the submission of controversies to speedy and inexpensive tribunals of the parties own selection, and generally, in the absence of fraud or palpable mistake, will not interfere with their findings, even though a verdict of a jury, to the same effect might be set aside as contrary to law. But the underlying reason for the recognition of the award is found in the fact that the parties not only agreed to submit their differences, but voluntarily permitted the agreement to be executed, and consented for the award to be actually made by judges of their own selection. The mere executory agreement to submit is generally revocable, otherwise nothing would be easier than for the more astute party to oust the Courts of their jurisdiction. By first making the contract, and then declaring who should construe it, the strong could oppress the weak, and in effect so nullify the law as to secure the enforcement of contracts usurious, illegal, immoral, or contrary to public policy. Civil Code 1895, sec. 3668. A common law agreement, therefore, to submit the validity and effect of a contract, or to submit all matters in dispute, to arbitration, may be revoked by either party at any time before the award. For statutory awards, see Civil Code 1895, sec. 4486. Some of the early cases put this rule upon the ground that a provision whereby the Courts may be ousted of their jurisdiction is repugnant to that other provision, implied in every contract, that its validity and effect shall be determined by the Courts and the law of the land. But whether predicated on the idea that the agreement is repugnant to the contract or to public policy, the principle is universally recognized that such general submissions are revocable. But this does not mean that nothing can be submitted, nor that the parties may not stipulate that certain facts must be determined by those of their own choosing. For example, in building contracts it is manifest that there must be some one other than a Court or jury to pass on the question as to whether there has been a compliance with the specifications as the building proceeds, or to determine whether the work shall be accepted or rejected as completed. Hence there may be a lawful and irrevocable stipulation for the certificate of the architect or engineer. In contracts of insurance the assessment of the amount of damages may be made a condition precedent to a suit by the insured on the policy. So, too, in contracts of sale, the parties may stipulate for the opinion of an attorney as to the validity of the title, or that the value of the property shall be ascertained by appraisers before either has the right to sue. This fixing of value, however, is a mere incident, and not of the substance of the contract. It rather serves the office of evidence, than of a finding which construes the contract or determines rights. The jurisdiction of the Courts over these substantial matters may be retained by revocation, though the incidental stipulation for valuation is not revocable by the act of the parties, each of whom is bound to do all that is reasonably in his power to procure the appraisement, and must continue to act until he puts the opposite party in the wrong, or make it manifest that no suitable person can be obtained to do the service within a reasonable time. Hood v. Hartshorn, 100 Mass. 121, 1 Am. Rep. 89."

Applying these rules of law, the question here is whether it appears, from the contract, either expressly or by necessary implication, that as a condition precedent to an action on the contract the amount of damages first should be ascertained by arbitrators. The contract, after providing in detail for the arbitration on the amount of damages from back water, stipulates, "and if for any reasons the arbitrators cannot be chosen, then the amount of such damages is to be determined by action at law." This clearly means that the amount shall be determined by action only in the event the arbitrators cannot be chosen or cannot agree, thus necessarily implying that in the ascertainment of damages, suit could be resorted to only after arbitration had become impossible. For these reasons it seems to me that the contract to arbitrate the amount of damages was valid, that it made arbitration as to such damages a condition precedent to an action, and that it was not revocable. Hence, I think the judgment should be affirmed.

MR. JUSTICE HYDRICK concurs.

MR. JUSTICE FRASER concurs in the result.

MR. JUSTICE WATTS absent.