Frizzell Construction, Inc. v. Gatlinburg, LLC.

IN THE COURT OF APPEALS
AT KNOXVILLE
FILED
November 2, 1998
Cecil Crowson, Jr.
FRIZZELL CONSTRUCTION COMPANY, ) SEVIER CHANCERYourt Clerk
Appellate C
INC., ) C.A. NO. 03A01-9805-CH-00161
)
Plaintiff-Appellant )
)
)
)
)
)
vs. ) HON. TELFORD E. FOGERTY, JR.
) CHANCELLOR
)
)
)
)
)
GATLINBURG, L.L.C. ) AFFIRMED AND REMANDED
)
Defendant-Appellee )
C. PAUL HARRISON, Long, Ragsdale & Waters, P.C., Knoxville, for Appellant.
BERNARD E. BERNSTEIN & CELESTE H. HERBERT, Bernstein, Stair & McAdams, L.L.P.,
Knoxville, for Appellee.
OPINION
McMurray, J.
The facts of this case, as material to this appeal, are relatively simple. The parties entered
into a contract for the construction of a hotel in Gatlinburg, Tennessee. The contract was a standard
Associated General Contractors Construction Manager contract styled "Standard Form of Agreement
Between Owner and Construction Manager." The agreement contains two provisions that are
germane to the issues under consideration here.
ARTICLE 14
Assignment and Governing Law
14.1 ...
14.2 This Agreement shall be governed by the law of the place where the project
is located.
ARTICLE 16
Arbitration
16.1 All claims, disputes and other matters in questions arising out of, or relating
to, this Agreement or the breach thereof, except with respect to the Archit-
ect/Engineer's decision on matters relating to artistic effect, and except for claims
which have been waived by the making or acceptance of final payment 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.
We will first note that the "place where the project is located" is Gatlinburg, Tennessee,
therefore paragraph 14.2, Article 14, if effective, makes Tennessee law the governing law concerning
the contract. If this provision is ineffective, then, in any event, Tennessee law governs since the
contract was entered into here and the project is located here.
A dispute, relating to the contract, arose between the parties. The dispute gave rise to a
complaint in the Chancery Court for Sevier County by Frizzell for the purpose of enforcing a
mechanic's lien and for breach of contract. Frizzell, the appellant here, specifically charged in its
2
complaint, (styled "Complaint to Enforce Mechanic's Lien and for Breach of Contract") that the
defendant, Gatlinburg, L.L.C., appellee here, "breached the construction management contract by
failing to pay the amount owed under the construction contract." A judgment for damages over and
above the amount claimed to be subject to the mechanic's lien was also sought. Gatlinburg, L.L.C.,
filed its answer, a counterclaim and a third party action. Thereafter, Frizzell submitted a demand for
arbitration.1 In its answer Gatlinburg denied that it owed Frizzell as alleged in the complaint but on
the other hand, in its counterclaim, sought damages from Frizzell. Frizzell filed a motion to stay the
court proceedings pending arbitration based on the contract provision. Gatlinburg opposed the
motion and amended the counterclaim to allege that Frizzell fraudulently induced Gatlinburg to enter
into the contract. It is this claim that constitutes the basis of this appeal.
The court heard the motion to stay. The court noted in its order that the "issue presented to
the court is whether the arbitration proceeding should go forward or whether this court should take
jurisdiction of all or some issues as between Frizzell and Gatlinburg." The court chose to retain
jurisdiction to consider the legal issue of fraud in the inducement of the contract entered into by the
parties in the primary case and ordered the parties not to submit this issue to the arbitrators. The
court further determined that the arbitrators in the primary case should resolve the construction
disputes between those parties and render a decision to the court.
1
T h o u g h n o t r a i s e d a s a n i s s u e i n t h i s c a s e , i t i s n o t b e y o n d t h e r e a l m o f
r e a s o n t o f i n d t h a t t h i s a c t i o n c o n s t i t u t e s a w a i v e r o f a r b i t r a t i o n . S e e e . g . ,
W o r l d s o u r c e C o i l C o a t i n g , I n c . , e t a l v . M c G r a w C o n s t r u c t i o n C o m p a n y , I n c . , 9 4 6 F . 2 d
4 7 3 ( 6 t h C i r c u i t 1 9 9 1 ) .
3
This appeal resulted from this judgment of the trial court.2 The appellant presents the
following issues for our consideration:
I. Whether the trial court erred in failing to find that the contract between
Frizzell and Gatlinburg involved interstate commerce as defined under the
Federal Arbitration Act?
II. Whether the trial court erred in holding that even if the contract between
Frizzell and Gatlinburg involved interstate commerce that the Federal
Arbitration Act did not apply.
The issue of whether the arbitration provisions of a contract require that a claim for fraud in
the inducement of the contract be submitted to arbitration has been addressed and resolved in this
jurisdiction. See City of Blaine v. John Coleman Hayes & Assoc., 818 S.W.2d 33 (Tenn. App. 1991),
infra. The court resolved the issue against requiring the issue to be arbitrated. We, therefore, agree
with the result reached by the trial court.
The Uniform Arbitration Act was passed by our Legislature in 1983 and is now codified as
T.C.A. § 29-5-301 - § 29-5-320. The provisions of the act pertinent to the controversy before us are
T.C.A. § 29-5-302 which provides in pertinent part as follows:
29-5-302. Agreements to submit to arbitration - Jurisdiction. - (a) A written
agreement to submit any existing controversy to arbitration or 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; ...
2
I t a p p e a r s t h a t t h e j u d g m e n t o f t h e t r i a l c o u r t m a y n o t b e f i n a l s i n c e o t h e r
i s s u e s h a v e b e e n r e s e r v e d b y t h e t r i a l c o u r t f o r l a t e r d i s p o s i t i o n . H o w e v e r , w e , i n
o u r d i s c r e t i o n a n d i n a c c o r d a n c e w i t h R u l e 2 , T e n n e s s e e R u l e s o f A p p e l l a t e
P r o c e d u r e , w i l l e n t e r t a i n t h e a p p e a l f o r t h e p u r p o s e o f e x p e d i t i n g a d e c i s i o n o n
t h e i s s u e s b e f o r e u s .
4
City of Blaine v. John Coleman Hayes & Assoc., 818 S.W.2d 33 (Tenn. App. 1991), is a
veritable treatise on the subject of whether "fraud in the inducement" is subject to arbitration. In
Blain, Judge Crawford compared and contrasted the various resolutions of the issue in other
jurisdictions including the position advanced by the United States Supreme Court.
In Blain, Judge Crawford speaking for this court noted:
In 1983, when the Tennessee legislature passed the Uniform Arbitration Act,
they had full knowledge of the long established right of a person to seek rescission
of a contract procured by fraud. With this knowledge, we find it logical for the
legislature to intend to except actions for rescission from a decision by arbitrators and
giving the language of the statute its usual and ordinary meaning, the legislature did
just that. This legislative intent is exemplified by Justice Black in the Prima [Prima
Paint Corp. v. Flood and Conklin Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L. Ed. 2d
1270 (1967)] dissent. "Fraud, of course, is one of the most common grounds for
revoking a contract. If the contract was procured by fraud, then, unless the defrauded
party elects to affirm it, there is absolutely no contract, nothing to be arbitrated." 87
S.Ct. at 1810. It would be difficult to improve on this language.
Blaine, at page 38.
It is well-settled in Tennessee contract law that fraud in the inducement renders contracts
voidable at the instance of the party upon whom fraud was perpetrated. It is clear that an individual
induced by fraud to enter into a contract may elect between two remedies. He may treat the contract
as voidable and sue for the equitable remedy of rescission or he may treat the contract as existing and
sue for damages at law. Vance v. Schulder, 547 S.W.2d 927, 931 (Tenn. 1977); Derryberry v. Hill,
745 S.W.2d 287, 291 (Tenn. App. 1987); Graham v. First Am. Nat'l Bank, 594 S.W.2d 723, 726
(Tenn. App. 1979). Thus, when a party to a contract seeks rescission in a court of competent
jurisdiction and alleges facts, which if proved to the requisite degree, would justify rescission of a
contract, the very existence of the contract is in limbo until the issue is resolved. To require
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arbitration pursuant to the terms of a contract concerning the validity or very existence of the contract
is to presuppose the validity and existence of the contract at least for some purposes. We do not
understand this to be the law in Tennessee. It has been held that fraud vitiates every contract ab
initio. Samuel v. King, 158 Tenn. 546, 14 S.W.2d 963 (1929). Therefore, if there is no contract,
there is no arbitration clause.
As to the issues as framed by the appellant, unless and until it is established that there is a
contract in existence, a consideration of whether the contract is controlled by or subject to the
Federal Arbitration Act is premature. Whether the contract should be rescinded and voided is a
question that can be answered only after a trial on the merits. If it is rescinded, there is nothing to
arbitrate. On the other hand, if the contract is found to be valid and binding, the disputes between
the appellant and the appellee are subject to arbitration.
We affirm the judgment of the trial court in reserving the issue of fraud in the inducement
as a question to be determined by the court. Costs of this appeal are assessed to the appellant and
this cause is remanded to the trial court for such other and further action as may be necessary.
________________________________
Don T. McMurray, J.
CONCUR:
___________________________________
Houston M. Goddard, Presiding Judge
___________________________________
William H. Inman, Senior Judge
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IN THE COURT OF APPEALS
AT KNOXVILLE
FRIZZELL CONSTRUCTION COMPANY, ) SEVIER CHANCERY
INC., ) C.A. NO. 03A01-9805-CH-00161
)
Plaintiff-Appellant )
)
)
)
vs. ) HON. TELFORD E. FOGERTY, JR.
) CHANCELLOR
)
)
)
GATLINBURG, L.L.C. ) AFFIRMED AND REMANDED
)
Defendant-Appellee )
JUDGMENT
This appeal came on to be heard upon the record from the Chancery Court of Sevier County,
briefs and argument of counsel. Upon consideration thereof, this Court is of opinion that there was
no reversible error in the trial court.
We affirm the judgment of the trial court in reserving the issue of fraud in the inducement
as a question to be determined by the court. Costs of this appeal are assessed to the appellant and
this cause is remanded to the trial court for such other and further action as may be necessary.
PER CURIAM