Shepler Construction v. Gary And Susan Leonard

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IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION ONE
SHEPLER CONSTRUCTION, INC.,
No. 68227-0-1
Respondent,
ORDER GRANTING
MOTION TO PUBLISH
GARY LEONARD and SUSAN KIRALY-
LEONARD, and the marital community
thereof, o
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J>-
Appellants H2
PHH MORTGAGE SERVICES I
CORPORATION, a New Jersey >-tJrvi
corporation,
Defendant. — o-
o
Gary Leonard and Susan Kiraly-Leonard, appellants, filed a motion to publish in
part. Associated General Contractors of Washington and Paul R. Cressman Jr., who
are nonparties, filed a motion to publish. We called for an answer and Shepler
Construction Inc., respondent, filed a motion to extend time to file its answer. We grant
that motion, and accept Shepler's answer. A panel of the court having reconsidered its
prior determination not to publish the opinion, and finding that it is of precedential value
and should be published; now, therefore it is hereby
ORDERED that the written opinion filed June 3, 2013, shall be published and
printed in the Washington Appellate Reports.
DATED this ^
' - Km,
day of. ,2013.
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
SHEPLER CONSTRUCTION, INC.,
No. 68227-0-1
Respondent,
DIVISION ONE
v.
PUBLISHED OPINION
GARY LEONARD and SUSAN KIRALY-
LEONARD, and the marital community
thereof,
Appellants
PHH MORTGAGE SERVICES
CORPORATION, a New Jersey
corporation,
Defendant. FILED: June 3, 2013
Appelwick, J. — Shepler and the Leonards appear before this court on their third
appeal in this case. In 2006, this court reversed a summary judgment order dismissing
the Leonards' construction defect counterclaims. In 2009, we held that both parties
waived arbitration, affirming the trial court's denial of the Leonards' motion to compel
arbitration. We noted that the parties did not waive their underlying claims.
r^J^evgtheless, the trial court on remand barred the Leonards from asserting any
SgouoJerclaim
•<__ that should have been submitted to arbitration under the contract's dispute
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--cr^fesdjEition provision. We reverse.
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No. 68227-0-1/2
FACTS
In 2000, Gary Leonard and Susan Kiraly-Leonard contracted with Shepler
Construction, Inc., to build a custom home on San Juan Island.1 The fixed price
contract contained a dispute resolution mechanism and a provision for Shepler to
remedy nonconforming work before final payment. Shepler made an express warranty
that work would be "substantially completed in a workmanlike manner." The contract
did not contain any disclaimer of implied warranties or any provision limiting remedies.
In 2001, a dispute arose regarding Shepler's performance and the Leonards'
payment. Shepler sent letters to the Leonards recommending that they initiate the
dispute resolution process. The Leonards admit that they did not respond to the
requests for dispute resolution of their claims.
After filing a mechanic's lien against the Leonards' property, Shepler filed suit to
enforce the lien and obtain damages for breach of contract. The Leonards filed
affirmative defenses and counterclaims, including a construction defect claim alleging
that Shepler breached the contract by failing to complete construction in a workmanlike
manner. The trial court granted Shepler's motion for summary judgment on the
Leonards' construction defect counterclaim. After holding a trial on enforcement of the
mechanic's lien, the court entered judgment and awarded attorney fees in Shepler's
favor. The Leonards appealed the dismissal of their counterclaims on summary
judgment. Leonard v. Shepler Constr., Inc., noted at 132 Wash. App. 1054, 2006 WL
1 The underlying facts of this case are detailed at length in this court's two
previous opinions. Shepler Constr., Inc. v. Leonard, noted at 153 Wn. App 1035, 2009
WL 5153672, at *1-2; Leonard v. Shepler Constr., Inc., noted at 132 Wash. App. 1054,
2006 WL 1217216, at *1-2. We repeat only those facts necessary to this opinion.
No. 68227-0-1/3
1217216, at *2. In 2006, we reversed and remanded for trial, holding that a genuine
issue of material fact existed as to whether Shepler breached its contractual obligation
to perform in a workmanlike manner. IcL at *3.
In 2008, Shepler again filed for summary judgment, arguing that the Leonards'
counterclaims should be dismissed, because they breached the contract by failing to
seek arbitration. The trial court initially denied the motion. Upon Shepler's motion for
reconsideration, the trial court granted summary judgment on March 31, 2008. The
court ordered:
The Leonards are barred from bringing any claim before this court
that should have been determined by submittal to binding arbitration under
the contract[']s dispute resolution provision. All causes of actions or
counterclaims relating to Shepler Construction's performance under the
parties agreement, and specifically those asserting that Shepler
Construction's work was not performed in accordance with the contract
between the parties, applicable building codes, and in good and
workmanlike manner, are therefore dismissed.
The Leonards did not directly appeal the grant of summary judgment.
On April 11, 2008, the Leonards filed a motion for reconsideration of the
summary judgment order or, alternatively, to compel arbitration. The court denied the
motion for reconsideration, finding that it was not timely. But, the court determined that
the Leonards' right to bring a timely motion to compel arbitration at a later date was
preserved. On May 21, 2008, the Leonards filed a motion to compel arbitration, which
the court denied. The Leonards appealed from that denial. Shepler Constr., Inc. v.
Leonard, noted at 153 Wn. App 1035, 2009 WL 5153672.
On appeal before this court, Shepler argued that the Leonards waived arbitration
and were therefore estopped from invoking it. JcL at *2. We held that both parties
No. 68227-0-1/4
waived arbitration, jd. at *3. Neither party initiated notice of arbitration as provided by
chapter 7.04A RCW. ]d Neither party asserted a right to arbitration in their answers to
the pleadings of the other party. IdL Both parties conducted discovery and engaged in
substantial litigation, including the prior appeal of the counterclaims, id. Seven years
passed and substantial case development occurred before the Leonards asserted the
right to arbitrate, jd Therefore, the trial court did not err in denying their motion to
compel arbitration. Id.
The Leonards argued in the same appeal that the trial court erred in dismissing
their counterclaims on summary judgment. kL They did not directly appeal the March
summary judgment order, but asked that we consider it under RAP 2.4(b). jd. We
declined to do so. jd. But, we added in footnote one that "[t]he arbitration clause did
not provide that it was the exclusive remedy for breach. As noted above, the parties
waived the arbitration clause by litigating, not the underlying claims." ]d. at *3 n.1.
The case was tried a second time on August 8-10, 2011. Citing footnote one of
our 2009 opinion, the Leonards requested that evidence of construction defects be
admitted at least for a recoupment or offset defense, or more broadly for the purpose of
their underlying counterclaims, jd. The court recognized, "I want to make sure that I
follow The Court of Appeal's mandate, and I'm having a difficult time considering that
the footnote is a mandate." But, the court continued, "I believe that the mandate here is
exactly as [Shepler's counsel] has indicated and that is to determine... the amount
owed under the charge orders ... but it's not to consider construction defects, and I will
so rule."
No. 68227-0-1/5
Affirming the March 2008 summary judgment order, the trial court barred the
Leonards' counterclaims for construction defects. In a November 9, 2011, decision
letter, the court reiterated that the "Leonards' refusal to comply with the dispute
resolution procedure set forth in the contract waived any claim of construction defect."
(citing Absher Constr. co. v. Kent Sch. Dist. No. 415, 77 Wash. App. 137, 890 P.2d 1071
(1995)). The trial was limited to Shepler's claims for compensation and foreclosure, and
the Leonards' counterclaims for incomplete work or offsets. The court entered judgment
and awarded attorney fees and costs in Shepler's favor.
The Leonards appeal and argue that the trial court erred in dismissing their
construction defect counterclaims.
DISCUSSION
We review summary judgment orders de novo. Hadley v. Maxwell, 144 Wash. 2d
306, 310-11, 27 P.3d 600 (2001). Summary judgment is proper only when there are no
genuine issues of material fact and the moving party is entitled to judgment as a matter
of law. CR 56(c); Peterson v. Groves, 111 Wash. App. 306, 310, 44 P.3d 894 (2002).
The legal effect of a contract is a question of law reviewed de novo. Litho Color, Inc. v.
Pac. Emp'rs Ins. Co., 98 Wash. App. 286, 295, 991 P.2d 638 (1999).
I. Summary Judgment Dismissal of the Leonards' Counterclaims
We unambiguously held in 2009 that both Shepler and the Leonards waived
arbitration by litigating. Shepler. 2009 WL 5153672, at *3. In the same opinion, we
noted that "[t]he arbitration clause did not provide that it was the exclusive remedy for
breach. As noted above, the parties waived the arbitration clause by litigating, not the
underlying claims." ]d at *3 n.1. The trial court was persuaded that the Leonards'
No. 68227-0-1/6
breach of the agreement by failing to seek arbitration required dismissal of all their
claims that should have been arbitrated, and was not affected by our determination that
Sheplerwaived arbitration.2 This was error.
The agreement between the Leonards and Shepler stated:
If a dispute arises between owner and contractor as to the
performance of contractor's obligations under this agreement, such
disputes shall be resolved as follows:
Each party shall employ a contractor of his or her choice to
evaluate the work completed. The contractors then will select a third
contractor to act as an impartial arbiter. This contractor shall, likewise,
inspect the construction to determine if the work has been performed in
accordance with this agreement, applicable building codes and in a good
workmanlike manner as provided hereinabove. If two of the three
contractors determine that the work is not in conformity with the provisions
of this agreement, then they shall state in writing the work in need of repair
or replacement and contractor shall undertake to perform same as soon
as reasonably practical. Contractor shall be responsible for owner's fees
and costs associated with this arbitration as well as the impartial
contractor's fees and costs. If no remedial work is recommended by the
contractors, then the owner shall pay for the costs of the arbitration. The
owner shall forthwith pay the amounts due to the contractor as established
by a majority of the arbiters.
The Leonards assert that, because the dispute resolution provision does not use the
words "exclusive," "sole," or "only," it is not the only remedy for their counterclaims.
Shepler contends that use of the word "shall" throughout the provision means it is
mandatory and therefore the exclusive remedy for the Leonards' counterclaims. Failure
2 The Leonards never directly appealed the March 2008 summary judgment
order. Shepler. 2009 WL 5153672, at *2. Nor did they file a written motion to
reconsider or vacate after our 2009 decision. However, both parties agreed at oral
argument that we have discretion to review the summary judgment order, because it did
not become final until the second trial in August 2011. RAP 2.4(a); Franz v. Lance. 119
Wash. 2d 780, 781, 836 P.2d 832 (1992).
No. 68227-0-1/7
to arbitrate, Shepler argues, barred suit on the Leonards' claims and was not subject to
waiver by Shepler.
Most contract terms will be viewed as mandatory in the sense that the parties
agreed that they will be bound by them and expect that they will be enforced by the
court. However, this does not mean that contract terms cannot be waived or modified.
It is also well established that parties may contract for an exclusive remedy that limits
their rights, duties, and obligations. Graoch Assocs. #5 Ltd. P'ship. v. Titan Constr.
Corp.. 126 Wash. App. 856, 865, 109 P.3d 830 (2005). But, the contract must clearly
indicate the parties' intent to make the stipulated remedy exclusive, jd at 865-66
(holding that one year warranty was not an exclusive remedy for defective construction
where the contract did not so state); see also Torgerson v. One Lincoln Tower. LLC.
166 Wash. 2d 510, 522, 210 P.3d 318 (2009) ("[P]rovisions limiting remedies in a
consumer transaction must be explicitly negotiated between buyer and seller and be set
forth with particularity.").
Shepler relies on Absher and Mike M. Johnson. Inc. v. Spokane County, 150
Wash. 2d 375, 78 P.3d 161 (2003). This reliance is misplaced. Absher and Mike M.
Johnson are distinguishable from the contract at issue here, because the contracts in
those cases explicitly provided that failure to follow dispute resolution procedures
constituted a waiver of those claims. Mike M. Johnson. 150 Wash. 2d at 380; Absher. 77
Wash. App. at 139-40. In Absher. Kent School District awarded Absher a contract to build
an elementary school. 77 Wash. App. at 139. Absher was required to give the district
written notice of any claims within 14 days after the events giving rise to claims, enter
into structured dispute resolution procedures, and mediate remaining disputes before
No. 68227-0-1/8
any lawsuit could be commenced. Id The contract specified that failure to provide
written notice constituted an absolute waiver of any claims arising from or caused by
delay. Jd at 140. As a result, the court held that Absher waived its claims by failing to
follow the dispute resolution procedures, jd at 146.
Similarly, in Mike M. Johnson, the county awarded Mike M. Johnson Inc. (MMJ)
bids to construct two sewer projects. 150 Wash. 2d at 378. The two contracts required
that MMJ give signed, written notice of protest of work, jd at 379. The contracts stated
that MMJ completely waived any claims for protested work by failing to follow this
procedure, jd at 380. If protest procedures failed to provide a satisfactory resolution,
another provision required a mandatory formal claim procedure, jd MMJ's failure to
submit required information supporting its claims constituted a waiver of those claims.
Id. The contract required full compliance with the claim procedures as "a contractual
condition precedent to the Contractor's right to seek judicial relief." ]d When disputes
arose, MMJ failed to follow both the protest and formal claim procedures before filing a
complaint for additional compensation. Id at 384. As a result, the Supreme Court
affirmed that trial court's dismissal of MMJ's claims. ]d at 384, 393. In contrast, the
contract here does not state that Leonards' failure to follow the dispute resolution
procedures expressly waives their right to pursue those claims in court.
Even mandatory remedies are subject to waiver. See Mike M. Johnson. 150
Wash. 2d at 389 (a party to a contract may waive a contract provision meant for its
benefit). In Otis Housing, the Washington Supreme Court held that the defendants
waived a mandatory arbitration clause when they failed to raise it as a defense in an
unlawful detainer action, but subsequently attempted to invoke it in a later action. Otis
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No. 68227-0-1/9
Housing Ass'n. Inc. v. Ha. 165 Wash. 2d 582, 589, 201 P.3d 309 (2009). The arbitration
clause read:
In the event that a dispute should arise under this agreement, as a
condition precedent to suit, the dispute shall be submitted to arbitration in
the following manner: The party seeking arbitration shall submit to the
other party a statement of the issue(s) to be arbitrated and shall designate
such party's nominated arbitrator.
Otis Housing Ass'n. Inc. v. Ha. noted at 138 Wash. App. 1058, 2007 WL 1567675, at *1.
This clause explicitly makes arbitration a condition precedent to suit. But, the contract
nowhere precluded waiver or required waiver by the other party to be in writing. Though
the facts differ, Otis Housing stands for the proposition that even where arbitration is a
precondition to suit, arbitration may be waived by the conduct of the parties, absent
language to the contrary. See 165 Wash. 2d at 587; see also Detweiler v. J.C. Penney
Cas. Ins. Co.. 110 Wash. 2d 99, 101, 111-12, 751 P.2d 282 (1988) (holding that insurer
waived uninsured motorist endorsement requiring arbitration of liability and damages
where it never demanded arbitration during four years of litigation). Moreover, Otis
Housing recognized waiver of contract language even more restrictive than the
language in the contract before us.
Absher and Mike M. Johnson are further distinguishable, because Kent School
District and Spokane County never waived the contractors' compliance with the dispute
resolution procedures. Mike M. Johnson. 150 Wash. 2d at 391-92; Absher. 77 Wash. App. at
139-40. In Absher. the contract required any waiver of the claim procedures to be in
writing. 77 Wash. App. at 139-40. Kent School District never signed a written waiver or
evidenced any intent to waive the contract's mandatory claim procedures. ]d at 144.
No requirement of written waiver appears in the contract at issue here. Likewise,
No. 68227-0-1/10
Spokane County never showed any intent to waive MMJ's compliance with the
contractual claim procedures, so the Supreme Court found no question of material fact.
Mike M. Johnson. 150 Wash. 2d at 391-92. Because the school district and the county did
not waive arbitration, they could use it as a defense to preclude Absher and MMJ's
claims that should have been arbitrated.
In contrast, we have already plainly held as a matter of law that both parties here
waived arbitration. Shepler. 2009 WL 5153672, at *3. As we explained then,
Washington courts have long held that the contractual right to arbitration may be waived
through a party's conduct if the right is not timely invoked. See, e.g.. Ives v. Ramsden.
142 Wash. App. 369, 382-84, 174 P.3d 1231 (2008); Hailing v. Barton. 101 Wash. App. 954,
962, 6 P.3d 91 (2000). The right to arbitrate is waived by conduct inconsistent with any
other intention but to forego a known right. Verbeek Props.. LLC v. GreenCo Envtl..
Inc.. 159 Wash. App. 82, 87, 246 P.3d 205 (2010). Simply put, a party waives a right to
arbitrate if it elects to litigate instead of arbitrate. Otis Housing. 165 Wash. 2d at 588. The
Leonards filed their counterclaims in 2002. Shepler did not assert arbitration as a
defense or move to dismiss the Leonards' arbitrable claims on that basis until 2008.
Both parties waived the dispute resolution clause by conduct. Our decision became the
law of the case, "effective and binding on the parties to the review and governing] all
subsequent proceedings in the action in any court." RAP 12.2; see also State v.
Strauss. 119 Wash. 2d 401, 412-13, 832 P.2d 78 (1992).
The trial court erred in dismissing the Leonards' counterclaims. Because we are
reinstating the Leonards' counterclaims, we need not reach their alternative estoppel,
laches, and affirmative defense arguments.
10
No. 68227-0-1/11
II. Jury Demand and Transfer to a New Judge
The Leonards made a jury demand based on their counterclaim for damages, but
the trial court struck the demand after dismissing their counterclaims. The Leonards
request that we mandate a jury trial on remand, or at a minimum, mandate that the trial
court revisit their jury demand. The Leonards also ask that we grant a new trial on all
issues.
The parties dispute whether the action is primarily legal or equitable in nature,
with Shepler's lien foreclosure claim being equitable and the Leonards' construction
defect counterclaims being legal in nature. Where an action is neither purely legal nor
purely equitable in nature, the trial court must determine whether it is primarily legal or
equitable in nature. Auburn Mech.. Inc. v. Lvdig Constr.. Inc.. 89 Wash. App. 893, 898,
951 P.2d 311 (1998). In making this determination, the trial court has considerable
discretion and should consider the seven factors described in Brown v. Safeway Stores.
Inc.. 94 Wash. 2d 359, 368, 617 P.2d 704 (1980). Any doubt should be resolved in favor of
a jury trial, in deference to the constitutional nature of the right. Auburn Mech.. 89 Wn.
App. at 898. On remand, the trail court should revisit the Leonards' jury demand to
determine whether a jury trial is warranted based on the primary relief requested.
The Leonards also request that we transfer the case to a different judge on
remand. They contend that the judge has already expressed erroneous views in the
case. The cited statements do not compel us to replace the trial judge. We decline to
do so.
11
No. 68227-0-1/12
III. Attorney Fees
The contract has a prevailing party fee provision. The Leonards are the
prevailing party in this appeal. We vacate the trial court's award of fees and costs to
Shepler, pending the new trial. Any fees awardable to the Leonards for this appeal shall
be determined if they are the ultimate prevailing party following trial.
We reverse and remand for further proceedings.
WE CONCUR:
^~/£/
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