Arbitration Update in Missouri: 2002

by James R. Keller

This article appeared in St. Louis Daily Record, The Countian and St. Charles County Business Record, November 27, 2002.

2002 marks another year of significant appellate decisions involving arbitration from Missouri's state courts and the Eighth Circuit Court of Appeals. The issues are becoming more complex as arbitration continues to mature as a serious alternative to traditional litigation.

This article highlights and discusses briefly several of these cases, referencing occasionally a couple of cases from 2001 to put the most recent case into proper context or to provide depth to a growing trend.

I. Missouri Appellate Court Cases

A. The Agreement to Arbitrate

No where has arbitration been under more attack recently than by parties who assert that they did not execute an agreement to arbitrate and thus they cannot be forced against their will into this forum for dispute resolution when they prefer traditional litigation. Construction projects, in particular, seem to involve this issue since there are so many parties necessary to begin and complete the job and thus there are many layers of agreements. This leads to the practice of referring to other contracts, both to save time in repeating obligations and to make certain that multiple parties have the same obligations.

When a contract refers to another contract, and the referenced contract contains an arbitration provision, it is quite possible that the parties have agreed to binding arbitration even though it was not specifically discussed in the body of the main contract between the two parties.

In Dunn Industrial Group, Inc. v. City of Sugar Creek and Lafarge Corp., 2002 WL 31548615 (Mo. App. W.D. 2002), decided November 19, the Western District concluded that a mere reference to another contract that contained a binding agreement to arbitrate was not enough, however, especially since the party resisting arbitration had been consistently resolute in its opposition throughout the process of litigation and arbitration. Instead, there must be a specific incorporation by reference to the contract in question.

B. Jurisdiction

1. Typically, after someone files a petition, if there is a written agreement to arbitration, the defendant moves the court to stay the lawsuit and requests an order compelling arbitration. Before a court can grant a motion to compel arbitration, the court must first decide whether the agreement containing the arbitration provision is valid and legally binding. Estate of Burford by Pam Bruse v. Edward D. Jones & Co., 83 S.W.3d. 589 (Mo. App. W.D. 2002), decided June 11. Only then does the arbitrator have jurisdiction.

In Edward D. Jones, the court determined that co-conservators did not have authority to enter into an account agreement on behalf of the estate without prior court approval and therefore the agreement was void. The language of the arbitration clause was "wholly irrelevant" if the party never entered into the contract as a whole or agreed to be bound by an arbitration.

The court rejected the argument that the validity of the account agreement was an issue to be decided by the arbitration tribunal and not the court. "Missouri courts have held that under either the Missouri Arbitration Act or the Federal Arbitration Act 'before a court may grant a party's motion to compel arbitration, it must decide whether the agreement containing the arbitration is valid and legally binding." Id.

2. In Estate of James Athon and Joe Athon v. Conseco Finance Servicing Corp. and Ronsee, 2002 Mo. App. LEXIS 1716, decided August 20, 2002, the Western District reversed a trial court's order denying a motion to compel arbitration. The estate had sued Conseco alleging that it wrongfully trespassed onto the estate's property and repossessed a mobile home.

The appellate court found that the claims in dispute, including those in tort, were subject to an arbitration agreement. The agreement had provided in part: "All disputes, claims or controversies arising from or relating to this Contract or the parties thereto shall be resolved by binding arbitration by one arbitrator selected by you with my consent."

The court stated that the Federal Arbitration Act (FAA), 9 U.S.C. 2 (1999), applied to the case because the contract between the parties involved interstate commerce. Further, the claims of respondeat superior, conversion, trespass, interference with expectancy of inheritance and unlawful repossession of personal property all involved issues whose resolution "requires reference to or construction of some part of the Contract." For arbitration not to apply, the tort claim had to be independent of the contract terms and not require reference to the underlying contract.

C. Punitive Damages

1. For years, Missouri litigators considered arbitration to be an unlikely forum for the award of punitive damages, at least until the decision inGroceman v. Pulte Homes Corp., 53 S.W.2d 599 (Mo. App. W.D. 2001), decided in August of 2001. The Western District upheld an arbitrator's award of punitive damages, despite facts that many would argue did not seem to support such a result.

The case involved a contract dispute (with fraud allegations) over the construction of a house, alleged to have several structural defects, including roof deflection, inadequate rafters, and ceiling cracks. On its face, this case hardly seemed to be the kind that would muster any serious concern that punitive damages were a realistic possibility, especially since it was in arbitration. The arbitrator-appointed by the court-awarded $50,000 in actual damages and another $50,000 in punitive damages against the contractor.

Probably few arbitrators will consider Pulte Homes to be a catalyst to start awarding punitive damages. Its importance is that if punitive damages are appropriate, the arbitrator now has court support for his or her decision and absent a showing that the arbitrator "manifestly disregarded the law," the courts will uphold the decision

2. Now there is the decision in Hoskins v. Business Men's Assurance, 79 S.W.3d 901 (Mo. 2002) decided July 23. The Supreme Court of Missouri upheld the constitutionality of Sec. 537.675 R.S.Mo (2000), dealing with the state's lien of 50 percent on any final judgment for punitive damages. While the case did not involve arbitration, it is noteworthy because the statute in question includes this provision: "Cases resolved by arbitration, mediation or compromise settlement prior to a punitive damage final judgment are exempt from the provisions of this section."

This, coupled with the decision in Pulte Homes, may convince many, who previously shied away from arbitration because of a perception that punitive damages would not be awarded by an arbitrator or affirmed by a court, to reconsider the merits of arbitration.

D. Waiver of Arbitration

Recently, the Western District decided, in a case of first impression, that there was a waiver of the right to arbitrate when the plaintiff filed in a court of law a petition for injunctive relief seeking replevin and then engaged in significant trial-oriented activity. The case is Getz v. Recycling, Inc., 71 S.W.3d 224 (Mo. App. W.D. 2002), decided March 26. Since waiver cases are fact intensive, the following facts are necessary to understand the court's decision.

Plaintiff, a recycling company, had leased, pursuant to a written contract, a piece of equipment to business owners who owned a rock crushing business. The business owners complained that the equipment was useless for its intended use and thus they only paid rent for one month. Getz sued in equity for replevin and an injunction, and sought

declaratory relief and damages for breach of contract. Getz also sought a temporary restraining order (TRO) after the business owners refused to return or surrender the piece of equipment. The business owners countersued.

The court set a hearing on the TRO and entered a show-cause order on why the court should not order an injunction and replevin. The parties resolved this dispute by agreeing to the return of the equipment and the posting of a replevin bond of $45,000 pending resolution of the underlying lawsuit. Counsel also discussed the arbitration agreement and they decided that rather than enforcing its terms, they would stipulate to the return of the equipment and the bond.

A month later, plaintiff filed an application to stay the court proceedings and to move the dispute to arbitration pursuant to the arbitration agreement. Defendants did not timely respond to the motion, so the court treated it as being unopposed and granted the request.

The court transferred the case to a new judge who granted defendants' motion to set aside the earlier order. This judge scheduled the case for trial and Getz appealed.

The appellate court concluded that the arbitration agreement covered the claim and counterclaim, including defendants' allegations of negligent misrepresentation and misrepresentation. The agreement had provided: "In the event of any dispute as to the terms and/or conditions as set forth in the agreement, arbitration is to be conducted under the rules of the American Arbitration Association in Phoenix, Arizona at a time and location to be specified by GETZ RECYCLE, INC. or its authorized representative."

To find waiver, the court noted, requires a finding of prejudice and the burden of showing prejudice is on the party seeking waiver. The problem is whether a party whose arbitration agreement is silent on injunctive relief can seek a TRO in a court and then arbitrate the substance of the claim.

The court found that a four-month delay between filing the lawsuit and the application to stay the proceeding pending arbitration was not substantial, citing as support McIntosh v. Tenet Health Sys. Hosps., Inc./Lutheran Med. Ctr., 48 S.W.3d 85, 89 (Mo. App. E.D. 2001). In McIntosh, there was no waiver where the period of time before seeking arbitration was less than a year after filing the lawsuit and the substantial discovery already conducted could be used in the arbitration.

Other events, however, more clearly pointed to waiver, according to the court. First, there was the TRO activity, and then Getz's counsel led defendants to believe that it would not invoke the arbitration clause. While the court noted that "bad faith" is not an element to a finding of prejudice, this conduct may have influenced the outcome.

The court thus concluded that Getz's actions deprived the defendants of the main goals of arbitration, namely "speedy and low-cost dispute resolution." Id. at 231. The court further found that plaintiff "misused the court process." Id.

Given the substantial amount of trial activity, there was prejudice and given that the arbitration agreement did not allow for injunctive relief, the appellate court decided there was a waiver of plaintiff's right to arbitrate.

II. Eighth Circuit Cases

A. The Agreement to Arbitrate

Recently, some litigants have been attacking arbitration agreements by arguing that they do not allow an arbitrator to award all relief that could be available in a court of law, and thus the agreement is not enforceable. "Whether the Agreement validly limits the arbitrator's remedies for an AFPA violation does not affect the validity of the agreement to arbitrate. Rather, issues of remedy go to the merits of the dispute and are for the arbitrator to resolve in the first instance." Arkcon Digital Corp. v. Xerox Corp., 289 F.3d 536, 539 (8th Cir. 2002).

This decision reaffirms that the courts have been resolving doubts about arbitration in favor of arbitration, even when the agreement may attempt to limit statutory rights to certain claims. Id. at 538. The federal courts continue to voice confidence in arbitrator decisions and to offer solid recognition for the authority of arbitrators to adjudicate disputes.

B. Enforcing Arbitrator Awards

Parties who disregard arbitrator awards may want to reconsider their thinking. The Eighth Circuit has made clear that arbitrator awards and orders, once confirmed by the District Court, are not subject to trifling or disregard without incurring a substantial consequence, including contempt of court. The case isInternational Brotherhood of Electrical Workers, Local Union No. 545 v. Hope Electrical Corp., 293 F.3d 409 (8th Cir. 2002), decided June 7.

A corporation had failed to comply with two arbitration awards. The union asked the District Court to enforce the awards, which it did, and when the corporation did not comply with the court's orders, the union sought an order of contempt. Considerable procedural maneuvering and additional motion activity followed.

In the end the Eighth Circuit upheld the district court's contempt order using an abuse of discretion standard for review. "As a general matter, when a litigant refuses to respect the authority of the court, it is not an abuse of discretion for the court to hold the litigant in contempt and impose a sanction to coerce compliance." Id. at 418.

James R. Keller is a partner at HERZOG, CREBS & McGHEE, LLP, St. Louis, Missouri, where he concentrates on business litigation, construction law and ADR. He also is a neutral/arbitrator with the American Arbitration Association and a court-certified mediator in federal court and on the list of approved mediators in state court.

* This Article originally appeared in The Countian on November 27, 2002.