Charles J. Frank, Inc. v. Associated Jewish Charities of Baltimore, Inc.

Davidson, J., delivered the opinion of the Court. In 1976, the appellant, Charles J. Frank, Inc. (contractor), and the appellee, Associated Jewish Charities of Baltimore, Inc. (owner), entered into a contract for the construction of a Jewish community center (project). The construction contract contained an arbitration clause providing, among other things, that "[a]ll claims, disputes and other matters in question arising out of, or relating to, [the] Contract ... shall be decided by arbitration in accordance with the ... Rules of the American Arbitration Association. . . .” The contractor subcontracted the required earthwork to Consolidated Excavators, Inc. (subcontractor).

The subcontract incorporated an arbitration clause identical to that contained in the construction contract. A dispute arose between the subcontractor and the contractor as to whether the subcontractor’s removal of earth from the project’s football field was extra work entitling it to additional compensation. In the Circuit Court for Baltimore County, the subcontractor sued the contractor for $10,172.00 (Baltimore County case). The contractor pleaded to the merits and filed a third party claim against the owner alleging that the owner was liable to the contractor for any judgment the subcontractor might recover, as well as for an amount representing the contractor’s profit on that portion of the subcontractor’s work.

The owner filed various pleadings to the third party claim, including a demurrer and an answer. Although the ⁴⁴⁶ dispute was arbitrable, no party sought arbitration. Ultimately, the subcontractor, contractor, and owner settled, and on 28 January 1980, a consent judgment was entered. Subsequently, the contractor demanded the balance of $139,579.11 due under the construction contract.

The owner refused to pay because of alleged faulty construction work, unrelated to the earthwork involved in the Baltimore County case. On 31 March 1980, in accordance with the construction contract, the contractor filed a Demand for Arbitration with the American Arbitration Association. On 15 May 1980, in the Circuit Court of Baltimore City, the owner filed a Petition to Stay Arbitration (Baltimore City case) contending that the contractor had waived its right to arbitration by litigating its third party claim against the owner in the Baltimore County case. Additionally, in the Superior Court of Baltimore City, the owner filed a declaration against the contractor, its surety, and Nelson/Salabes, Inc., the project architect (Superior Court case), seeking damages for alleged faulty construction, design, and supervision.

The architect filed a third party claim against the mechanical and electrical engineers, the structural engineers, and the swimming pool designers. On 20 April 1981, in the Superior Court case, the contractor filed a Motion to Stay Proceedings, alleging that the claims asserted by the owner were issues required to be resolved by arbitration. The contractor’s motion to stay was granted, pending resolution of the Baltimore City case. Because the contract between the architect and the owner did not contain an arbitration clause, the Superior Court case against the architect was not stayed.

On the same day, 20 April 1981, in the Baltimore City case, the contractor filed a Petition to Order Arbitration. On 3 June 1981, in the Baltimore City case, the trial court initially determined that the contractor had waived its right to arbitrate those issues resolved in the Baltimore County case. The trial court specifically found that the issues in the Baltimore County case "aside from .. . arising out of the ⁴⁴⁷ same contract, [had] no connection with the Superior Court suit or [the contractor’s] claim for arbitration.” The trial court noted that unless the construction contract contained a clause stating that "waiver for one situation is not waiver as to another,” a waiver of the arbitration clause for one purpose would constitute a waiver for all purposes. Accordingly, the trial court then held that by litigating its third party claim against the owner in the Baltimore County case, the contractor had waived the contractual arbitration clause "for all purposes under that contract” and, therefore, had waived its right to arbitrate unrelated issues arising under the same contract with the owner.

Moreover, the trial court acknowledged that were it to order arbitration of such unrelated issues, the owner might be compelled to arbitrate its claim against the contractor and to litigate its claim against the architect because, unlike the contract between the owner and the contractor, the contract between the owner and the architect did not contain an arbitration clause. Emphasizing that the owner had voluntarily entered into these particular contractual arrangements, the trial court specifically concluded that the prospect of duplicative proceedings with a potential for inconsistent results was not an appropriate basis upon which to stay arbitration. Nevertheless, having determined that the contractor had waived its right to arbitrate the unrelated issues raised in the Superior Court case, the trial court granted the owner’s petition to stay arbitration and denied the contractor’s petition to order arbitration. The contractor appealed to the Court of Special Appeals.

We issued a writ of certiorari before consideration by that Court. We shall reverse the judgment of the Circuit Court of Baltimore City. The initial question here is whether the contractor, by participating as a party in a judicial proceeding that resulted in a final judgment on an issue arbitrable under its contract with the owner, has waived the right subsequently to arbitrate unrelated issues arising under the contract. Additionally, if the contractor did not waive that right, the remaining question would be whether the owner, then ⁴⁴⁸ participating in multiparty litigation, was entitled to an order staying arbitration in order to prevent multiple proceedings with the possibility of inconsistent results.

I Arbitration is the process whereby parties voluntarily agree to substitute a private tribunal for the public tribunal otherwise available to them. The Maryland Uniform Arbitration Act, enacted in 1965, 1 now Maryland Code (1974, 1980 Repl. Vol.) §§ 3-201 through 3-234 of the Courts and Judicial Proceedings Article, embodies a legislative policy favoring enforcement of executory agreements to arbitrate. Aetna Casualty & Sur.

Co. v. Insurance Comm’r, 293 Md. 409, 421 , 445 A.2d 14, 19 (1982); Maietta v. Greenfield, 267 Md. 287, 291 , 297 A.2d 244, 246 (1972); Bel Pre Medical Center, Inc. v. Frederick Contractors, Inc., 21 Md.App. 307, 320, 320 A.2d 558, 565 (1974), modified, 274 Md. 307 , 334 A.2d 526 (1975). This Court has recognized that arbitration is a matter of contract which the parties should be allowed to conduct in accordance with their agreement. C. W. Jackson & Assocs. v. Brooks, 289 Md. 658, 666 , 426 A.2d 378, 382 (1981); Continental Milling & Feed Co. v. Doughnut Corp. of America, 186 Md. 669, 675 , 48 A.2d 447, 450 (1946). Because the right to arbitrate is a matter of contract, it is possible for parties to waive that right.

See University Nat’l Bank v. Wolfe, 279 Md. 512, 522 , 369 A.2d 570, 576 (1977); Bargale Indus., Inc. v. Robert Realty Co., 275 Md. 638, 643 , 343 A.2d 529 , 533 (1975); see also, e.g., Dickinson v. Heinhold Sec., Inc., 661 F.2d 638, 641 (7th Cir. 1981); Tothill v. Richey Ins. Agency, Inc., 117 N.H. 449, 453 , 374 A.2d 656, 658 (1977). We have frequently considered the criteria applicable to the waiver of a contractual right. E.g., Chertkof v. Southland Corp., 280 Md. 1, 5 , 371 A.2d 124, 127 (1977); Bargale Indus., Inc., 275 Md. at 643-44 , 343 A.2d at 533 ; ⁴⁴⁹ Fidelity & Casualty Co. of New York v. Dulany, 123 Md. 486, 494 , 91 A. 574, 576-77 (1914).

Thus, in Bargale Industries, Inc., this Court said: "A waiver is the intentional relinquishment of a known right, or such conduct as warrants an inference of the relinquishment of such right, and may result from an express agreement or be inferred from, circumstances. '[A]cts relied upon as constituting a waiver of the provisions’ of a contract must be inconsistent with an intention to insist upon enforcing such provisions.” Bargale, 275 Md. at 643 , 343 A.2d at 533 . The intention to waive must be clearly established and will not be inferred from equivocal acts or language. Bargale Indus., Inc., 275 Md. at 644, 343 A.2d at 533 ; see, e.g., Midwest Window Systems, Inc. v. Amcor Indus., Inc., 630 F.2d 535, 536 (7th Cir. 1980); James Julian, Inc. v. Raytheon Serv. Co., 424 A.2d 665, 668 (Del.Ch. 1980).

Thus, whether there has been a waiver of a contractual right involves a matter of intent that ordinarily turns on the factual circumstances of each case. Chertkof, 280 Md. at 5-6 , 371 A.2d at 127 ; see, e.g., Doers v. Golden Gate Bridge, Highway & Transp. Dist., 23 Cal.3d 180, 185 , 588 P.2d 1261, 1263 , 151 Cal.Rptr. 837, 839 (1979); Standard Co. of New Orleans v. Elliott Constr. Co., 363 So.2d 671, 675 (La. 1978); REA Express v. Missouri Pacifíc R.R., 447 S.W.2d 721, 727 (Tex.Civ.App. 1969).

This Court has not previously considered the question whether participation as a party in a judicial proceeding constitutes a waiver of the right to arbitrate issues raised and/or decided in that proceeding. Courts in other jurisdictions that have considered the question are divided with respect to the degree of participation necessary to constitute such a waiver. 2 Under the circumstances here, however, we ⁴⁵⁰ need not delineate the precise degree of participation in a court proceeding required to constitute such a waiver. The record shows that in the Baltimore County case, the contractor filed a third party claim against the owner; that the owner filed an answer on the merits; that there was no demand for arbitration; and that the judicial proceeding resulted in a final judgment on an arbitrable matter. The trial court found, the parties concede, and we agree that under such circumstances the contractor waived its right to arbitrate those issues raised and decided in the Baltimore County case.

E.g., Doers, 23 Cal.3d at 188 , 588 P.2d at 1265 , 151 Cal.Rptr. at 841 ; Jones v. Pollock, 34 Cal.2d 863, 867 , 215 P.2d 733, 735 (1950); Anchor Fireproofing Co. v. Stewart-McGehee Constr. Co., 175 La. 7, 12 , 142 So. 783, 784 (1932). Thus, we need now only determine whether that waiver extends to the right to arbitrate other unrelated issues arising under the contract between the contractor and the owner. While courts in many jurisdictions have decided that some degree of participation in a judicial proceeding constitutes a waiver, only a few courts have considered whether such a waiver is limited to those issues raised and/or decided in the judicial proceeding, or extends to other unrelated issues arising under the contract.

Courts in New York have frequently concluded that although a party waives the right to arbitrate contractual issues raised and/or decided in a judicial proceeding, the waiver does not extend to other unrelated issues also arbitrable under the contract. E.g., ⁴⁵¹ Clurman v. Clurman, 52 N.Y.2d 1036, 1038 , 420 N.E.2d 385, 386 , 438 N.Y.S.2d 504, 505 (1981); Denihan v. Denihan, 34 N.Y.2d 307, 310 , 313 N.E.2d 759, 760 , 357 N.Y.S.2d 454, 456 (1974); Dandy Dress, Inc. v. Rae Dress Co., 179 Misc. 36, 37 , 37 N.Y.S.2d 449, 450 (1942). In Denihan v. Denihan, 34 N.Y.2d 307 , 313 N.E.2d 759 , 357 N.Y.S.2d 454 (1974), some shareholders demanded arbitration in May 1970 of certain issues arising under the shareholders’ agreement. In January and February 1971, while the arbitration was pending, the same shareholders initiated two shareholder derivative actions against the corporation.

In March 1971, the arbitration resulted in an award. In January 1972, the same shareholders initiated a third derivative suit. Although the issues in all three suits were arbitrable, no party sought arbitration of those issues. In March 1972, the shareholders made two separate demands for arbitration of other unrelated issues.

The corporation initiated a judicial proceeding to stay arbitration. The Court of Appeals of New York considered "whether by commencing several actions against other parties to the shareholders’ agreement on causes arising therefrom, the [shareholders] waived [their] right to arbitrate different issues arising under the same agreement.” Denihan, 34 N.Y.2d at 309 , 313 N.E.2d at 760 , 357 N.Y.S.2d at 455 . In determining that the right to arbitrate unrelated issues was not waived, the Court said: "While the claims encompassed in the various arbitrations and actions brought by the respondent may have arisen from the shareholders’ agreement, it is not disputed that the claims are separate and distinct. As to the claims sought to be redressed in judicial proceedings, there can be no question but that the respondent has waived his right to arbitrate.

But as to claims separate and distinct, no waiver of arbitration may be implied from the fact that resort has been made to the courts on other claims arising under a common agreement which remains in full force and effect.” Denihan, 34 ⁴⁵² N.Y.2d at 310, 313 N.E.2d at 760-61 , 357 N.Y.S.2d at 456 (citations omitted) (emphasis added). The Supreme Court of Louisiana has reached the same conclusion. In Standard Company of New Orleans v. Elliott Construction Co., 363 So.2d 671 (La. 1978), a contractor subcontracted certain roofing work. The subcontractor sued the contractor for compensation.

The contractor filed a third party claim against the owner. While the suit was pending, the contractor demanded arbitration of a claim against the owner involving unrelated issues. In the pending judicial proceeding, a question was raised as to whether the contractor had waived its right to arbitrate the unrelated issues. While the Supreme Court of Louisiana offered several reasons to support its conclusion that the contractor had not waived its right to arbitrate unrelated issues, it placed primary reliance upon the fact that the issues in the judicial proceeding were separate and distinct from those raised in the arbitration proceeding.

There the Court said: ’’First, the issues in the suit and the claim for equitable adjustment are separate and distinct. The claims in suit 1802, 491 involved issues of liability and damages in connection with the original roofing and subsequent re-roofing of the Minidome. The claims for equitable adjustment involve issues of liability and damages in connection with interference with construction method and sequence, change in proposal for floorslab delay, misrepresentation about sub-surface conditions, synthetic flooring, and excusable delays necessitating extensions of time.” Standard Co., 363 So.2d at 675-76 (emphasis added). Thus, the Louisiana Court adopted the New York Court’s approach and determined, in essence, that although a party to a judicial proceeding involving issues arising under a contract waives the right to arbitrate those issues, the ⁴⁵³ waiver does not extend to unrelated issues arbitrable under the contract.

We recognize that courts in some jurisdictions have decided that when some degree of participation in a judicial proceeding constitutes a waiver of the right to arbitrate a part of a dispute arising under a contract, the waiver extends to the entire dispute. E.g., Midwest Window Systems, Inc., 630 F.2d at 537 ; Gutor Int’l AG v. Raymond Packer Co., 493 F.2d 938, 945 (1st Cir. 1974); Maddy v. Castle, 58 Cal.App.3d 716, 722 , 130 Cal.Rptr. 160, 163 (1976), disapproved on other grounds, Doers v. Golden Gate Bridge, Highway & Transp. Dist., 23 Cal.3d 180 , 588 P.2d 1261 , 151 Cal.Rptr. 837 (1979); Seville