Crown Oil and Wax Co. of Delaware, Inc. v. Glen Construction Co. of Virginia, Inc.

RODOWSKY, Judge. “It is an ancient rule of the common law that a person who did not enter into a contract, or succeed to the interest of those who did, has no right of action for its breach, although he sustained damage thereby.” Levy v. Glens Falls Indem. Co., 210 Md. 265, 270 , 123 A.2d 348, 351 (1956). In this case we examine the concept of a “successor” in the context of steps in the development of a parcel of unimproved, commercially zoned realty. The issue is whether, under a construction contract signed, as owner, by a corporation controlled by two individuals developing the property, the contractor is obliged to arbitrate claims on behalf of a limited partnership used by the same two individuals to syndicate the project.

On the south side of the intersection of Interstate Route 270 and Maryland Route 85 in Frederick County lies a 7.009 acre portion of a former farm. In February 1982 this portion was one of the assets owned by Crown Oil & Wax Company of Delaware, a Delaware corporation (Crown Inc.). An experienced real estate developer, Edward J. Joyeusaz, a/k/a Ed Joy (Joy), for some time had been interested in acquiring the parcel for development as a hotel. Crown Inc. had defaulted on a bank loan secured by ⁵⁵⁰ its stock. .

On February 28, 1982, Joy and his C.P.A., tax adviser and co-investor, Robert S. Understein (Understein), purchased from the bank 100% of the stock in Crown Inc. Joy, as “trustee,” acquired 93.75% of the shares and 6.25% were acquired by R.U. Associates Limited Partnership, of which Understein was general partner. 1 Other assets of Crown Inc. at the time of its acquisition were three other parcels of land, seven gasoline stations and a tax loss carry forward in excess of $800,000. Joy testified that the plan was to develop the seven acre parcel through a partnership that would be syndicated through a private offering. By letter dated January 9, 1984, and addressed to “Frederick Inn Limited Partnership,” attention Joy, Quality Inns International, Inc. (Quality Inns) advised that the addressee’s application for a Quality Inns franchise had been approved. Frederick Inn Limited Partnership did not exist of public record.

An attorney in Understein’s office had not yet prepared the papers for that partnership. Later, when the attempt was made to register a partnership in that name, the name was not available. The name Frederick Hotel Limited Partnership (FHLP) was then used. FHLP is at the center of the present controversy.

The franchise agreement with Quality Inns for the subject project was entered into April 9, 1984, by Crown Inc. A typewritten addendum to the printed franchise contract permitted, without payment of additional fees to the franchisor, transfer of that franchise to a partnership in which Joy’s Park, Inc. and Jefferson Investments Limited Partnership (Jefferson) would be general partners. Joy’s Park, Inc. was a wholly owned subsidiary of Ed Joy Real Estate, ⁵⁵¹ Inc., which was owned or controlled by Joy. Understein was general partner of the limited partnership that was general partner of Jefferson. FHLP, as it was ultimately formally documented, satisfied this criterion for franchise transfer.

With the franchise in hand, Joy directed his attention to obtaining financing. On June 4, 1984, Citizens Savings & Loan Association, Inc. (Citizens) issued a commitment to Crown Inc. for a $1,155,000 loan secured by the seven acres and by the personal liability of Joy and Understein. That loan closed on June 13. Approximately $1 million of the loan proceeds were used for partial releases of mortgages on the parcel and the balance was used for preconstruction expenses of development. 2 Bids from a number of general contractors were received by Joy in late June, and he selected Glen Construction Company of Virginia, Inc. (Glen), which he had used as general contractor for other projects.

The final version of the written construction contract was not executed until more than a year later. Construction work, however, actually commenced in the field in August 1984. All of the construction contract negotiations were conducted within the framework of contract documents, which included the American Institute of Architects (AIA) Document A201-1976, “General Conditions of the Contract for Construction.” Glen prepared the initial, proposed contract. It named Joy as owner.

That offer was signed and transmitted by Glen to Joy on September 13, 1984. Joy was also negotiating a construction loan with Citizens, which on October 5 committed to lend an additional $8,853,000. That commitment was addressed to Crown Inc., Frederick Inn Limited Partnership, Joy and Understein. It stated that “Frederick Inn Limited Partnership is the devel ⁵⁵² oper of the Project.” The commitment required that “a firm construction contract” be entered into between the borrower and Glen prior to the first disbursement.

Written acceptance of that commitment by Crown Inc. and by “Frederick Inn Limited Partnership,” acting through Joy and Understein as its “general partners,” was dated October 25, 1984. A certificate of limited partnership — for FHLP — was approved by the State Department of Assessments and Taxation October 30, 1984. The general partners were Joy’s Park, Inc. (7.5%) and Jefferson (2.5%). The limited partners were Joy (67.5%) and Understein (22.5%), each as a “Trustee.” As described in the certificate, FHLP’s business was “building, developing and operating” a Quality Inn on the seven acre site.

The construction loan agreement with Citizens was executed on November 28, 1984. The borrower was FHLP, which was again described as developer, although the agreement recited that Crown Inc. was the fee owner. FHLP was maker of the note evidencing the loan. Crown Inc., Joy and Understein guaranteed the loan.

The proposed contract, tendered on September 13, 1984, by Glen to Joy, was used to satisfy the loan commitment’s requirement for a firm construction contract. Joy struck his name as owner and inserted Crown Inc. As president of Crown Inc., he signed that writing under date of October 16, 1984. The commitment also required a security assignment to Citizens, approved by the contractor, of the rights to enforce the construction contract. In satisfaction of this requirement, Crown Inc., FHLP and Joy executed, also on November 28, an assignment of the construction contract.

Glen, acting through its president, signed a written acknowledgment of the assignment at the foot of the assign ⁵⁵³ ment. 3 Glen and Joy continued to negotiate the construction contract. There were five additional versions drafted before the final version was fully executed on September 17, 1985. All of these versions name Crown Inc. as owner. 4 While the final form of the written contract was evolving, Glen was building and being paid monthly draws. The draws for September 1984 through February 15, 1985, were paid by checks bearing the printed name or description, “Frederick Inn Construction.” These payments totaled $1,058,104.90.

Beginning with the payment of March 13, 1985, and continuing each month through the payment of September 20, 1985, the draws were by checks on which FHLP’s name was printed. These totaled $2,332,535.10. At some point after construction commenced Glen received evidence of the owner’s coverage for “all risks” builder’s insurance. The policy was issued for one year beginning July 1, 1984, and originally named “Crown Oil Wax” as owner.

By endorsement No. 1, effective July 1, 1984, the named insured was corrected, at a time not stated in the record, to read: “Crown Oil & Wax Co., Inc. t/a Frederick Inn, Edward Joyeusaz, Robert Understein, A.T.I.M.A.” A further endorsement, also of undisclosed date but effective July 1, 1984, added Glen as an additional insured. Sometime in 1985 limited partnership interests in FHLP were sold by private placement. By letter dated October 29, 1985, on the letterhead of Crown Inc. and signed by Joy, “President,” notice was given to Glen terminating the construction contract seven days thereafter. In November 1985, on a date not specified in this record, Glen demanded arbitration with Crown Inc. ⁵⁵⁴ By a document originally prepared for execution in 1984, but not signed until November 13, 1985, Crown Inc. and FHLP executed a letter of commitment for a ground lease of the hotel site from the former to the latter for a period of forty-eight years beginning July 1, 1984, on the terms outlined in that letter.

The shareholders of Crown Inc., by agreement dated November 15, 1986, formed Crown Oil & Wax Partnership (Crown Partnership) to which they contributed their shares in that corporation. This agreement named the beneficial owners for whom Joy and Understein had been holding the stock of Crown Inc. See n. 1, supra. The agreement also recited the partners’ need for advice concerning impending changes in the income tax laws. By a ground lease “made as of” the 1st day of July 1984 Crown Inc., the fee owner, leased the hotel site to FHLP for a term of six years beginning July 1, 1984, with the option in FHLP to extend for up to seven additional terms of six years each.

This instrument was acknowledged by the parties before a notary public on December 9, 1986. On December 2, 1986, Crown Partnership, as sole shareholder of Crown Inc., approved a plan of complete liquidation of Crown Inc., to be completed before the end of calendar 1986. On December 29, 1986, Crown Inc. deeded all of its realty, including the reversion underlying the ground lease, to Crown Partnership and assigned all of its nonrealty assets to Crown Partnership. Crown Inc.’s certificate of dissolution was filed in Delaware on December 30, 1986.

Crown Inc. had answered the demand for arbitration in late December 1985 by denying allegations of liability, and Crown Inc. had counterclaimed for an amount later to be determined. Glen also sought a mechanics’ lien. The answer to that petition was filed by Crown Inc., FHLP, Joy’s Park, Inc. and Jefferson who had apparently been named by Glen as defendants. An affidavit by Joy in opposition to the me ⁵⁵⁵ chanics’ lien claim stated that the contract was entered into between Glen and Crown Inc. and referred to damages incurred by Crown Inc. The action now before us was precipitated in June 1987 when Crown Inc. filed an amended answer and counterclaim in arbitration.

The amendment averred that Crown Inc. answered and counterclaimed “on its own behalf, and on behalf of” FHLP. Thereupon Glen, on August 11, 1987, filed the instant complaint in the Circuit Court for Frederick County naming Crown Inc. and FHLP as defendants and seeking to restrain Crown Inc. and FHLP from pursuing in arbitration “any claim by or on behalf of FHLP.” 5 Glen acknowledges that it has agreed to arbitrate with Crown Inc. Its position is that FHLP is not a party to the construction contract, that Glen has not agreed to arbitrate with FHLP claims by FHLP, and that Glen has not agreed to arbitrate claims on behalf of FHLP asserted by Crown Inc. In the circuit court counsel for the defendants argued that claims by or on behalf of FHLP were arbitrable because FHLP was a third party beneficiary of the written construction contract between Glen and Crown Inc. The circuit court concluded that FHLP was not a third party beneficiary of the construction contract. The court viewed as “most significant” the fact that FHLP was not named in the contract, and it saw as “particularly significant” that only Crown Inc. had counterclaimed for damages in the arbitration. The circuit court enjoined Crown Inc. and FHLP “from pursuing against Glen ... in any arbitra ⁵⁵⁶ tion proceeding, any claim by or on behalf of FHLP.” Crown Inc. and FHLP appealed to the Court of Special Appeals.

In their brief to that court the appellants argued that the issue of damages recoverable by Crown Inc. was for the arbitrators, that FHLP could arbitrate with and obtain an award against Glen as a successor in interest to Crown Inc., and that FHLP was an intended third party beneficiary of the construction contract. 6 The Court of Special Appeals affirmed in an unreported opinion. That court would not consider the appellants’ successor in interest argument. The intermediate appellate court viewed the argument as an issue that had not been raised in or decided by the trial court and declined to exercise its discretion under Maryland Rule 8-131(a) to consider the “issue.” 7 We granted a petition for certiorari filed by Crown Inc. and FHLP. That petition and our writ included among the questions presented the successor in interest argument.

The general conditions of the construction contract contain a broad arbitration agreement and a provision relating ⁵⁵⁷ to successors and assigns. The former, in relevant part, reads: “7.9 ARBITRATION 7.9.1 All claims, disputes and other matters in question between the Contractor and the Owner arising out of, or relating to, the Contract Documents or the breach thereof ... shall be decided by arbitration ... unless the parties mutually agree otherwise.” Paragraph 7.2.1, dealing with “SUCCESSORS AND ASSIGNS,” reads in relevant part: “The Owner and the Contractor each binds himself, his partners, successors, assigns and legal representatives to the other party hereto and to the partners, successors, assigns and legal representatives of such other party in respect to all covenants, agreements and obligations contained in the Contract Documents.” The foundation of Glen’s action is the Maryland Uniform Arbitration Act (the Act), Md.Code (1974, 1989 Repl.Vol.), §§ 3-201 through 3-234 of the Courts and Judicial Proceedings Article (CJ). Section 3-206 provides that an agreement to arbitrate future disputes “is valid and enforceable, and is irrevocable____” “If the court determines that the agreement exists it shall order arbitration.” § 3-207(c). Likewise, § 3-208 allows a party that denies the existence of any arbitration agreement to seek a stay of the arbitration proceeding. “If the court determines that existence of the arbitration agreement is in substantial and bona fide dispute, it shall try this issue promptly and order a stay if it finds for the petitioner.

If the court finds for the adverse party, it shall order the parties to proceed with arbitration.” § 3-208(c). Thus, under §§ 3-207 and 3-208 the sole question before the court is whether there exists an agreement to arbitrate. Section 3-210 prohibits the court from inquiring into the merits of a claim: ⁵⁵⁸ “An order for arbitration shall not be refused or an arbitration proceeding stayed: (1) On the ground that the claim in issue lacks merit or bona fides; or (2) Because a valid basis for the claim sought to be arbitrated has not been shown.” Maryland courts have consistently stated that the Act embodies a legislative policy favoring the enforcement of executory agreements to arbitrate. See Anne Arundel County v. Fraternal Order of Anne Arundel Detention Officers and Personnel, 313 Md. 98, 105 , 543 A.2d 841, 845 (1988); Gold Coast Mall v. Larmar Corp., 298 Md. 96, 103 , 468 A.2d 91, 95 (1983); Charles J. Frank, Inc. v. Associated Jewish Charities, 294 Md. 443, 448 , 450 A.2d 1304, 1306 (1982); 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); Rosecroft Trotting & Pacing Ass’n v. Electronic Race Patrol, Inc., 69 Md.App. 405, 408 , 518 A.2d 137, 139 (1986); Bel Pre Medical Center, Inc. v. Frederick Contractors, Inc., 21 Md.App. 307, 320 , 320 A.2d 558, 565 (1974), modified, 2 74 Md. 307 , 334 A.2d 526 (1975). The intention of the parties controls on whether there is ah agreement to arbitrate. See Stephen L. Messersmith, Inc. v. Barclay Townhouse Assocs., 313 Md. 652, 658 , 547 A.2d 1048, 1051 (1988). But; where the parties use a broad, all encompassing clause, it -is presumed they intended all matters to be arbitrated.

NSC Contractors, Inc. v. Borders, 317 Md. 394, 403 , 564 A.2d 408, 412 (1989); Gold Coast, 298 Md. at 104 , 468 A.2d at 95 . In Frederick Contractors, Inc. v. Bel Pre Medical Center, Inc., 274 Md. 307, 315 , 334 A.2d 526, 531 (1975); this Court held that “the timeliness of a demand for arbitration is a threshold question, which is, in the first instance, for the courts____” Board of Educ. of Charles County v. Education Ass’n, 286 Md. 358 , 408 A.2d 89 (1979), held that “a eourt, not an arbitrator, makes the final.determination of ⁵⁵⁹ the legality of a contract before an arbitration award is enforced.” Id. at 366 , 408 A.2d at 93 . Stephen L. Messersmith, Inc. v. Barclay Townhouse Assocs., 313 Md. 652 , 547 A.2d 1048 , addressed “the proper standard of review when a party to an arbitration proceeding moves to vacate the ... award, claiming ... the parties never agreed to arbitrate----” Id. at 654 , 547 A.2d at 1049 . We held that the determination of whether an agreement to arbitrate had ever been formed is an issue for the court.

No weight was given to the arbitrators’ determination that they had jurisdiction; rather, we held that a court should conduct a de novo review of that issue. Id. at 664 , 547 A.2d at 1053-54 . Our decision in Gold Coast, supra, laid down the rules for determining whether court or arbitrator determines arbitrability where the arbitrability issue is the scope of the arbitration clause and its applicability to the dispute at hand. Gold Coast involved “a dispute concerning the payment of rent, arising under a lease agreement containing an arbitration clause____” 298 Md. at 99 , 468 A.2d at 93 .

One lease provision required arbitration of all disputes. Two other provisions, however, appeared to provide the landlord with remedies other than arbitration. This Court began by noting that “[a] party cannot be required to submit any dispute to arbitration that it has not agreed to submit.” Id. at 103 , 468 A.2d at 95 . We further said that: “[i]n accord with this legislative policy [favoring enforcement of arbitration agreements], the Act strictly confines the function of the court in suits to compel [or stay] arbitration to the resolution of a single issue — is there an agreement to arbitrate the subject matter of a particular dispute.” Id. at 103-04 , 468 A.2d at 95 .

After canvassing the case law throughout the country, Judge Davidson, writing for this Court, concluded that there were three classifications of disputes over the scope of an arbitration clause. First, where the language of the ⁵⁶⁰ arbitration clause is clear, and the dispute in question falls clearly within the provision. Second, where it is clear that “the issue sought to be arbitrated lies beyond the scope of the arbitration clause____” In these two situations the court decides the issue of arbitrability and compels or stays arbitration accordingly. Id. at 104 , 468 A.2d at 95 .

In the third class of disputes, “the language ... is unclear as to whether the subject matter of the dispute falls within the scope of the arbitration agreement.” Id. at 105 , 468 A.2d at 96 . As a general rule, “[w]here there is a broad arbitration clause, calling for the arbitration of any and all disputes arising out of the contract, all issues are arbitrable unless expressly and specifically excluded.” Id. at 104 , 468 A.2d at 95 . Thus, in this third class, the Court should promote the legislative policy favoring arbitration and leave the issue of arbitrability to the arbitrators. In the instant action Glen argues that this case is like Stephen L. Messersmith, Inc. v. Barclay Townhouse Assocs. and that it is for the court to decide if there is any contract between Glen and FHLP to arbitrate disputes.

Crown Inc. says this case is like Gold Coast in that Glen has agreed to arbitrate with Crown Inc. but is attempting to have the court invade the province of the arbitrators by excluding potential items of damage if claimed by or through Crown Inc. These contentions concern that portion of the injunction which prohibits Crown Inc. from asserting any claim on behalf of FHLP. We need not decide those contentions if Glen has agreed to arbitrate with FHLP. We, therefore, turn to whether we may consider FHLP’s successor in interest argument and, if so, its application here. I Glen submits that FHLP’s contention that it is a successor to Crown Inc. is an “issue” which was not raised in or decided by the trial court and cannot be considered by us because of Rule 8-131(a).

See n. 7, supra. Whether FHLP could directly claim in arbitration against Glen has ⁵⁶¹ been an issue in this action from its inception. Glen joined FHLP as a party to this action, even though FHLP was not a named party in the arbitration and had not sought to be added directly as a party. Glen sought, and obtained, an injunction restraining FHLP from pursuing in arbitration any claim in its own name.

The third party beneficiary theory advanced by FHLP in the circuit court is basically an argument supporting arbitration by FHLP with Glen. Although FHLP did not argue the successor theory