Regina Construction Corp. v. Envirmech Contracting Corp.

WILNER, Judge. The issue before us is whether the Circuit Court for Anne Arundel County erred in concluding that the underlying dispute between the parties was not within the scope of a contractual arbitration clause. We think that it did so err. Regina Construction Corporation, a Nevada corporation having its principal office in Virginia, was the general contractor on a construction project in Washington, D.C. In June, 1984, Envirmech Contracting Corporation, a Maryland corporation, entered into a Subcontract Agreement with Regina under which Envirmech was to perform certain mechanical and plumbing work on the Washington project.

Paragraph 18 of the Subcontract required that disputes arising out of. acts, omissions, or responsibilities of the owner be resolved in accordance with the procedures set forth in the Prime Contract. With respect to disputes between Envirmech and Regina, the paragraph provided: “Disputes solely with Contractor shall be resolved by arbitration in Washington D.C. in accordance with the rules of the American Arbitration Association. Disputes shall not interfere with the progress of the job. Work shall proceed as ordered, subject to claim.” Envirmech “substantially completed” its work on the job in September, 1985.

In May, 1988, it filed this action contending, essentially, that (1) prior to entering into the ⁶⁶⁴ subcontract, it had informed Regina that it did not have the financial wherewithal to complete the contract without assistance, (2) in order to induce it to enter into the subcontract, Regina “assured and represented that it would financially assist [Envirmech] in the performance of this project,” and (3) despite repeated requests, Regina failed to honor that commitment. The complaint consisted of three counts. Count One charged Regina with fraud — falsely representing, “at the inception and throughout the course of this contract,” that Envirmech would be paid its actual costs plus profit and overhead without ever intending to fulfill that promise. Count Two, incorporating by reference the averments of Count One, asserted negligent misrepresentation; Count Three, also incorporating the earlier allegations, charged breach of contract.

Compensatory and punitive damages were sought in all three counts. Regina responded to the Complaint with a Motion to Dismiss. Pointing out the arbitration provision in ¶ 13 of the subcontract, it contended that Envirmech had “failed to take any step to resolve this case by Arbitration, as provided in the contract between the parties” and that the court therefore “does not have any jurisdiction over this case until such time as plaintiff fully complies with the Arbitration provisions of the subcontract____” It asked that the action be dismissed and “for such other and further relief of [sic, as] this Court deems just and proper.” Envirmech attacked that motion on both procedural and substantive grounds. Procedurally, it urged that a motion to dismiss was not the appropriate vehicle to raise that defense — that if Regina desired to invoke the arbitration clause, it should have filed a petition to compel arbitration.

Substantively, Envirmech contended that the dispute was not arbitrable for three reasons: (1) the Complaint charged that the contract, of which the arbitration clause was a part, was induced by fraud, and only the court could determine that issue; (2) the obligation to arbitrate was not mutual ⁶⁶⁵ and therefore was not binding; and (3) the issue of punitive damages was also for the court and not an arbitrator. Eschewing the notion that discretion, at least in most instances, is the better part of valor, Regina declined to file a petition to compel arbitration and insisted that its motion to dismiss was a proper response to the Complaint. In a memorandum in support of its motion, however, it did urge that the court “has the power to compel arbitration under § 3-207 of the Courts and Judicial Proceedings Article and that compelling arbitration in this case is appropriate____” It asked that the court “either dismiss or stay this action because the arbitration clause in the contract between the parties is valid and broad.” In an order entered January 27, 1989, the court denied Regina’s motion to dismiss on the ground that the dispute was not covered by the arbitration clause. Examining the relevant provisions of ¶ 13, the court acknowledged that the general statement that “[disputes solely with Contractor” must be arbitrated was broad enough to cover “all” disputes solely with the contractor.

But that sentence, it held, was modified by the next two, requiring that disputes not interfere with the progress of the work. Accordingly, the court concluded: “Since the work was completed, disputes solely with the Contractor cannot interfere with the progress of work, and therefore, the arbitration provisions are not applicable. The disputes alleged in this complaint are not disputes contemplated by the parties to be resolved by arbitration before resort to the courts.” This appeal by Regina is from that order. (1) Appealability Before considering whether the court was right or wrong, we need to determine whether the order is even appealable at this point.

In a motion to dismiss the appeal, Envirmech insists that the order does not constitute a final judgment within the meaning of Md.Cts. & Jud.Proc.Code Ann. § 12-301. It looks then to § 12-303, providing a right ⁶⁶⁶ of appeal from certain interlocutory orders, but concludes that the order at issue here does not fall within the ambit of that section. The closest possibility, it contends, is § 12-303(3)(ix), allowing an immediate appeal from an order granting a petition to stay arbitration pursuant to § 3-208, but that is not what this order did. Given the procedural posture of the case — Regina’s unfortunate insistence on a motion to dismiss rather than a petition to compel arbitration — the question of appealability is not an easy one.

To decide it, we need to look first at what law applies. As we indicated, the subcontract at issue was between a Nevada corporation and a Maryland corporation involving a significant construction project in the District of Columbia. In that circumstance, there can be little doubt that the contract evidences “a transaction involving [interstate] commerce” and therefore falls within the ambit of the Federal Arbitration Act. 9 U.S.C. § 1 (1947). Section 2 of that Act makes valid and enforceable a written provision in any such contract “to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof ... save upon such grounds as exist at law or in equity for the revocation of any contract.” Sections 3 and 4 of the Act provide the two basic mechanisms for enforcing § 2.

Section 3 looks to the kind of situation Regina contends we have here — a pending action involving “an issue referable to arbitration under an agreement in writing for such arbitration.” In that circumstance, § 3 provides that, if the court is indeed satisfied that the issue is referable to arbitration, it shall, on application of a party, stay trial of the action “until such arbitration has been had in accordance with the terms of the agreement.” Section 4 deals with the situation in which there is no pending action, but where one party has demanded arbitration of an existing dispute pursuant to a written arbitration ⁶⁶⁷ agreement and the other party has refused to arbitrate. It provides a form of specific performance action, authorizing the aggrieved party to petition the U.S. District Court to compel that other party to arbitrate the dispute. If the making of the agreement or the failure to arbitrate pursuant to it is questioned, the court resolves that issue, but, upon a finding that the agreement exists and has not been complied with, the court must order the parties to proceed to arbitration. Although §§ 3 and 4 of the Federal Act look to the enforcement of the Act through proceedings in Federal court, the United States Supreme Court has made clear that State courts are also bound to recognize and enforce § 2 (when it applies), even to the exclusion of inconsistent State law.

Southland Corp. v. Keating, 465 U.S. 1, 14-15 , 104 S.Ct. 852, 860-861 , 79 L.Ed.2d 1 (1984); Perry v. Thomas, 482 U.S. 483, 489 , 107 S.Ct. 2520, 2525 , 96 L.Ed.2d 426 (1987). As the Southland Court further held, however, while State courts must enforce § 2, they are not bound by the procedural provisions of §§ 3 and 4 of the Federal Act and may generally apply their own procedures. Id. at 16 n. 10, 107 S.Ct. at 861 n. 10. The Maryland arbitration law falls generally into three broad categories — that set forth in the Maryland Uniform Arbitration Act, codified in Md.Cts. & Jud.Proc.Code Ann. title 3, subt. 2, that set forth in other specific statutes, and that which is a matter of State common law.

Because the only other specific statute applicable here — the Federal Arbitration Act — does not control the procedural issue before us, we need to look at the Maryland Uniform Act and the State common law. The Maryland Uniform Act is the State analogue, to the Federal Arbitration Act. Md.Cts. & Jud.Proc.Code Ann. § 3-206(a), the counterpart of § 2 of the Federal Act, makes “a provision in a written contract to submit to arbitration any controversy arising between the parties in the future” valid, enforceable, and irrevocable, “except upon grounds that exist at law or in equity for the revoca ⁶⁶⁸ tion of a contract.” Section 3-206(a) has to be read in conjunction with § 3-202, however; that section states that an agreement “providing for arbitration under the law of the State ” confers jurisdiction “on a court to enforce the agreement and enter judgment on an arbitration award.” (Emphasis added.) Whether the emphasized language in § 3-202 serves to limit application of the Act to agreements specifically referring to Maryland law is not clear but, for purposes of this appeal, is not important. 1 If the Maryland Uniform Act applies, the procedure for enforcing it “shall be in accordance with said act.” Md. Rule El. If the Act does not apply, the procedure for application to a court to enforce an arbitration agreement “shall be as nearly as practicable the same as that provided for such an application in arbitration to which said act applies.” Md. Rule E4. ⁶⁶⁹ In a Federal proceeding, the immediate appealability of an order such as that entered here would seem to depend on whether the appellate court construed it as an order denying a stay of a pending proceeding under § 3 of the Federal Act or one denying a petition to compel arbitration under § 4.

If regarded as the former, it would not be appealable as a final judgment or as a collateral order but, because the pending action is legal rather than equitable in nature, likely would be appealable as equivalent to the denial of an injunction. If regarded as an order entered under § 4, it would be appealable as a final judgment, for it effectively would dispose of the proceeding in the trial court. See Matterhorn, Inc. v. NCR Corp., 727 F.2d 629 (7th Cir.1984); Langley v. Colonial Leasing Co. of New England, 707 F.2d 1 (1st Cir.1983); Baltimore Contractors v. Bodinger, 348 U.S. 176 , 75 S.Ct. 249 , 99 L.Ed. 233 (1955). The Maryland Uniform Act has counterparts to §§ 3 and 4 of the Federal Act.

Section 3-207 states that if a party to “an arbitration agreement described in § 3-202” refuses to arbitrate, the other party may file a petition with a court to order arbitration. If the court concludes that the agreement exists, it must order arbitration. Section 3-209, the State version of § 3, requires a court to “stay any action or proceeding involving an issue subject to arbitration if ... [a] petition for order to arbitrate has been filed____” As is the case in the Federal system, an order entered under § 3-207 denying a petition to compel arbitration would clearly be appealable as a final judgment. See Jos.

Trionfo & Sons v. E. LaRosa & Sons, 38 Md.App. 598 , 609-10 n. 9, 381 A.2d 727 (1978). A similar kind of order entered under § 3-209 would also seem to be immediately appealable. In the original enactment of the Maryland Uniform Act, the procedures now set forth in §§ 3-207 and 3-209 were consolidated in one section — § 2 of art. 7. The initial application to compel arbitration was provided for in § 2(a); the authority to stay a pending proceeding in favor of arbitration was