December 10, 2007
DELAM CONSTRUCTION CORPORATION, PLAINTIFF-APPELLANT,
15 THORNTON ROAD, L.L.C. AND GREGORY COPELAND, DEFENDANTS-RESPONDENTS.
On appeal from Superior Court of New Jersey, Law Division, Bergen County, L-3573-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued June 5, 2007
Before Judges Kestin, Weissbard and Lihotz.
Plaintiff Delam Construction Corporation (Delam) appeals from an order (1) granting summary judgment in favor of defendant Gregory Copeland and (2) granting the motion of defendant 15 Thornton Road, L.L.C. (Thornton), dismissing plaintiff's complaint against Thornton and referring the dispute to binding arbitration.
A resolution of this case requires us to set forth the background in some detail.
On June 23, 2003, Thornton entered into a contract with Delam to construct a new building at 23 Thornton Road in Oakland (the project). The parties utilized a standard AIA contract form that contained the following pertinent provisions:
Par. 4.5.1: provided, "Any controversy or claim arising out of or related to the contract or the breach thereof shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbiter or arbiters may be entered in any court having jurisdiction thereof . . . ."
Par. 4.5.2: provided that claims shall be arbitrated "unless the parties mutually agree otherwise."
Par. 13.4.2: provided, "No action or failure to act by the Owner, Architect or Contractor shall constitute a waiver of a right or duty afforded them under the Contract, nor shall such action or failure to act constitute approval of or acquiescence in a breach thereunder, except as may be specifically agreed in writing."
It was not disputed that Thornton owes Delam a balance of $187,368 plus interest with respect to Delam's work on the project. In response to not being paid, Delam filed a construction lien on August 9, 2004.
On May 19, 2005, Delam filed its complaint against Thornton seeking to recover monies due from its work on the project. Specifically, Delam asserted a breach of contract claim and a construction lien claim. On July 26, 2005, Thornton filed its answer. On October 18, 2005, Delam filed an amended complaint not only reasserting its claims against Thornton, but adding Copeland as a defendant. The amended complaint asserted that Copeland was "the managing member of, and controls, Thornton," and caused Thornton to violate its fiduciary duty to insure that the proceeds of a construction loan from Valley National Bank were used to satisfy Delam's claims. On November 12, 2005, Thornton and Copeland answered the amended complaint, in which Thornton asserted a counterclaim alleging damage resulting from construction deficiencies caused by Delam's work on the project. Delam answered the counterclaim on December 1, 2005. On February 17, 2006, the court entered an order extending the discovery end date to April 24, 2006.
During the discovery period Delam served written interrogatories upon Thornton. One of the questions requested an identification of proposed expert witnesses expected to be called to testify at trial. In response, Thornton certified that it had no experts at that time. Copeland, on behalf of Thornton, signed those answers on October 25, 2005.
As a result, on May 23, 2006, a month after the discovery end-date, Delam moved for partial summary judgment based on Thornton's lack of expert testimony as to the alleged construction deficiencies. The motion sought to: (1) establish an indebtedness by Thornton in the amount of $223,661.36, which included interest to date; (2) establish the amount due on the construction lien in the same amount; and (3) dismiss Thornton's counterclaim that alleged construction defects. The motion was returnable on June 23, 2006.
On June 6, 2006, however, Thornton amended its answers to interrogatories and named Robert Gank and Rudolph E. Faust as experts and provided copies of their reports. In response to Delam's motion, Copeland filed a certification in which he stated that lack of funds had "impacted Thornton's ability to obtain experts in the industry to inspect the site for Delam's deficiencies regarding the construction and the cost to repair." Thornton cross-moved for a discharge of Delam's construction lien. On June 21, 2006, Delam moved to bar Thornton's named experts because they were submitted beyond the discovery end-date. That motion was made returnable on June 28, 2006, the anticipated date of trial. If the trial could not start on that date, it was scheduled to begin on July 7, 2006. On June 23, the court heard oral argument on Delam's motion for summary judgment. By order filed on June 27, the court denied the motion pending determination of Delam's motion to bar the expert reports supplied by Thornton. The court granted Thornton's motion to discharge Delam's construction lien based upon a failure to comply with N.J.S.A. 2A:44A-16(a). The same day, Thornton's counsel wrote to Delam's counsel, withdrawing its previously filed supplemental answers to interrogatories in which it named Dank and Faust as experts.
On June 28, 2006, the parties appeared for trial. In light of the withdrawal of Thornton's experts, Delam sought a postponement of the trial so that its application for summary judgment could be reconsidered, based upon Thornton's new position that it would not produce experts to establish its defenses and affirmative claims based on construction deficiencies. As a result, the judge adjourned the trial and permitted Delam to refile its motion for partial summary judgment and at the same time permitted Thornton and Copeland to file any new motions that they deemed appropriate.
On June 30, Delam moved for partial summary judgment based on Thornton's lack of experts. However, on July 19, 2006, Thornton obtained new counsel. On July 29, the new attorneys filed a cross-motion seeking: (1) to dismiss Delam's complaint on the basis that the parties were contractually bound to arbitrate their dispute; (2) for partial summary judgment dismissing Delam's claims against Copeland individually; and (3) to extend discovery to enable Thornton to submit expert reports out of time. In support of that motion, Copeland submitted an affidavit in which he stated that it was not until June 2006 that he learned for the first time that prior counsel had missed the deadline for expert witness disclosure. He went on to state the following:
5. Thereafter, I further learned that in early June my prior counsel had obtained experts' reports from Robert Dank and R.E. Faust, Inc. regarding the construction of the subject premises. It was my understanding that those expert reports were going to be provided to plaintiff's counsel and that some type of application would be made to the Court to allow those experts to testify on my behalf.
6. Thereafter, there were discussions with my prior counsel regarding the benefit of expert testimony on my behalf. As a result of those discussions, I became quite concerned. What I was being told regarding the need for experts differed substantially with what my prior understanding was regarding the use of expert testimony. What I was told simply made no sense to me in light of my prior discussion and my common sense understanding of what the experts found with regard to the construction of my building.
7. I was present in Court when my prior attorney advised the Court that he did not intend to rely upon expert testimony on my behalf.
8. The more I thought about this issue, the more concerned I became. I did not understand how waiving expert testimony could possibly help my case and my relationship with my prior counsel was becoming more strained.
9. Very quickly thereafter, I concluded that my prior attorney could not effectively represent my interests.
10. I believe my prior attorney waived the right to call experts' reports not because it was in my best interest but because he sought to protect himself from a potential claim of professional negligence. There is no dispute that my prior counsel served experts' reports beyond the time permitted under the rules and/or any applicable Case Management Order.
11. By waiving experts and taking the position that experts were not beneficial to my claims or defenses, in the event of an adverse outcome, my prior counsel would then be able to argue that his failure to meet the deadline for expert disclosure was not a proximate cause of any adverse verdict that may have been rendered against me.
12. Based upon the foregoing, I respectfully request that the Court grant my attorney's application to reopen discovery for the purposes of serving experts' reports.
As a result of Thornton's retention of new counsel the trial judge held a case management conference on August 7, 2006. The conference resulted in an order of that same date, providing that Thornton could bring any motion for affirmative relief as long as it had been filed by July 31, 2006. The order also adjourned the trial, scheduled for July 31, and provided that a new trial date would be set after the motions were decided.
On August 17, 2006, Judge Toskos heard oral argument on the motions. The judge noted that Thornton's prior counsel "for some explicable reason took a unique strategic position in this case, neither raising the arbitration clause [nor] presenting any expert reports." Nevertheless, the court decided that the matter would be submitted to arbitration even at that late date. Accordingly, Delam's motion for partial summary judgment was denied as moot. Thornton's motion for summary judgment dismissing the claims against Copeland for failure to state a claim was granted, as was its motion to dismiss the amended complaint because of the referral to binding arbitration. The order further provided for reinstatement of Delam's construction lien and for tolling of the statute of limitations with regard to Delam's obligation to enforce the construction lien. Thornton was ordered to file its demand for arbitration with the American Arbitration Association (AAA) no later than August 31, 2006; Thornton did so on August 30, 2006. Delam filed its response with the AAA on September 14 and expressly reserved its right to appeal the court ruling that referred the matter to arbitration.
On appeal, Delam presents the following arguments:
POINT I: IT IS ERROR TO CONCLUDE THAT THORNTON HAD NOT WAIVED ITS RIGHT TO ARBITRATION BY PARTICIPATING IN THE LITIGATION FOR OVER ONE (1) YEAR, BY FAILING TO PLEAD SAME AS AN AFFIRMATIVE DEFENSE, BY PROSECUTING ITS COUNTERCLAIM AND BY PARTICIPATING IN DISCOVERY.
POINT II: DELAM'S THIRD COUNT OF THE AMENDED COMPLAINT SHOULD NOT BE DISMISSED AS SAME ASSERTS A VIABLE CLAIM FOR FRAUD AGAINST COPELAND.
POINT III: EXPERT TESTIMONY WAS NECESSARY TO ESTABLISH THE EXISTENCE AND EXTENT OF ANY CONSTRUCTION DEFECTS, AND ANY DAMAGES SUSTAINED BY DEFENDANTS; AND, IN THE ABSENCE OF ANY EXPERTS, THE COURT SHOULD HAVE ENTERED SUMMARY JUDGMENT ON BEHALF OF PLAINTIFF.
As noted earlier, the parties entered into a contract that contained a provision requiring all disputes to be resolved through arbitration. Paragraph 4.5.2 of the contract states that the parties may only opt out of arbitration by mutual consent. In derogation of this provision, Delam instituted an action in Superior Court. Thornton responded to the suit without ever raising the arbitration clause as a defense. Delam argues that Thornton's belated attempt to invoke the arbitration provision, after more than a year of litigation, should have been denied because Thornton waived such protections through its voluntary participation in the Superior Court action.
Specifically, Delam contends that Thornton waived its arbitration rights by filing an answer and counterclaim, by failing to timely raise arbitration as an affirmative defense in the pleadings as required by R. 4:5-4 and R. 4:6-7, and by generally failing to demand arbitration at an earlier date. Delam notes that Thornton's voluntary and lengthy litigation in this matter, while fully aware of its right to demand arbitration under the contact, resulted in Delam expending considerable amounts of time and money in prosecution of their claims. Thus, Delam submits that the trial judge's decision to compel arbitration at such a late stage caused it undue prejudice.
Thornton responds by noting that Section 13.4.2 of the contract specifically provides that:
No action or failure to act by the Owner, Architect or Contractor shall constitute a waiver of a right or duty afforded them under the Contract, nor shall such action or failure to act constitute approval of or acquiescence in a breach thereunder, except as may be specifically agreed in writing.
Thornton takes issue with Delam breaching the express provisions of the contract regarding arbitration and thereby compounding that breach by attempting to use the procedural rules of an incorrect forum to defeat the express terms of the contract. Thornton contends "that if the terms of a contract are clear, the courts must enforce the contract as written and not make a better contract for either party."
To resolve this dispute we must reconcile two competing lines of authority. On the one hand, there is no doubt that the modern view favors commercial arbitration as a speedy and inexpensive alternative to litigation in the courts. Ohio Casualty Ins. Co. v. Benson, 87 N.J. 191, 199 (1981). In fact, arbitration is particularly favored for resolution of construction contract disputes. Marchak v. Claridge Commons, Inc., 134 N.J. 275, 281 (1993). On the other hand, in the recent case of Wein v. Morris, 388 N.J. Super. 640 (App. Div. 2006), certif. granted, 190 N.J. 254 (2007), we stated that "[a]lthough our courts are empowered to compel parties to arbitrate disputes in accordance with their private agreements, the active and prolonged litigation of such disputes in the trial court will require a finding of the waiver of the right to compel arbitration." Id. at 649-50 "[A] waiver resulting from the parties' voluntary pursuit of their positions in the Superior Court will preclude the enforcement of a contractual promise to arbitrate." Id. at 650. Wein involved a trial judge's sua sponte decision to compel arbitration nearly five years after the filing of the original complaint. We held that the trial judge erred in compelling the arbitration, given the length of time the case was pending and the extensive discovery that had ensued. Id. at 651.
While the compelling facts supporting waiver presented in Wein are not paralleled in the present case, we observed there that determining when waiver has occurred may be more difficult under other factual circumstances. Id. at 650-51. In Wein, id. at 650, we noted that case law in New Jersey is somewhat confusing on the issue of exactly when waiver attaches in regards to arbitration clauses. We stated:
[I]n Hudik-Ross[, Inc. v. 1530 Palisade Ave. Corp.], we held that "the mere institution of legal proceedings . . . without ostensible prejudice to the other party" did not constitute "a waiver of a right to proceed with arbitration in accordance with the terms of an arbitration agreement," when arbitration was not demanded "until four months after the institution of plaintiff's lawsuit" and the promise to arbitrate was pleaded in an affirmative defense. 131 N.J. Super. [159, 167 (App. Div. 1974)]. On the other hand, in Farese [v. McGarry], we found a waiver when the agreement to arbitrate was not mentioned until the filing of a responsive pleading nine months after the institution of suit, which was two weeks before the commencement of trial. 237 N.J. Super. [385, 394 (App. Div. 1989)]. [Id. at 650.]
Here, the facts seem closer to Farese than to Hudik-Ross, especially in light of the fact that defendant first asserted the defense of arbitration after the trial date passed. However, the trial judge relied on yet another line of authority to support his decision to refer the case to arbitration. In Wasserstein v. Guild Contracting Corp., 261 N.J. Super. 277, 290 (App. Div. 1993), we stated that "[t]he court has the power, any time before judgment, to refer the dispute to arbitration." (citing Pyramid Elec. Co. v. Staklinski, 61 N.J. Super. 278, 282 (App. Div.), certif. denied, 33 N.J. 117 (1960)). We explained that "[e]lection of remedies is not irrevocable unless and until either a court proceeding goes to judgment or an arbitration proceeding consummates in an award." Id. at 290.
Nevertheless, Wein and Farese clearly place a constraint on the ability of trial judges to order arbitration after significant litigation has been pursued in the courts. Thus, while "'not every foray into the courthouse effects a waiver of the right to arbitrate,' . . . [p]arties waive their right to arbitration where they commence litigation or use the litigation process improperly, such as to gain pretrial disclosure not generally available in arbitration." Lucier v. Williams, 366 N.J. Super. 485, 500 (App. Div. 2004) (quoting Shevlin v. Prudential Commercial Ins. Co., 256 N.J. Super. 691, 700 (Law Div. 1991)).
A similar formulation concerning when the right to arbitration is waived through litigation can be found in the federal courts. In Hoxworth v. Blinder, Robinson & Co., Inc., 980 F.2d 912, 925 (3d. Cir. 1992), the court stated that "prejudice is the touchstone for determining whether the right to arbitrate has been waived." In Hoxworth, the court found that defendants in the action waived their right to arbitration by actively litigating the case for almost a year prior to filing their motion to compel arbitration. Id. at 927. The court supported its decision by citing numerous federal cases finding prejudice in similar circumstances.*fn1 The court specifically noted that plaintiffs in Hoxworth devoted substantial time and effort in prosecuting the action, while defendants were allowed to pursue discovery not available in the arbitration forum. Id. at 926.
In the present case, Delam contends that it was prejudiced in much the same way as the plaintiffs in Hoxworth, i.e., by spending considerable resources in conducting the lengthy litigation. However, defendants note that while there was some discovery during the litigation, the parties have agreed that the information obtained in the civil action will be admissible in the arbitration. Defendant repeatedly argues that it was plaintiff who commenced the action in the courts and engaged in extensive motion practice, to which defendant was obligated to respond. Thus, defendant argues, any prejudice that occurred through the year long litigation process was not only minimal, but also the fault of plaintiff for filing the action in contravention of the plain terms of the original construction contract. The trial judge apparently accepted the latter argument by stating that "plaintiff instituted the action with the arbitration clause in the contract, so if we're going to presume that the defendant knew about the arbitration clause, we have to presume that the plaintiff knew about the arbitration clause."
While the issue is close, we conclude that Judge Toskos chose the correct outcome. Here, neither side is blameless.
Plaintiff may be fairly perceived as having instituted suit in the hope that, as apparently occurred, defendant would overlook its right to arbitrate. It is difficult to believe that its decision to choose litigation over arbitration was an oversight. On the other hand, defendant may rightfully be seen as having played "fast and loose" with the courts by litigating with full knowledge of its right to arbitrate and utilizing the court time and procedures until, on the eve of trial, strategically deciding that arbitration would better suit its purposes. In regard to defendant's action, we cannot overlook the fact that when defendant retained new counsel the demand for arbitration was promptly made.
If a longer period of litigation had ensued and plaintiff was able to demonstrate a greater degree of prejudice, the outcome might be different. It appears, however, that much of the discovery undertaken in the court proceeding will be of use in the arbitration and, as we have noted, to the extent that it is not, plaintiff is equally at fault. Thus, we affirm the decision under review insofar as it dismissed plaintiff's complaint and remitted the parties to arbitration under their contract.
With respect to the summary judgment in favor of Copeland, we find no merit in plaintiff's argument and affirm for the reasons expressed by Judge Toskos in his oral decision of August 17, 2006. R. 2:11-3(e)(1)(E).