Arbitration and the Courts

When Rule 31 and the Tennessee Uniform Arbitration Act Meet

Your client is served with a complaint from a person with whom he has a contract containing an arbitration clause. The clause requires that the parties submit all disputes to arbitration. In lieu of filing an answer to the complaint, you file a Motion to Compel Arbitration and Stay Proceedings. The court takes the motion under advisement and, at a preliminary hearing, refers both parties to mediation on all issues raised in the complaint. The court orders the parties to engage in discovery necessary to have a fruitful mediation.

The issue of law presented by this situation concerns the interplay between Tennessee Supreme Court Rule 31 (Rule 31) and the Tennessee Uniform Arbitration Act (TUAA). Rule 31 empowers the trial court to refer parties to mediation and other alternative dispute resolution (ADR). The TUAA, on the other hand, instructs the trial court to “summarily” determine whether a case is subject to arbitration when so moved. Considering these two rules, does the trial court have the authority to order the parties to mediation on all issues when a motion to compel arbitration is pending?

Although no published case is squarely on point, the language of the TUAA necessarily limits the trial court’s authority to order the parties to mediation. The TUAA requires that all proceedings be stayed while the trial court determines whether a dispute is subject to arbitration.[1] “All proceedings” means “[a]ll … proceedings on the merits,” including discovery and only excluding proceedings necessary to determine whether the parties should be required to arbitrate, according to the Court of Appeals’ memorandum opinion, Southeast Drilling & Blasting Services Inc. v. BRS Construction Company.[2]

In that case, the Court of Appeals reviewed a trial court’s order compelling discovery when the trial court had not entered an order compelling or staying arbitration.[3] The Court of Appeals held that the Tennessee Uniform Arbitration Act requires courts to determine “whether a party is entitled to arbitration prior to conducting any proceedings related to the merits.”[4] The intermediate appellate court concluded that “the normal course of proceedings is first to resolve the issue of whether the parties should be required to arbitrate. All other proceedings on the merits, including discovery, should be stayed pending this determination.”[5]

The text of Rule 31 seemingly empowers a trial court to order parties to mediation while a motion to compel arbitration is pending, but the TUAA must control. Rule 31 grants trial courts broad discretion to refer matters to ADR. The court adopted Rule 31 “to expedite the efforts of the courts to secure the just, speedy, and inexpensive determination of disputes.”[6] A court on its own initiative may order “the parties to an Eligible Civil Action to participate in … Mediation.”[7] An Eligible Civil Action includes “all civil actions except forfeitures or seized property, civil commitments, adoption proceedings, habeas corpus and extraordinary writs, or juvenile delinquency cases.”[8] Nothing in the text of Rule 31 excludes cases in which a motion to compel arbitration is pending.

Nevertheless, mediation on the merits, like all proceedings, should be stayed pending the court’s determination of the motion to compel arbitration. Tenn. Code Ann. section 29-5-303 clearly limits a court’s powers when faced with a motion to compel arbitration. It instructs courts to determine the issue of arbitrability “summarily,” and it states, “Any action or proceeding involving an issue subject to arbitration shall be stayed if an order for arbitration or an application therefor has been made under this section.”[9]

Moreover, as the Tennessee Supreme Court has observed, the TUAA restricts judicial review of arbitration awards.[10] This limitation is necessary lest the appeal of an arbitration award become a de novo review, rendering the arbitration nothing but a precursor to litigation.[11] The courts’ limited review over arbitration proceedings governed by the TUAA must extend to the initiation of arbitration. The scheme enacted by the TUAA envisions that a trial court will compel arbitration or deny the motion to compel arbitration. An order denying a motion to compel arbitration is appealable as of right pursuant to Tenn. Code Ann. section 29-5-319.12 “Section 29-5-319 exists so that the issue of arbitration can be appealed and resolved before litigation begins.”[13] There is not a comparable appeal as of right for an order compelling arbitration.[14]

The Court of Appeals has held that a trial court “must proceed expeditiously” in resolving a motion to compel arbitration pursuant to the TUAA.[15] Even in instances in which a factual dispute exists as to whether the arbitration agreement is enforceable, the court must determine the motion to compel arbitration first. The trial court “must distinguish between those arguments attacking the agreement which can be resolved solely as a matter of law and those arguments which require resolution of factual issues.”[16] An evidentiary hearing may be required to resolve factual disputes, but “it may not decline to resolve the question until trial of the underlying case.”[17]

The provisions of the TUAA and decisions of the Court of Appeals show that public policy favors construing arbitration clauses broadly.[18] Case law has repeatedly affirmed this public policy in favor of arbitration agreements.[19] Furthermore, the Court of Appeals has held that failure by a party to compel arbitration in a diligent manner may waive the contractual right to arbitration.[20] In so ruling, the Court of Appeals has observed that the benefits of arbitration are lost if not instituted early in the litigation process.[21] To permit Rule 31 mediation to forestall resolution of a motion to compel arbitration would undermine the favored status of arbitration agreements. Such an interpretation of Rule 31 would undermine and contravene the TUAA.[22]

The lawyer faced with court-ordered mediation while her motion to compel arbitration is pending may use Rule 31 to seek relief. Rule 31, section 3(c) provides that a party may request review of an “Order of Reference” to mediation and that the order “shall be vacated” if the court determines the case “is not appropriate for ADR or is not likely to benefit from submission to ADR.” The rule leaves the decision in the trial court’s discretion.[23]

Another manner of relief is an interlocutory appeal pursuant to Tennessee Rule of Appellate Procedure 9 or an extraordinary appeal pursuant to Tennessee Rule of Appellate Procedure 10. Appellate court review of the trial court’s order is subject to an abuse-of-discretion standard of review. Failing to adhere to the clear instruction of a statute is a reversible error applying this standard of review.[24]

Ultimately, however, lawyers and the trial courts may continue to dispute the authority of a trial court pursuant to Rule 31 until the matter is resolved in a published opinion of the appellate courts.

Notes

  1. Tenn. Code Ann. § 29-5-303(d).
  2. No. 01A01-9706-CH-00272, 1997 WL 399387 (Tenn. Ct. App. July 16, 1997) (Koch, J.). The Court of Appeals designated the opinion, “Memorandum Opinion,” and it therefore “shall not be cited or relied on for any reason in a subsequent unrelated case.” Id. at *1, n.2 (citing Tenn. Ct. App. P. 10(b)).
  3. Id. at *1.
  4. Id. at *2 (construing Tenn. Code Ann. § 29-5-303(a)). It is well settled that “Tennessee law contemplates judicial resolution of contract formation issues.” Frizzell Const. Co. Inc. v. Gatlinburg LLC, 9 S.W.3d 79, 85 n.12 (Tenn. 1999).
  5. Id.
  6. Environmental Abatement Inc. v. Astrum R.E. Corp., 27 S.W.3d 530, 540 (Tenn. Ct. App. 2000).
  7. Tenn. Sup. Ct. R. 31, §3(b). It states in pertinent part, “Upon motion of either party, or upon its own initiative, a court, by Order of Reference, may order the parties to an Eligible Civil Action to participate in a Judicial Settlement Conference or Mediation.” See also Environmental Abatement, 27 S.W.3d at 540.
  8. Tenn. Sup. Ct. R. 31, §2(f).
  9. Tenn. Code Ann. § 29-5-303(a), (d) (emphasis added).
  10. Pugh’s Lawn Landscape v. Jaycon Development Corp., 320 S.W.3d 252, 256 (Tenn. 2010) (citing Tenn. Code Ann. §§ 29-5-312 to -314).
  11. Id. at 257 (citing Arnold v. Morgan Keegan & Co., 914 S.W.2d 445, 448 (Tenn. 1996)).
  12. Tenn. Code Ann. § 29-5-319(a)(1).
  13. Mitchell v. Owens, 185 S.W.3d 837, 840 (Tenn. Ct. App. 2005) (quoting Stahl v. McGenty, 486 N.W.2d 157, 159 (Minn. Ct. App. 1992)).
  14. Thompson v. Terminix International Co., L.P., No. M2005-02708-COA-R3-CV, 2006 WL 2380598, at * 3 (Tenn. Ct. App. Aug. 6, 2006) (citing Tenn. Code Ann. § 29-5-319).
  15. Raines v. National Health Corp., No. M2006-1280-COA-R3-CV, 2007 WL 4322063, *6 (Tenn. Ct. App. Dec. 6, 2007) (Kurtz, Walter C. Sp. J.).
  16. Id. at *4.
  17. Id. at *6.
  18. Wachtel v. Shoney’s Inc., 830 S.W.2d 905, 908 (Tenn. Ct. App. 1991) (“It is the responsibility of the courts to give as broad a construction to an arbitration agreement as the words and intention of the parties, drawn from their expressions, will warrant, and to resolve any doubts in favor of arbitration.”). But see Howell v. NHC Healthcare-Fort Sanders Inc., 109 S.W.3d 731, 733 (Tenn. Ct. App. 2003) (stating “while courts are required to give an arbitration agreement ‘as broad a construction as the words and intentions of the parties will allow,’ this applies to the scope of the agreement, and not whether grounds exist to deny enforceability of the agreement”).
  19. E.g., Benton v. Vanderbilt Univ., 137 S.W.3d 614, 617 (Tenn. 2004).
  20. See Robert J. Denley Co. Inc. v. Neal Smith Const. Co. Inc., No. W2006-00629-COA-R3-CV, 2007 WL 1153121, at *8 (Tenn. Ct. App. April 19, 2007). To show waiver, one must show that the party knew of her right to arbitrate and acted inconsistently with that right to the prejudice of the moving party. Id.
  21. See Mitchell, 185 S.W.3d at 838.
  22. This article does not address whether a trial court has authority under Rule 31 to order the parties to mediation as to the issue of whether their dispute is arbitrable.
  23. Tenn. Sup. Ct. R. 31, §3(c).
  24. Boyd v. Comdata Network Inc., 88 S.W.3d 203, 212 (Tenn. Ct. App. 2002) (“By definition, a trial court ‘abuses its discretion’ when it makes an error of law.”).

Adam J. Eckstein ADAM J. ECKSTEIN is an associate with Martin, Tate, Morrow & Marston PC in Memphis and is licensed to practice law in Tennessee. He received his law degree with honors from the University of Cincinnati College of Law in 2008.