Petition for Writ of Certiorari — Frizzell Construction Co. v. Gatlinburg, L. L. C.

Bupfetne Court, v.-

FIL ED

991 853 FEB 1 4 2000

No. 99-

— _DEsICE Oe JHE CLERK

IN THE

Supreme Court of the Gnited States

FRIZZELL CONSTRUCTION COMPANY, INC.,

Petitioner,

Vv.

GATLINBURG, L.L.C.,

Respondent.

Petition for a Writ of Certiorari to the

Supreme Court of Tennessee

PETITION FOR A WRIT OF CERTIORARI

C. PAUL HARRISON DAVID G. LEITCH*

DIANA M. THIBODAUX GREGORY G. GARRE

LONG, RAGSDALE LORANE F. HEBERT

& WATERS, P.C. HOGAN & HARTSON L.L.P.

1111 Northshore Dr., N.W. 555 Thirteenth Street, N.W.

Suite S-700 Washington, D.C. 20004

Knoxville, TN 37919 (202) 637-5822

(423) 584-4040

DONALD A. HARPER

THE HARPER LAW FIRM

135 S. Main Street

Greenville, SC 29602

(864) 235-5535

* Counsel of Record Counsel for Petitioner

QUESTION PRESENTED

Whether this Court should resolve the conflict between

the Tennessee Supreme Court—which held in this case

that a general choice-of-law provision in a contract

subject to the Federal Arbitration Act has the effect of

incorporating state law displacing that Act’s directive

that arbitration provisions are enforceable—and this

Court, the federal circuit in which Tennessee is located,

and other federal courts of appeal and state high courts,

which have held that such a choice-of-law provision

does not have that effect.

il

RULE 29.6 STATEMENT

The caption contains the names of all the parties that

appeared in the Tennessee Supreme Court. Frizzell

Construction Company, Inc. (“Frizzell”) is a Tennessee

corporation. There is no parent corporation or publicly

held company owning 10% or more of Frizzell’s stock.

ill

TABLE OF CONTENTS

Page

QUESTION PRESENTED.........sssssssssseseseseeeeeeees

EME Be DUS STA TIOMIEINT o.ccsesicscssssssscsssncsesessanes i

TABLE OF AUTHORITIES .......ssssessssesssssessssssee v

OE AL l

SAE 2

- CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED.\.......+:::::ssseee0000 2

i aasviinsassuiovsnenie 2

STATEMENT OF THE CASE .....sssssssssssseessssseees 4

REASONS FOR GRANTING THE WRIT ......... g

I. THE TENNESSEE HIGH COURT

DECISION DIRECTLY CONFLICTS

WITH THIS COURT’S PRECEDENTS

AND IS “UNTENABLE” UNDER

MASTROBUONDO. .......:::0000seeeeeeeeseeteeseeetees 8

Il. THE TENNESSEE HIGH COURT

DECISION DIRECTLY CONFLICTS

WITH A DECISION OF THE FED-

ERAL CIRCUIT IN WHICH TEN-

NESSEE IS LOCATED, AS WELL AS

DECISIONS OF OTHER FEDERAL

CIRCUITS AND STATE HIGH

COURTS. .....ccccssccsssccccssccscssnrsconcccoscccesnnsees 14

IV

TABLE OF CONTENTS—Continued

Page

III. THE QUESTION PRESENTED IS IM-

PORTANT AND RECURRING. .............. 23

NT cei ehslewissciiacossadepiacblacestadsdideuiiecao 26

APPENDICES

Appendix A:

Opinion of the Supreme Court of Ten-

nessee (November 15, 1999)... la

Appendix B:

Opinion of the Court of Appeals of

Tennessee (November 2, 1998)................. 13a

Appendix C:

Order of the Chancery Court for Sevier

County, Tennessee (May 8, 1998) (at-

Appendix D:

Order of the Chancery Court for Sevier

County, Tennessee (March 23, 1998) ....... 27a

Vv

TABLE OF AUTHORITIES

Page

CASES:

Allied-Bruce Terminix Cos. v. Dobson,

SES ULE. BEG CT saccensivinssnscesencsntssitittseinenten 4,14,17

Arnold v. Arnold Corp., 920 F.2d 1269 (6th

Che FD csc csissicinssinnsitsierhinccianintiacianmanenaieiai 9

Barrentine v. Arkansas-Best Freight Sys.,

Frew, 450 US. T2B CUSED). aceresssosncvevavcsssoscsnrneres 23

Bird v. Shearson Lehman/American Express,

Inc., 926 F.2d 116 (2d Cir. 1990) ............seeeees 25

Campaniello Imports, Ltd. v. Saporiti Italia

S.p.A., 117 F.3d 655 (2d Cir. 1997) .........-:000++ 8

City of Blaine v. John Coleman Hayes & As-

socs. Inc., 818 S.W.2d 33 (Tenn. Ct. App.

BIDE) sescsrvenssinesocectininncnsnpniiatinntcssincnitelinniitnieastniitinies 6

Dean Witter Reynolds, Inc. v. Trimble, 631

N.Y.S.2d 215 (N.Y. Sup. Ct. 1995)........ccc00e0se- 21

Doctor’s Assocs., Inc. v. Casarotto, 517

TBR, GE CI aciscresesttncccideremntoenaminenrsians 12,13,14

Ferro Corp. v. Garrison Indus., Inc., 142

F.3d 926 (6th Cir. 1998) ..............cccccccssecceees passim

Homes of Legend, Inc. v. McCollough, 2000

WL 92255 (Ala. Jan. 28, 2000)............ccecieeeee i9

Hunter, Keith Indus. v. Piper Capital Man-

agement Inc., 575 N.W.2d 850 (Minn. Ct.

App. 1998) ........-c-ccccorsccscersscsseserecesessecssoesenees i

Jones v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 604 So.2d 332 (Ala. 1991)............ 9

Kamaya Co. v. American Property Consult-

ants, Ltd., 959 P.2d 1140 (Wash. Ct. App.

1998), rev. denied, 978 P.2d 1099 (Wash.

RODD) cscsissinnncsiereninntivcersmsioninstianseaniavadaiensiaicensn 20

vi

TABLE OF AUTHORITIES—Continued

Page

Klaxon Co. v. Stentor Elec. Mfg. Co., 313

Se NU EOE Ricicinanies irc uence 17

L&L Kempwood Assocs., L.P. v. Omega

Builders, Inc. (In re L & L Kempwood As-

“er L.P.), 1999 WL 1084240 (Tex. Dec.

hj ROOD iicinnenestanibiaieiaadta eect ae 19

Lee v. Heftel, 911 P.2d 721 (Haw. 1996) ........... 9

Levine v. Advest, Inc., 714 A.2d 649 (Conn.

LOIN D sncwsitgennesseicenindsekaetiaise atest eee ae 20

Lingle v. Norge Div. of Magic Chef, Inc., 486

CAB. FEA Pe icisitncihicnsensbtnasisseeel oo ae ee 25

Mastrobuono v. Shearson Lehman Hutton,

see, SETTLE, SE CT a hiciisolisctcsseidvssesecriacus passim

Moses H. Cone Mem'l Hosp. v. Mercury

Constr. Corp., 460 U.S. 1 (1983).......ccccceceseee. 3,11

National Union Fire Ins. Co. of Pittsburgh v.

Belco Petroleum Corp., 88 F.3d 129 (2d Cir.

FPP \arnsavcssachcineninintebcnmiedt ca saumier teh oe 18

Osteen v. T.E. Cuttino Constr. Co., 434

Ae ae Ces WED ccshincurcembdomee 20

PaineWebber, Inc. v. Elahi, 87 F.3d 589 (1st

COUP. . FI iccithaconciminncltnabiassiae cma Gea eeae ae 18

Perry v. Thomas, 482 U.S. 483 (1987).........0.... 12,14

Porter Hayden Co. v. Century Indem. Co.,

136 F.3d 380 (4th Cir. 1998) ooo. 18

Prima Paint Corp. v. Flood & Conklin Mfg.

Co., FOS ID. FOS CGF visvsintsitnscste tla passim

R.M. Perez & Assocs., Inc. v. Welch, 960 F.2d

Doe COUN Gs PM cicxiecicenotsantlaniatee ce: 9

Scherk v. Alberto-Culver Co., 417 U.S. 506

LL SR EME RES re a LN 23

vii

TABLE OF AUTHORITIES—Continued

Page

Shearson/American Express Inc. v. McMa-

hon, 482 U.S. 220 (1987)......sscccsccceeereeeereeeeees 23

Southland Corp. v. Keating, 465 US. |

(19BA) ..ncecrcscerosccossreercnsecsesenssnconsessessnascoveososeesees 14

State Farm Mut. Ins. Co. v. George Hyman

Constr. Co., 715 N.E.2d 749 (Ill. App. Ct.

SDS sc cscsccerevssvesecssevssnsceanesenensanervenstsnutnonongsnse 21

Thor Power Tool Co. v. Commissioner, 439

U.S. 522 (1979).......csscccsccscccersencsesesccescssrscsseees 23

UHC Management Co. v. Computer Sciences

Corp., 148 F.3d 992 (8th Cir. 1998) .........-++. 18

Volt Info. Sciences, Inc. v. Board of

Trustees of Leland Stanford Junior

Univ., 489 U.S. 468 (1989)........ cece 10,13,16,22

Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d

1205 (9th Cir. 1998)..........:cescesscsseesrersesetesereees 18

CONSTITUTION:

U.S. Const. art. VI. § 2................csceseerererseoreseeees 2,26

STATUTES:

Federal Arbitration Act, 9 U.S.C. § | et seq.... passim

DULG. © Bo ccccacssorsnccsccccaseccenssnsesscnssoosevernenconens 2

28 U.S.C. § 1257(€) ......ececceccerceseeceeessesseeeensenes 2

RULES:

S. Ct. Rule 10(D) .........-cccscsescscossccssccsnvccssccssonsees 14

S. Ct. Rule 10(c) ............c...ssccssccsesrerceseroosssseseees 13

Vili

TABLE-OF AUTHORITIES—Continued

Page

OTHER:

—Fhomas A. Diamond, Choice of Law Clauses

and Their Preemptive Effect Upon the Fed-

eral Arbitration Act: Reconciling The Su-

preme Court Within Itself, 39 Ariz. L. Rev.

tt. j ee ditiieadadaieainichadeiishbaedeleeisieis 20,21

G. Richard Shell, Federal Versus State Law in

the Interpretation of Contracts C ontaining

Arbitration Clauses: Reflections on Mas-

trobuono, 65 U. Cin. L. Rev. 43 1. | See 22

Gabrie! M. Wilner, Domke on Commercial

Arbitration App. I (Rev. ed. 1999) .................. 25

; IN THE

Supreme Court of the Gnited States

No. 99-__

FRIZZELL CONSTRUCTION COMPANY, INC.,

Petitioner,

Vv.

GATLINBURG, L.L.C.,

Respondent.

Petition for a Writ of Certiorari to the

Supreme Court of Tennessee

PETITION FOR A WRIT OF CERTIORARI

Petitioner Frizzell Construction Company, Inc. (“Friz-

zell”) respectfully petitions for a writ of certiorari to

review the judgment of the Supreme Court of Tennessee

in this case.

OPINIONS BELOW

The opinion of the Supreme Court of Tennessee is not

yet reported and is reproduced in the appendix hereto

(“App.”) at la. The opinion of the Court of Appeals of

Tennessee is unreported and reproduced at id. 12a. The

rulings of the Chancery Court for Sevier County, Ten-

nessee are unreported and reproduced at id. 22a, 28a.

2

JURISDICTION

The judgment of the Supreme Court of Tennessee was

entered on November 15, 1999. App. la. The jurisdic-

tion of this Court is invoked under 28 U.S.C. § 1257(a).

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

Article VI, § 2 of the United States Constitution pro-

vides:

This Constitution, and the Laws of the United States

which shall be made in Pursuance thereof; * * * shall

be the supreme Law of the Land; and the Judges in

every State shall be bound thereby, any Thing in the

Constitution or Laws of any State to the Contrary

notwithstanding.

Section 2 of the Federal Arbitration Act (“FAA” or

Act’), 9 U.S.C. § 2, provides in pertinent part:

A written provision in any * * * contract evidencing

a transaction involving commerce to settle by arbi-

tration a controversy thereafter arising out of such

contract or transaction * * * shall be valid, irrevoca-

ble, and enforceable, save upon such grounds as exist

at law or in equity for the revocation of any contract.

INTRODUCTION

This case presents an important question concerning

the interplay between federal and state law in an

area—the enforcement of contracts subject to the

FAA—in which this Court has frequently been called

upon to provide guidance due to the vital national

asia, Wn Seo x

PAE tae 108 en fe

3

interests at stake and countless number of transactions

and parties affected.

The FAA establishes a national policy promoting ar-

bitration of all claims or disputes arising under contracts

involving interstate commerce, and a federal guarantee

that agreements to arbitrate claims arising out of such

contracts “shall be valid, irrevocable, and enforceable.”

9 U.S.C. § 2. The effect of the Act is “to create a body

of federal substantive law of arbitrability, applicable to

any arbitration agreement within [its] coverage.” Moses

H. Cone Mem’! Hosp. v. Mercury Constr. Corp., 460

U.S. 1, 24 (1983). As this Court held in Prima Paint

Corp. v. Flood & Conklin Manufacturing Co., 388 US.

395, 400 (1967) (quotation omitted), one of the “na-

tional substantive Jaw” rules embodied in the FAA is

that “a claim of fraud of inducement of [a] contract * * *

is for the arbitrators and not for the courts,” and that this

rule “governs even in the face of a contrary state rule.”

Accordingly, “if contracting parties agree to include

claims for [fraudulent inducement] within the issues to

be arbitrated, the FAA ensures that their agreement will

be enforced according to its terms even if a rule of state

law would otherwise exclude such claims from arbitra-

tion.” Mastrobuono v. Shearson Lehman Hutton, Inc.,

514 U.S. 52, 58 (1995) (emphasis in original). In

Mastrobuono, this Court further held that inclusion of a

generic choice-of-law provision in a contract governed

by the FAA does not, without more, evince an intent on

the part of the parties to incorporate state law that

conflicts with federal arbitration law. Id. at 63-64.

4

This case arises out of a clash between federal and

state law over the arbitrability of claims of fraudulent

inducement of a contract. The parties here entered into a

standard form contract providing for the arbitration of

““[a]ll claims, disputes and or other matters” arising out

the contract. App. 2a. The Tennessee Supreme Court,

however, held that the contract’s general choice-of-law

provision incorporated state law precluding arbitration

of fraudulent inducement claims, even though it ac-

knowledged that such claims are “certainly arbitrable

under the FAA.” App. 8an.11. That decision directly

conflicts with this Court’s decision in Mastrobuono,

recent precedent of the federal circuit in which Tennes-

see 1s located, and the decisions of other federal courts

of appeal and state high courts.

When it enacted the FAA, Congress did not intend

“state and federal courts to reach different outcomes

about the validity of arbitration in similar cases.”

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265,

272 (1995). That is precisely what has happened here.

The conflict created by the decision in this case on the

important question presented is direct and extensive, and

defeats the very uniformity of results that the FAA was

enacted to secure. This Court should grant certiorari and

resolve that conflict here.

STATEMENT OF THE CASE

Petitioner Frizzell is in the construction business. In

April 1995, Frizzell agreed to oversee the construction

of a hotel for respondent Gatlinburg L.L.C. (“Gatlin-

burg’) in Gatlinburg, Tennessee. The parties used a

standard Associated General Contractors Construction

PLease eae OG ese ~ an

5

Manager contract entitled “Standard Form of Agreement

Between Owner and Construction Manager.” The

contract contained a choice-of-law clause (Art. 14.2)

providing: “This Agreement shall be governed by the

law of the place where the Project is located”—.e

Tennessee. App. 2a & n.1. It also contained an arbitra-

tion clause (Art. 16.1) providing: “All claims, disputes

and or other matters in questions arising out of, or

relating to, this Agreement or the breach thereof * * *

shall be decided by arbitration.” /d. 2a, 15a.

Shortly after the project was completed, a dispute

arose between the parties over payments allegedly due

under the contract. In August 1997, Frizzell filed an

action in the Chancery Court of Sevier County, Tennes-

see, to perfect a contractor’s lien on the property.

Frizzell then submitted a demand with the American

Arbitration Association to arbitrate all disputes arising

under the contract, and moved the Chancery Court to

stay the proceedings pending arbitration. Gatlinburg

opposed Frizzell’s arbitration demand and filed a coun-

terclaim alleging that Frizzell had fraudulently induced

it to enter into the contract. Jd. 2a. In February 1998,

the Chancery Court granted Frizzell’s request for a stay

and submitted its claim for payments under the contract

to arbitration, but enjoined arbitration of Gatlinburg’s

fraudulent inducement claim. Jd. 2a-3a, 30a.

Frizzell moved for reconsideration, explaining that

because the contract involved interstate commerce, it

was covered by the FAA, and under the FAA (not to

mention the terms of the agreement itself) a// claims

arising under or related to the contract—including

fraudulent inducement claims—were arbitrable. The

6

Chancery Court disagreed, holding that the contract did

not involve interstate commerce “so as to bring the

contract under the FAA,” and, in any event, did not

require arbitration of Gatlinburg’s fraudulent induce-

ment claim. /d. 3a. With respect to the latter issue, the

court held that Tennessee law does not permit arbitration

of fraudulent inducement claims, see City of Blaine v.

John Coleman Hayes & Assocs., Inc. 818 S.W.2d 33

(Tenn. Ct. App. 1991),' and that Tennessee law—not the

FAA—controlled here. App. 3a, 24a-2Sa.

The Court of Appeals of Tennessee affirmed. It

agreed with the Chancery Court that under state law and,

in particular, the Blaine case, “the issue of fraud in the

inducement [w]as a question to be determined by the

court,” not an arbitrator. /d. 20a. The Court of Appeals

did not reach the question whether the contract was

covered by the FAA, because—according to the rea-

soning of Blaine—“unless and until it is established that

there is a contract in existence, a consideration of

whether the contract is controlled by or subject to the

[FAA] is premature.” Jd. 19a.

| In Blaine, the Tennessee Court of Appeals held that the Ten-

nessee Arbitration Act “entitle[s]” parties “to a judicial determina-

tion on the issue” of fraud in the inducement of a contract. 818

S.W.2d at 38. In so holding, the Tennessee court “disagree[d] with

the conclusion reached” by this Court in Prima Paint Corp. v.

Flood & Conklin Manufacturing. Co., supra—i.e., that unless the

contract provides otherwise, “a claim of fraud of inducement of [a]

contract * * * is for the arbitrators and not for the courts,” 388 U.S.

at 400—and expressly “conform[ed]” its decision “to the dissent in

Prima [Paint].” 818 S.W.2d at 37-38.

abate

7

Frizzell filed an application for discretionary review to

the Supreme Court of Tennessee, presenting both the

issue whether the contract involved interstate com-

merce—so as to implicate the FAA—and, if so, whether

the Chancery Court improperly barred arbitration of the

fraudulent inducement claim. The Tennessee Supreme

Court held that “this case plainly involves interstate

commerce”—thus triggering the FAA—but that “in

accordance with the [FAA], the chancery court properly

retained jurisdiction over the claim of fraudulent in-

ducement to enter a contract.” Jd. la.

The Tennessee Supreme Court recognized that the

contract expressly provides for the arbitration of “‘[alll

claims, disputes and or other matters in questions arising

out of, or relating to, this Agreement.” Jd. 2a (quoting

Article 16.1). But it held that—solely as a result of the

separate choice-of-law provision—the arbitration clause

“is limited and subject to the additional qualification that

Tennessee law provides the basis for deciding questions

concerning [what claims are subject to arbitration].” Jd.

10a. Thus, because Tennessee law does not allow the

arbitration of fraudulent inducement claims, the Tennes-

see Supreme Court held that the Chancery Court prop-

erly refused arbitration of _ that claim

here—notwithstanding that such claims are “certainly

arbitrable under the FAA.” /d. 8an.11.

The Tennessee Supreme Court believed this holding

was “consistent with the policies underlying the FAA.”

Id. 11a. But the court refused to address Frizzell’s

contention that this result contravenes the terms of the

parties’ express agreement to arbitrate “all claims”

arising out of their standard form contract, and directly

8

conflicts with the result reached in numerous decisions

construing the virtually identical provisions of other

contracts governed by the FAA, including Mastrobuono

v. Shearson Lehman Hutton, Inc., supra, and Ferro

Corp. v. Garrison Industries, Inc., 142 F.3d 926 (6th

Cir. 1998). See Appellant’s Br. in Tenn. S. Ct., at 19-34.

REASONS FOR GRANTING THE WRIT

I. THE TENNESSEE HIGH COURT DECISION

DIRECTLY CONFLICTS WITH THIS

COURT’S PRECEDENTS AND IS “UNTEN-

ABLE” UNDER MASTROBUONO.

1. The question presented in this case is framed by

this Court’s decision in Prima Paint Corp. v. Flood &

Conklin Manufacturing Co., supra. There, the Court

considered whether a claim for fraudulent inducement of

a contract governed by the FAA is subject to arbitration

when the contract—ike the one at issue here—broadly

provides for the arbitration of all claims “arising out of

or relating to” that contract. 388 U.S. at 398. In an-

swering that question, this Court squarely held that—in

the absence of evidence that the contracting parties

intended otherwise—such a claim is for the arbitrator.

Id. at 402-404. Thus, Prima Paint establishes as a

matter of substantive federal law that “a broad arbitra-

tion clause will be held to encompass arbitration of the

claim that the contract itself was induced by fraud,”

“even in the face of a contrary state rule.” Jd. at 400,

402 (emphasis added).?

2 The clear import of Prima Paint has not been lost on the

lower courts. See, e.g., Campaniello Imports, Ltd. v. Saporiti

Italia S.p.A., 117 F.3d 655, 666 (2d Cir. 1997) (under FAA a court

9

The arbitration clause in Prima Paint was “easily

broad enough” to require arbitration of the fraudulent

inducement claim in that case, and the same goes for the

virtually identical contractual language in the arbitration

clause in this case. Jd. at 406 (emphasis added). Com-

pare id. (contract requires arbitration of “[a}ny contro-

versy or claim arising out of or relating to this Agree-

ment, or the breach thereof”) with App. 2a (contract

requires arbitration of “[aJll claims, disputes and or other

matters in questions arising out of, or relating to, this

Agreement or the breach thereof”).

2. The Tennessee Supreme Court attempted to side-

step Prima Paint by pointing to the choice-of-law

provision in the contract—and that provision alone—as

evidence that the parties did not intend to arbitrate

contract formation issues. /d. at. 8an.11. But in doing

so, the court directly contravened this Court’s decision

in Mastrobuono v. Shearson Lehman Hutton, Inc.,

supra. There, this Court held—as a matter of federal

arbitration law—that the inclusion of a generic choice-

of-law provision establishing that the contract is gov-

erned by the law of a particular state is not “evidence”

that the parties intended to incorporate state law that

may not adjudicate claims of fraud in the inducement of a contract

generally); R.M. Perez & Assocs., Inc. v. Welch, 960 F.2d 534, 538

(Sth Cir. 1992) (“If the fraud relates to the entire agreement, then

the [FAA] requires that the fraud claim be decided by an arbitra-

tor.”); Arnold v. Arnold Corp., 920 F.2d 1269, 1278 (6th Cir.

1990) (same); Lee v. Heftel, 911 P.2d 721, 724 (Haw. 1996) (under

FAA, “broad arbitration clause wili be held to encompass arbitra-

tion of the claim that contract itself was induced by fraud”), Jones

v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 604 So.2d 332,

336-337 (Ala. 1991) (same).

10

conflicts with federal arbitration law. See 514 U.S. at

63-64.

In Mastrobuono, the Court considered whether a

choice-of-law provision in a standard form contract

providing that it “shall be governed by the laws of the

State of New York” incorporated New York law pre-

cluding arbitration of punitive damages claims. /d. at

53. In determining that the answer was “no,” the Court

flatly rejected respondents’ argument that the “choice-

of-law provision in [the] contract evidence[d] the par-

ties’ express agreement that punitive damages should

not be awarded in the arbitration of any dispute arising

under [the] contract.” Jd. at 56.

The Court reasoned that the choice-of-law provision

could “reasonably be read as merely a substitute for the

conflict-of-laws analysis that otherwise would determine

what law to apply to disputes arising out of the contrac-

tual relationship.” Jd. at 59. Because it could be read as

_ such, “[i]t [was] not, in itself, an unequivocal exclusion

of punitive damages claims.” Jd. at 60 (emphasis

added). At most, “the choice-of-law clause introduce[d]

an ambiguity into an arbitration agreement that would

otherwise allow punitive damages awards,” in accor-

dance with federal law. Jd. at 62. And “when a court

interprets such provisions in an agreement covered by

the FAA, ‘due regard must be given to the federal policy

favoring arbitration, and ambiguities as to the scope of

the arbitration clause itself resolved in favor of arbitra-

tion.” Id. (quoting Volt Info. Sciences, Inc. v. Board of

Trustees of Leland Stanford Junior Univ., 489 U.S. 468,

476 (1989) (emphasis added)). See also Moses H. Cone,

460 U.S. at 24-25 (“The Arbitration Act establishes that,

ee Oe ee Ser eg Se Oe |

11

as a matter of federal law, any doubts concerning the

scope of arbitrable issues should be resolved in favor of

arbitration, whether the problem at hand is the con-

struction of the contract language itself or an allegation

or waiver, delay, or a like defense to arbitrability.”)

(emphasis added).

Accordingly, the Mastrobuono Court held:

[T]he best way to harmonize the choice-of-law pro-

vision with the arbitration provision is to read “the

laws of the State of New York” to encompass sub-

stantive principles that New York courts would ap-

ply, but not to include special rules limiting the

authority of arbitrators. Thus, the choice-of-law

provision covers the rights and duties of the parties,

while the arbitration clause covers arbitration; nei-

ther sentence intrudes upon the other. In contrast,

respondents’ reading sets up the two clauses in con-

flict with one another: one foreclosing punitive

damages, the other allowing them. This interpreta-

tion is untenable. [514 U.S. at 63-64 (emphases

added). |

The Tennessee Supreme Court decision in this case

flouts the rule of Mastrobuono—on which petitioner

specifically relied before the state high court in arguing

that respondent’s fraudulent inducement claim was

subject to arbitration under the “national substantive

law” recognized in Prima Paint, 388 U.S. at 400, and

the parties’ agreement to arbitrate “all claims” arising

under their contract. See supra at 5. The standard

choice-of-law and arbitration clauses contained in the

contract involved in this case are identical for all practi-

cal purposes to the ones contained in the contract in

12

Mastrobuono.3 Thus, the state high court’s conclusion

that the choice-of-law provision here incorporated state

arbitration law that conflicts with federal arbitration law

is just as “untenable” as the conclusion rejected by the

Court in Mastrobuono. 514 U.S. at 64.

The Tennessee Supreme Court, however, turned a deaf

ear to petitioner’s arguments, reached a result contrary

to Mastrobuono—allowing state arbitration law to

displace federal arbitration law—and, thus, directly

impeded the central aim of the FAA. State legislatures

are not free to enact laws that require parties to accept

rules or results that conflict with the FAA. See Doctor’s

Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996).

And state courts may not “construe [an] agreement”

subject to the FAA in a manner that “would enable the

court to effect what * * * the state legislature cannot.”

See Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987).

Thus, as the Court put it in Mastrobuono, 514 U.S. at

58, “if contracting parties agree to include [particular

claims] within the issues to be arbitrated, the FAA

ensures that their agreement will be enforced according

to its terms even if a rule of state law would otherwise

exclude such claims from arbitration.”

3 Compare App. 2a & n.1, 15a (“This Agreement shall be

governed by the law of [Tennessee],” and “[a]ll claims, disputes,

and or other matters in question arising out of, or relating to, this

Agreement or the breach thereof * * * shall be decided by arbitra-

tion”) with 514 U.S. at 58 n.2 (“This agreement * * * shall be

governed by the laws of the State of New York,” and “any contro-

versy arising out of or relating to * * * this agreement or the

breach thereof * * * shall be settled by arbitration”) (emphases

added).

13

In short, the conflict between Mastrobuono and the

Tennessee Supreme Court decision could scarcely be

more clear, and it provides reason enough to grant

certiorari. See S. Ct. Rule 10(c).

3. This Court’s decision in Volt Information Sci-

ences, Inc. v. Board of Trustees of Leland Stanford

Junior University, supra, is not to the contrary. In Volt,

the Court upheld a state court decision interpreting a

choice-of-law provision as incorporating state proce-

dural rules of arbitration where those rules were “mani-

festly designed to encourage resort to the arbitral proc-

ess,” and “generally foster[ed] the federal policy favor-

ing arbitration.” 489 U.S. at 476 & n.5 (emphasis

added). By contrast, the state law involved in this

case—precluding arbitration of fraudulent inducement

claims—frustrates the federal policy favoring arbitration

of such claims. More to the point, as this Court ob-

served in Doctor’s Associates, Inc. v. Casarotto, 517

U.S. at 688, “[t]he state rule examined in Volt deter-

mined only the efficient order of proceedings; it did not

affect the enforceability of the arbitration agreement

itself.” Here—as in Mastrobuono—the state arbitration

law at issue directly impinges on the enforceability of

the arbitration agreement in a manner that conflicts with

the FAA. In any event, any perceived inconsistency

between Mastrobuono and Volt only underscores the

need for review here. See infra at 21-23.

4. Finally, the Tennessee Supreme Court decision is

also in serious tension with decisions of this Court

holding that the FAA preempts conflicting state law

restricting the arbitrability of claims. In Doctor's .

Associates, 517 U.S. at 686-688, for instance, the Court

14

held that a state law requiring notice of an arbitration

clause to appear on the first page of a contract conflicted

with the FAA and was therefore preempted by the FAA.

Similarly, in Allied-Bruce Terminix Cos. v. Dobson, 513

U.S. at 273-281, the Court concluded that the FAA

preempted a state statute rendering arbitration agree-

ments unenforceable. And in Southland Corp. v. Keat-

ing, 465 U.S. 1, 10-16 (1984), and Perry v. Thomas, 482

U.S. at 489-491, the Court held that the FAA preempted

two California statutes that purported to require judicial

resolution of certain disputes. In supplanting the FAA

with state law precluding arbitration of fraudulent

inducement claims, the Tennessee high court ran afoul

of these decisions, too.

Il. THE TENNESSEE HIGH COURT DECISION

DIRECTLY CONFLICTS A DECISION OF

THE FEDERAL CIRCUIT IN WHICH TEN-

NESSEE IS LOCATED, AS WELL AS THE

DECISIONS OF OTHER FEDERAL CIR-

CUITS AND STATE HIGH COURTS.

1. The conflict created by this case is by no means

limited to this Court’s decisions. As we explain next,

the Tennessee Supreme Court decision also conflicts

with the decisions of the federal courts of appeal and

those of other state high courts, providing additional

grounds for certiorari. See S. Ct. Rule 10(b).

Most significantly, Tennessee Supreme Court decision

cannot be reconciled with the precedent of the Sixth

Circuit—the federal circuit in which Tennessee is

located. In Ferro Corp. v. Garrison Industries, Inc.,

supra, the Sixth Circuit considered the very same issue

Se ee Se

15

presented here—whether the inclusion of a choice-of-

law provision in a contract governed by the FAA incor-

porated state law requiring judicial resolution of a

fraudulent inducement claim. In reaching a result

contrary to that of the Tennessee Supreme Court in this

case, the Sixth Circuit first recognized that under Prima

Paint “the issue of fraudulent inducement of a contract

is to be decided by an arbitrator,” unless the parties

contract otherwise. 142 F.2d at 933. The court of

appeals then rejected the district court’s conclusion—the

same one reached by the Tennessee Supreme Court

here—that “by inserting [a standard] choice-of-law

clause into their arbitration agreement, the parties

expressly contracted to be bound by Ohio law, thus

precluding application of the FAA.” Jd.

Expressly invoking the rule of Mastrobuono, the Sixth

Circuit explained:

{T]he Court finds no indication that the parties in-

tended to incorporate Ohio law to determine that the

issue of fraudulent inducement should be adjudicated

in a judicial forum. As in Mastrobuono, the arbitra-

tion clause is conspicuously broad, as it applies to

“fajll controversies and claims arising out of or re-

lating to this Agreement * * *.” Given this broad

language, the Court does not believe that the parties

intended to incorporate Ohio law, or invoke the

power of courts, to determine the scope of the arbi-

tration agreement. Thus, we harmonize the provi-

sions of the [agreement] in the same manner as the

Court did in Mastrobuono: by ruling that the choice-

of-law clause [was] not an ‘unequivocal inclusion’ of

[state] law which arguably holds that the issue of

16

fraudulent inducement is one for a court, and not an

arbitrator, to decide. [/d. at 937.]

In so holding, the Sixth Circuit recognized that “[t]his

decision not only finds resonance in the decisional law

of other circuits, but also in policy and common sense.”

Id. at 937-938 (citing cases). Moreover, the court

expressly rejected the contention that this Court’s

decision in Volt required a different result. As the Sixth

Circuit explained, Volt “did not present a situation in

which state and federal law were in conflict,” since the

FAA does not address the issue dealt with by the state

procedural rule of arbitration involved in_ that

case—whether a court may stay arbitration pending

resolution of related litigation involving third parties not

subject to arbitration. /d. at 934. By contrast, in the

situation presented in Ferro—as here—state and federal

law clearly conflict: fraudulent inducement claims are

plainly arbitrable under federal law, see Prima Paint,

388 U.S. at 402, but not under state law. Yet the Ten-

nessee Supreme Court refused to even address Ferro,

notwithstanding petitioner’s specific reliance on it.

The direct and irreconcilable conflict between the

Sixth Circuit and the Tennessee Supreme Court on the

precise question presented by this case is especially

troubling, given that Tennessee is located within the

Sixth Circuit. On the same standard form contract, a

fraudulent inducement claim in Tennessee will not be

subject to arbitration if the contract is interpreted by a

state court, but will be subject to arbitration if it is

interpreted by a federal court. This result offends

notions of fairness, encourages forum-shopping, and

17

undermines federal policy. For these reasons, this Court

has already lamented this very predicament:

[I}t is clear beyond question that if this suit had been

brought as a diversity action in a federal district

court, the arbitration clause would have been en-

forceable. The [contrary] interpretation given * * *

by the California Supreme Court would therefore en-

courage and reward forum shopping. We are un-

willing to attribute to Congress the intent * * * to

create a right to enforce an arbitration contract and

yet make that right dependent for its enforcement on

the particular forum in which it is asserted. And

since the overwhelming proportion of all civil litiga-

tion in this country is in the state courts, we cannot

believe that Congress intended to limit the [FAA] to

disputes subject only to federal court jurisdiction.

Such an interpretation would frustrate Congressional

intent * * *. [Southland Corp. v. Keating, 465 U.S.

at 15-16 (footnotes omitted) (emphasis in original). ]

See also Allied-Bruce Terminix Cos. v. Dobson, 513

U.S. at 272 (“Congress would not have wanted state and

federal courts to reach different outcomes about the

validity of arbitration in similar cases.”); Klaxon Co. v

Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941) (courts

should strive for substantial uniformity and predictabil-

ity of outcomes in federal and state court litigation).

The Court should grant review to prevent such an

intolerable outcome here.

2. As the Sixth Circuit highlighted in Ferro, see 142

F.2d at 937-938, the conflict of authority implicated by

this case extends to the decisions of other federal courts

of appeals decisions as well. In the wake of Mastro-

18

buono, numerous courts of appeal have followed that

decision and held that a general choice-of-law provision

does not evince an intent to incorporate state law that

precludes arbitration of an issue or otherwise conflicts

with the FAA. See, e.g., UHC Management Co. Vv.

Computer Sciences Corp., 148 F.3d 992, 996-997 (8th

Cir. 1998) (under Mastrobuono, choice-of-law provision

did not evince an intent to have arbitration award re-

viewed under state law standards); Wolsey, Lid. v.

Foodmaker, Inc., 144 F.3d 1205, 1213 (9th Cir. 1998)

(‘“Mastrobuono dictates that general choice-of-law

clauses do not incorporate state rules that govern the

allocation of authority between courts and arbitrators”);

Porter Hayden Co. v. Century Indem. Co., 136 F.3d

380, 382-383 (4th Cir. 1998) (“The Supreme Court has

* * * squarely rejected the argument that a federal court

should read a contract’s general choice-of-law provision

as invoking state law of arbitrability and displacing

federal arbitration law.”); National Union Fire Ins. Co.

of Pittsburgh v. Belco Petroleum Corp., 88 F.3d 129,

134 (2d Cir. 1996) (Mastrobuono “squarely reject[s]”

argument that choice-of-law clause incorporated state

law requiring court to decide preclusion issue);

PaineWebber, Inc. v. Elahi, 87 F.3d 589, 594 (Ist Cir.

1996) (“Following the principles and analysis set forth

in Mastrobuono, we * * * find that the choice-of-law

clause in this case is not an expression of intent to adopt.

New York caselaw requiring [application of state rule

that contravened federal arbitration law]”).

3. The conflict also involves state court decisions.

Unlike the Tennessee Supreme Court, other state high

courts—heeding the rule of Mastrobuono—have held

19

that general choice-of-law provisions do not automati-

cally incorporate state arbitration law that conflicts with

the FAA.

In L & L Kempwood Assocs., L.P. v. Omega Builders,

Inc. (In re L & L Kempwood Assocs., L.P.), 1999 WL

1084240, at *2 & nn.16, 17 (Tex. Dec. 2, 1999), for

example, the Texas Supreme Court held that a standard

choice-of-law provision did not act to displace the FAA

with conflicting state arbitration law requiring a court to

determine the sufficiency of an arbitration demand.

Expressly relying on Mastrobuono, Ferro, and other

federal circuit decisions discussed above, the Texas high

court reasoned that “[t]he choice-of-law provision did

not specifically exclude the application of federal law,

and absent such an exclusion we decline to read the

choice-of-law clause as having such an effect.” /d. at *2

(footnotes omitted). Ignoring Mastrobuono and Ferro,

the Tennessee Supreme Court here held that an indistin-

guishable choice-of-law provision had the opposite

effect.

Similarly, in Homes of Legend, Inc. v. McCollough,

2000 WL 92255, at *5 n.9 (Ala. Jan. 28, 2000), the

Alabama Supreme Court—following Mastrobuono

—concluded that a choice-of-law clause “provide[d] for

the application of Alabama substantive law in deter-

mining the merits of the parties’ disputes,” whereas the

arbitration provision set forth “the procedure to be used

in resolving those disputes.” In so holding, the court

recognized that—under the rule of Mastrobuono—the

fact that the agreement contained both a provision

selecting Alabama law (which renders arbitration

agreements unenforceable) and an arbitration provision

20

did not render it “internally inconsistent or ambiguous.”

The court also held, moreover, that interpreting the

choice-of-law clause as incorporating state arbitration

rules that displaced federal arbitration law would “con-

flict[] with the FAA.” Jd.4

The conflict between the Tennessee Supreme Court

decision in this case and Kamaya Co. v. American

Property Consultants, Ltd., 959 P.2d 1140 (Wash. Ct.

App. 1998), rev. denied, 978 P.2d 1099 (Wash. 1999), is

even more acute. Kayama turned on precisely the same

issue presented here and in Ferro. The plaintiffs did not

dispute “that under the FAA, general arbitration clauses

ordinarily cover claims of fraud-in-the-inducement of a

contract,” but they argued that the contract’s standard

choice-of-law provision had the effect of displacing the

federal arbitration rule by providing that the contract

was governed by Japanese law (which, according to the

plaintiffs, does not require arbitration of such claims).

4 See also, e.g., Levine v. Advest, Inc., 714 A.2d 649,

659-661 (Conn. 1998) (choice-of-law provision did not

incorporate state law requiring court to decide issue of

timeliness); Osteen v. T.E. Cuttino Constr. Co., 434

S.E.2d 281, 283-284 (S.C. 1993) (choice-of-law provi-

sion did not incorporate state arbitration law, but rather

only state substantive law to be applied by arbitrators in

resolving conflicts under agreement); Hunter, Keith

Indus. v. Piper Capital Management Inc., 575 N.W.2d

850, 854 (Minn. Ct. App. 1998) (“As in Mastrobuono,

we read the choice-of-law provision to govern the rights

and duties of the parties, while the arbitration clause

covers the arbitration.”).

21

959 P.2d at 1145-46. The state court disagreed, recog-

nizing that this Court “rejected a very similar argument

in Mastrobuono,” and that the Sixth Circuit in Ferro had

done the same. See id. at 1146-47. Moreover, as the

Washington court observed, the “strong federal policy

favoring arbitration” also compelled this result. Jd. at

1148. Nevertheless, under the Tennessee high court

decision here the fraudulent inducement claim in Ka-

maya would have been subjected to adjudication rather

than arbitration, thus frustrating the “strong federal

policy favoring arbitration.” Jd.

4. Further heightening the need for review is the

confusion that Mastrobuono has left in its wake con-

cerning its application in state court. Because Mastro-

buono reached this Court by way of federal courts sitting

in diversity, some state courts have suggested that

Mastrobuono is only binding upon federal courts inter-

preting contracts under diversity jurisdiction, and that

state courts are accordingly free to ignore the rule of

Mastrobuono even when interpreting the same provi-

sions in contracts. See, e.g., State Farm Mut. Ins. Co. v.

George Hyman Constr. Co., 715 N.E.2d 749, 755 (Ill.

App. Ct. 1999) (holding that a choice-of-law provision

incorporated state arbitration law because court had

authority to reach that conclusion under Mastrobuono);

Dean Witter Reynolds, Inc. v. Trimble, 631 N.Y.S.2d

215, 217 n.4 (N.Y. Sup. Ct. 1995) (noting that “[e}ven if

the instant case involved a standard-form contract with

the identical New York choice-of-law clause {at issue in

Mastrobuono},” the court “would not be bound to

interpret it in the same way as the U.S. Supreme Court

did * * * since the interpretation of contracts is a matter

of state law.”); see also Thomas A. Diamond, Choice of

22

Law Clauses and Their Preemptive Effect Upon the

Federal Arbitration Act: Reconciling The Supreme

Court Within Itself, 39 Ariz. L. Rev. 36, 60 (1997)

(observing that “[s]tate courts have tended to give

Mastrobuono a narrow reading”).

While this is a minority view, it arguably finds support

in footnote 4 of the Mastrobuono decision, where the

Court distinguished Vo/t on the ground that it involved a

state court’s construction of a contract to which the

Court was obliged to give deference, whereas Mastro-

buono involved a federal court’s interpretation of a

contract which the Court reviewed de novo. See 514

U.S. at 60 n.4. As we have explained, Volt is distin-

guishable from Mastrobuono on other grounds—

including the fact that incorporation of the state law rule

in that case “foster[ed]” rather than frustrated federal

arbitration law. Volt, 489 U.S. at 476 & n.5. In addi-

tion, whatever deference is owed state court construc-

tions of contracts, such deference plainly does not

require adoption of “untenable” constructions of such

contracts. Mastrobuono, 514 U.S. at 64.

But in any event, the fact that some state

courts—including the Tennessee Supreme Court in this

case—have felt free to disregard Mastrobuono in con-

struing contracts with virtually the same choice-of-law

and arbitration provisions considered in Mastrobuono

demonstrates the need for this Court’s guidance. See

Diamond, supra, at 65 (“The longer Volt and Mastro-

buono remain unreconciled, the greater will be the

confusion and disparity of opinion among the state and

federal courts.”); G. Richard Shell, Federal Versus State

Law in the Interpretation of Contracts Containing

23

Arbitration Clauses: Reflections on Mastrobuono, 65 U.

Cin. L. Rev. 43, 63 (1996) (“By refusing to question the

underlying state-law bias of Volt, the Court in Mastro-

buono missed a major opportunity to clarify the law,

reduce uncertainty, and save arbitration users pointless

litigation costs.”). This case is an ideal vehicle through

which to provide such guidance.

Ill, THE QUESTION PRESENTED IS IMPOR-

TANT AND RECURRING.

Although the multiple conflicts raised in this petition

alone provide a compelling basis for review, certiorari is

particularly appropriate given the importance and

recurring nature of the question presented. See, e.g.,

Scherk v. Alberto-Culver Co., 417 U.S. 506, 510 (1974)

(granting certiorari to consider important arbitration

issue); Thor Power Tool Co. v. Commissioner, 439 U.S.

522, 525 (1979) (granting certiorari to consider “impor-

tant and recurring” issues).

Enacted to “revers[e] centuries of judicial hostility to

arbitration agreements,” the FAA reflects a strong

“federal policy favoring arbitration” of disputes. Shear-

son/American Express Inc. v. McMahon, 482 U.S. 220,

225-226 (1987) (quotation omitted) (alteration in origi-

nal). The reasons supporting this policy “are as wise as

they are obvious: litigation is costly and time consum-

ing, and * * * judges are less adapted to the nuances of

the disputes that typically arise” in various contexts than

persons chosen to arbitrate such disputes because of

their expertise in a particular area. Barrentine v. Arkan-

sas-Best Freight Sys., Inc., 450 U.S. 728, 747 (1981)

(Burger, C.J., and Rehnquist, J., dissenting). Submitting

24

disputes to such persons thus “provides a swift, fair, and

inexpensive remedy.” Jd. at 748. By “rigorously en-

forc[ing] agreements to arbitrate,” Shearson/American

Express, 482 U.S. at 226, this Court has consistently

endeavored to effectuate the federal policy favoring

arbitration. That policy is directly threatened here.

As the Sixth Circuit recognized in Ferro, “[t]he policy

of the FAA is to enforce privately entered agreements to

arbitrate, and to resolve any doubts concerning the scope

of arbitrable issues in favor of arbitration consistent with

the national policy favoring arbitration.” 142 F.3d at

938. Accepting the interpretation offered and rejected in

Mastrobuono and Ferro—but embraced by the Tennes-

see Supreme Court here—

would vitiate the policy aims of the Act by enabling

litigants to effectively abrogate the FAA’s applica-

bility to [contracts with choice-of-law provisions that

incorporate the law of States which preclude arbitra-

tion of fraudulent inducement claims] by pleading

fraudulent inducement. That is, a party would sim-

ply assert that the contract was fraudulently induced,

thereby removing the case from the jurisdiction of

the arbitrators, and vesting it with a court. Though

the court’s jurisdiction over the matter would termi-

nate subsequent to it determining whether or not the

contract was fraudulently induced, the litigation

would vitiate the primary benefit of arbitration, i.e.,

the expeditious, inexpensive resolution of disputes.

[Jd.]

That is precisely what has happened here. But the

matter is even graver than that. As the Sixth Circuit

continued: “Most contracts include a choice-of-law

a

clause, and, thus, if each of these clauses were read to

foreclose the application of the substantive law enacted

by Congress in the FAA, the FAA would be applicable

in very few cases. Such an interpretation is simply not

viable, as it would effectively emaciate the Act itself.”

Id. Nevertheless, that interpretation is now the law of

Tennessee.

Finally, as is evident from the numerous conflicts

engendered by the state high court decision, the basic

question presented by this case is recurring. Arbitration

clauses are a common feature of commercial contracts,

see, e.g., Lingle v. Norge Div. of Magic Chef, Inc., 486

U.S. 399, 411. n.11 (1988) (noting that arbitrators are

designated by nearly all collective bargaining agree-

ments as the adjudicators of contract disputes); Bird v.

Shearson Lehman/American Express, Inc., 926 F.2d

116, 124 (2d Cir. 1990) (Kearse, J., dissenting) (noting

“widespread use” of arbitration clauses in brokerage

contracts), and such contracts invariably contain choice-

of-law provisions. See Ferro, 142 F.3d at 938. The

contract in this case, for instance, is a standard form

contract used by a multitude of construction contrac-

tors—in Tennessee and elsewhere in the Nation. Nu-

merous States have enacted arbitration statutes that

expressly exclude certain types of disputes from arbitra-

tion, see 2 Gabriel M. Wilner, Domke on Commercial

Arbitration App. I (Rev. ed. 1999), and still oth-

ers—Tennessee and New York, for example—exclude

certain claims from arbitration as a matter of judicial

rule. Until resolved by this Court, the question pre-

sented by this case will accordingly continue to arise

with great frequency.

26

This Court should grant certiorari to ensure uniformity

of results and that the FAA’s mandate requiring the

enforcement of all arbitration agreements involving

interstate commerce—including agreements to arbitrate

fraudulent inducement claims—remains “the supreme

Law of the Land.” U.S. Const. art. VI. § 2.

CONCLUSION

For the foregoing reasons, the petition for a writ of

certiorari should be granted.

Respectfully submitted,

C. PAUL HARRISON DAVID G. LEITCH*

DIANA M. THIBODAUX GREGORY G. GARRE

LONG, RAGSDALE LORANE F. HEBERT

& WATERS, P.C. HOGAN & HARTSON L.L.P.

1111 Northshore Dr., N.W. 555 Thirteenth Street, N.W.

Suite S-700 Washington, D.C. 20004

Knoxville, TN 37919 (202) 637-5822

(423) 584-4040

DONALD A. HARPER

THE HARPER LAW FIRM

135 S. Main Street

Greenville, SC 29602

(864) 235-5535

* Counsel of Record Counsel for Petitioner

APPENDICES

la

APPENDIX A

[Filed Nov. 15, 1999]

IN THE SUPREME COURT OF TENNESSEE,

AT KNOXVILLE

FRIZZELL CONSTRUCTION COMPANY, INC.,

Plaintiff/Appellant,

v.

GATLINBURG, L.L.C.,

Defendant/Appellee.

No. E1998-00176-SC-R11-CV

Nov. 15, 1999

OPINION

WILLIAM M. BARKER, Justice.

In this appeal, we address two primary issues: (1)

whether the contract in this case providing for construc-

tion of a hotel in Tennessee “involves” interstate com-

merce so as to implicate the Federal Arbitration Act, and

(2) whether the chancery court erred in withholding

contract formation issues from arbitration. We hold that

the contract in this case plainly involves interstate

commerce and that the parties did not intend to arbitrate

a claim of fraudulent inducement to enter a contract.

Therefore, in accordance with the Federal Arbitration

Act, the chancery court properly retained jurisdiction

over the claim of fraudulent inducement to enter a

contract. The judgment of the Court of Appeals is

affirmed.

2a

BACKGROUND

On April 4, 1995, Gatlinburg, L.L.C. (“Gatlinburg’”’),

entered into a contract with Frizzell Construction Com-

pany, Inc. (“Frizzell”), for the construction of a hotel in

Sevier County, Tennessee. Gatlinburg owned the

project, and Frizzell served as the management company

in charge of constructing the hotel. The contract con-

tained a provision stating that the laws of Tennessee

would govern the contract and a provision requiring

arbitration of “[a]ll claims, disputes and or other matters

in questions arising out of, or relating to, this Agreement

or the breach thereof... .”!

Shortly after the substantial completion of the hotel, a

dispute arose between the parties relating to certain

payments due to Frizzell under the contract. This

dispute ultimately culminated in Frizzell filing a “Com-

plaint to Enforce Mechanic’s Lien and for Breach of

Contract” in the Sevier County Chancery Court on

August 22, 1997. On October 27, 1997, Gatlinburg filed

its Answer, and in an amended counterclaim, Gatlinburg

alleged that the contract was fraudulently induced

through Frizzell’s misrepresentation of its expertise and

ability to complete the project for the stated amount. On

November 3, 1997, Frizzell made a demand for arbitra-

tion, and eight days later, Frizzell filed a motion to stay

the court proceedings pending arbitration.

The chancellor granted Frizzell’s motion to stay and

submitted the issues concerning overdue payment to

| The choice-of-law provision in section 14.2 of the contract

states that “[t]his agreement shall be governed by the law of the

place where the Project is located.” The parties agree that the

clause contemplates application of Tennessee law.

i ae tl

3a

arbitration. However, the court withheld from arbitra-

tion Gatlinburg’s allegation of fraudulent inducement

because Tennessee law does not permit arbitration of

this claim. In a motion to reconsider, Frizzell argued

that because the contract involves interstate commerce,

the Federal Arbitration Act (“FAA”) required submis-

sion of all disputes, including that of fraudulent induce-

ment, to the arbitrator. The chancellor disagreed and

held that the contract did not “involve interstate com-

merce so as to bring the contract under the FAA.” The

chancellor also held, without stating any reasons, that

even if the contract did involve interstate commerce, the

FAA was nevertheless inapplicable.

The Court of Appeals affirmed the decision of the trial

court to withhold the issue of fraudulent inducement

from arbitration. While the Court of Appeals did not

decide whether the contract involves interstate com-

merce, the court held that because the parties had chosen

Tennessee law to govern the contract, the issue of

fraudulent inducement could not be submitted to the

arbitrator. The Court of Appeals also held that any

decision as to whether the contract was subject to the

FAA was “premature” until a determination was made

under Tennessee law that the contract was valid.”

We granted review to decide (1) whether this contract

involves interstate commerce, and (2) whether the trial

court erred in withholding the claim of fraudulent

inducement from arbitration. We hold that this contract

2 The Court of Appeals reasoned that “[i]f [the contract] is

rescinded, there is nothing to arbitrate. On the other hand, if the

contract is found to be valid and binding, the disputes between the

appellant and the appellee are subject to arbitration.” Frizzell

Constr. Co. v. Gatlinburg, L.L.C., No. 03A01-9805-CH-00161,

slip op. at 7 (Tenn. Ct. App. Nov. 2, 1998).

4a

plainly involves interstate commerce and that the FAA

does apply to enforce the agreement according to its

terms. Because we find that the contract evidences the

intent of the parties to judicially resolve a claim of

fraudulent inducement, we also hold that the chancellor

properly withheld this issue from arbitration.

ANALYSIS

The FAA ensures the enforcement of written agree-

ments to arbitrate “in any maritime transaction or a

contract evidencing a transaction involving com-

merce ....” See 9 U.S.C. § 2 (1994). Therefore, we

must first decide whether this contract is one “evidenc-

ing a transaction involving commerce” before we can

decide the proper application of the FAA.

On their face, the words “evidencing” and “involving

commerce” do not seem as broad as the phrase “affect-

ing commerce,” which is the language typically used by

Congress to invoke the full range of its commerce

power. However, the United States Supreme Court has

stated that “the word ‘involving’ is broad and is indeed

the functional equivalent of ‘affecting.’” Allied-Bruce

Terminix Cos. v. Dobson, 513 U.S. 265, 274 (1995). As

such, the FAA “embodies Congress’[s] intent to provide

for the enforcement of arbitration agreements within the

full reach of the Commerce Clause.” Perry v. Thomas,

482 U.S. 483, 490 (1987). This interpretation is sup-

3 As the United States Supreme Court has stated, “Again, half a

dozen enactments . . . are sufficient to illustrate that when [Con-

gress] wants to bring aspects of commerce within the full sweep of

its constitutional authority, it manifests its purpose by regulating

not only ‘commerce’ but also matters which ‘affect’, ‘interrupt’, or

‘promote’ interstate commerce.” See Polish Nat'l Alliance v.

NLRB, 322 U.S. 643, 647 (1944).

5a

ported by the original report of the House of Represen-

tatives, which further indicates that the phrase “involv-

ing commerce” is not meant to restrict the reach or

application of the FAA. The report states that “[tJhe

control over interstate commerce reaches not only the

actual physical interstate shipment of goods but also

contracts relating to interstate commerce.” H.R. Rep.

No. 96, at 1 (1924), quoted in Prima Paint Corp. Vv.

Flood & Conklin Mfg. Co., 388 U.S. 395, 401 n.7

(emphasis added).

As part of its constitutional authority to regulate inter-

State commerce, Congress may regulate intrastate

activities that have a substantial relation to interstate

commerce. See United States v. Lopez, 514 U.S. 549,

557-59 (1995). After a careful review of the record, we

find that such a relation is present in this case. At least

six out-of-state contractors participated in the construc-

tion of the hotel, at least nine employees were employed

from outside Tennessee, and at least seven out-of-state

vendors supplied more than $380,000 worth of materials

for the project.4 An Ohio corporation insured the proj-

ect,° and a Delaware corporation based in New Jersey

issued a payment and performance bond along with a

bond to discharge liens filed against the project as

required by the contract.6 The construction financing

* See Tennessee River Pulp & Paper Co. v. Eichleay Corp.,

637 S.W.2d 853, 855 (Tenn. 1982) (finding interstate commerce

present in part because the “materials used, the labor employed,

and the subcontractors involved . . . came to the project from

outside Tennessee”).

5 See United States v. Dye Constr. Co., 510 F.2d 78, 83 (10th

Cir. 1975) (finding interstate commerce in part when insurance

was acquired from out-of-state sources).

6 See, e.g., American Home Assurance Co. v. Vecco Concrete

Const. Co., 629 F.2d 961, 963 (4th Cir. 1980) (finding interstate

6a

was accomplished with the assistance of three out-of-

state banks,’ and the purpose and scope of the agreement

was to develop a commercial venture extending beyond

Tennessee. When all of these factors are viewed

together, it is clear that this contract is one that “involves

commerce.”9

Because the contract in this case is one that involves

interstate commerce, the FAA applies to ensure that the

arbitration agreement between the parties is enforced

according to its terms. Section two of the FAA states

that a written agreement to arbitrate “shall be valid,

irrevocable, and enforceable, save upon such grounds as

commerce present in part because performance bonds were issued

by out-of-state corporations); Lost Creek Util. v. Travis Indus.

Painters, 827 S.W.2d 103, 105 (Tex.Ct.App. 1992) (finding

interstate commerce in part because the performance bond was

given by a surety company headquartered in another state).

7 See, e.g., Roberson v. The Money Tree of Alabama, Inc., 954

F.Supp. 1519, 1523 (M.D. Ala. 1997) (finding that a contract

“involves commerce” in part because the financing was obtained

from out-of-state banks).

8 See, e.g. Foster v. Turley, 808 F.2d 38, 40-41 (10th Cir.

1986); Fairchild & Co. v. Richmond, Fredericksburg & Potomac

RR Co., 516 F.Supp. 1305, 1310-11 (D.D.C. 1981) (stating that

the FAA applies when purpose and scope of agreement is to

develop commercial venture extending beyond state line). In this

case, the intent to develop a commercial venture extending beyond

Tennessee is evidenced by efforts to market the hotel through a

nationwide reservation system and by the fact that the completed

hotel is a franchise of a national hotel chain.

9 Gatlinburg argues primarily that this contract does not in-

volve interstate commerce because the contract itself does not

contemplate interstate activity. The test under the FAA, however,

is whether interstate commerce is present in fact, not whether the

parties contemplated that interstate activity would occur. See

Allied-Bruce Terminix Cos., 513 U.S. at 281. Since interstate

commerce is plainly present in fact, the appellee’s argument is

without merit.

Ta

exist at law or in equity for the revocation of any con-

tract.” See 9 U.S.C. § 2. Although the provisions of the

FAA are to be applied in both state and federal courts,

Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 684-

85 (1996) (citing Southland Corp. v. Keating, 465 U.S.

1, 12 (1984)), the “FAA contains no express pre-

emptive provision, nor does it reflect a congressional

intent to occupy the entire field of arbitration.” Volt

Info. Sciences, Inc. v. Board of Trustees, 489 U.S. 468,

477 (1989).

The purpose of the FAA is “to ensure the enforceabil-

ity, according to their terms, of private agreements to

arbitrate.” Mastrobuono v. Shearson Lehman Hutton,

Inc., 514 U.S. 52, 57 (1995); Volt Info. Sciences, Inc.,

489 U.S. at 476. However, parties cannot be forced to

arbitrate claims that they did not agree to arbitrate. As

the United States Supreme Court has stated,

Arbitration under the [FAA] is a matter of consent,

not coercion, and parties are generally free to struc-

ture their arbitration agreements as they see fit. Just

as they may limit by contract the issues which they

will arbitrate, so too may they specify by contract the

rules under which that arbitration will be conducted.

Volt Info. Sciences, Inc., 489 U.S. at 479 (citations

omitted).

The FAA’s “proarbitration policy does not operate

without regard to the wishes of the contracting parties.”

Mastrobuono, 514 U.S. at 57. Because “arbitration is a

matter of contract[,] . . . a party cannot be required to

submit to arbitration any dispute which he has not

agreed so to submit.” AT & T Techs., Inc. v. Communi-

cations Workers of Am., 475 U.S. 643, 648 (1986).

8a

When parties agree to arbitration, the FAA ensures

enforcement of that agreement by withdrawing “the

power of the states to require a judicial forum for the

resolution of claims which the contracting parties agreed

to resolve by arbitration.” Southland Corp., 465 U.S. at

10. However, consistent with the FAA, parties may

agree that only certain issues will be submitted to arbi-

tration or that they will not arbitrate at all. Cf Mitsubi-

shi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473

U.S. 614, 628 (1985).

Therefore, the question essentially becomes “what the

contract has to say about the arbitrability of petitioner’s

claim ....” Mastrobuono, 514 U.S. at 58. If the parties

in this case agreed to arbitrate the claim of fraudulent

inducement, then despite such a prohibition under

Tennessee law,!° the claim must be submitted to arbitra-

tion. Conversely, if the parties did not agree to arbitrate

the claim of fraudulent inducement, then they can not be

compelled to arbitrate the claim despite its arbitrability

under the FAA.!!

10 In City of Blaine v. John Coleman Hayes & Associates, Inc.,

818 S.W.2d 33, 38 (Tenn. Ct. App. 1991), the Court of Appeals

held that the issue of fraudulent inducement could not be submitted

to arbitration under the Tennessee Uniform Arbitration Act, Tenn.

Code Ann. §§ 29-5-301 to -320 (Supp. 1990).

11 Citing the Supreme Court’s decision in Prima Paint Corp.,

Frizzell argues that the FAA compels the conclusion that a claim

of fraudulent inducement to enter a contract is to be resolved in

arbitration. While a claim of fraud in the inducement of a contract

is certainly arbitrable under the FAA, a more close reading of the

opinion, however, shows that the issue arose because “there [was]

no evidence that the contracting parties intended to withhold that

issue from arbitration.” 388 U.S. at 397. If evidence of such an

intent had been presented in Prima Paint Corp., then a different

conclusion may have resulted. The FAA simply does not compel

arbitration of any issue unless (1) an express agreement exists to

Mar ow

Nd A CR a a ERIM CAEN Aeateor eI SUNS a wl As, 9 Ara lat ONLI BBC ON RE hy in

9a

Courts should generally apply “ordinary state-law

principles” in deciding whether the parties agreed to

submit certain issues to arbitration. See First Options of

Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)

(citing Mastrobuono, 514 U.S. at 62-63). Under Ten-

nessee law, the law governing this contract, the “cardi-

nal rule [in interpreting contracts] . . . is to ascertain the

intention of the parties and to give effect to that inten-

tion, consistent with legal principles.” Bob Pearsall

Motors, Inc. v. Regal Chrysler-Plymouth, Inc., 521

S.W.2d 578, 580 (Tenn. 1975). Courts may determine

the intention of the parties “by a fair construction of the

terms and provisions of the contract, by the subject

matter to which it has reference, by the circumstances of

the particular transaction giving rise to the question, and

by the construction placed on the agreement by the

parties in carrying out its terms.” Penske Truck Leasing

Co. v. Huddleston, 795 $.W.2d 669, 671 (Tenn. 1990).

No single clause in a contract is to be viewed in isola-

tion; rather, the contract is to be “viewed from beginning

to end and all its terms must pass in review, for one

clause may modify, limit or illuminate another.” Cocke

County Bd. of Highway Comm'rs v. Newport Utils. Bd.,

690 S.W.2d 231, 237 (Tenn. 1985).

In this case, the arbitration clause purports to govern

“[a]ll claims, disputes and other matters in questions

arising out of, or relating to, this Agreement ....”

Viewed in isolation, the breadth of this clause appears to

evidence an intent to submit all issues to arbitration,

arbitrate a specific issue, or (2) doubt exists as to whether the

parties intended to withhold a specific issue from arbitration. See

Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S.

1, 24-25 (1983).

10a

including issues of contract formation. However,

reading the contract as a whole, the arbitration clause--

along with every clause in the contract--is limited and

subject to the additional qualification that Tennessee law

provides the basis for deciding questions concerning its

scope and interpretation.

Although the appellant urges that the Tennessee

choice-of-law clause is without effect upon the arbitra-

tion clause, we can find no support for this proposition

in the contract itself. The choice-of-law clause plainly

states that it governs the entire agreement, and no

provision in the contract appears to be exempt from the

effects of the choice-of-law clause. By stating that the

contract is to be governed by Tennessee law, the parties

have indicated their intention to arbitrate all disputes

“arising out of, or relating to” their agreement—but only

to the extent allowed by Tennessee law.!2 Interpreting

each clause in light of the other, we read the arbitration

clause to more accurately state, “In accordance with

Tennessee law, all claims, disputes, and other matters in

questions arising out of, or relating to, this Agree-

ment . . . shall be decided by arbitration. . . .” Therefore,

because Tennessee law contemplates judicial resolution

of contract formation issues, we conclude that the parties

have indicated their intention not to submit such issues

to arbitration.

12 The parties in this case were both relatively sophisticated

business contractors, and presumably, they were well aware that

Tennessee law does not allow arbitration of contract formation

issues. As such, the parties could have drafted the arbitration

clause with some ease to specifically include arbitration of contract

formation issues. The failure to do so, coupled with the express

adoption of Tennessee law to govern the contract, leads this Court

to conclude that the parties did not intend for contract formation

issues to be decided by the arbitrator.

ete)

$

+

'

=

lla

The FAA requires the courts of this state to enforce

arbitration agreements according to their terms. Be-

cause the parties in this case have agreed to arbitrate

their disputes to the extent allowed by Tennessee law,

we therefore hold that the chancery court properly

submitted all issues relating to the merits of the contract

to arbitration. We also hold that the chancery court

properly withheld the issue of fraudulent inducement

from arbitration in accordance with the intention of the

parties.

As evidence that a choice-of-law clause can not mod-

ify an arbitration clause, the appellant quotes our state-

ment in Tennessee River Pulp & Paper Co. v. Eichleay

Corp., 637 S.W.2d 853 (Tenn. 1982), that “parties

should not be able to render [the FAA] inapplicable by

providing for arbitration under the laws of a particular

state.” See 637 S.W.2d at 857. In Tennessee River,

however, we did not specifically address the effects of a

choice-of-law clause upon other contract provisions.

We only held that the FAA rendered arbitration agree-

ments fully enforceable according to their own terms,

thereby modifying our common law. We did not hold

that parties are incapable of choosing the law by which

arbitration is to be conducted. Such a rule would be

contrary to the declaration that “the FAA’s proarbitra-

tion policy does not operate without regard to the wishes

of the contracting parties.” See Mastrobuono, 514 U.S.

at 57.

Therefore, consistent with the policies underlying the

FAA, our holding in this case simply reflects that parties

may choose the arbitration law by which they intend to

be governed. The enforcement of this agreement ac-

cording to the intent of the parties is in full accord with

12a

the FAA, even if the result is that the parties agree to

submit some issues for judicial resolution that the FAA

would otherwise permit arbitration to resolve. This

Court “may give effect to the contractual rights and

expectations of the parties, without doing violence to the

policies behind the FAA.” See Volt Info. Sciences, Inc.,

489 US. at 479.

CONCLUSION

To summarize, we hold that the chancery court erred

in finding that this contract is one not “evidencing a

transaction involving commerce.” We also hold that

when viewed as a whole, the contract reveals the inten-

tion of the parties to arbitrate all disputes to the extent

allowed by Tennessee law. Because the parties did not

intend to arbitrate contract formation issues, the chan-

cellor’s decision not to submit the claim of fraudulent

inducement to arbitration was consistent with the FAA.

Therefore, we affirm the judgment of the Court of

Appeals and remand the sole issue of fraudulent in-

ducement to the chancery court for further proceedings

consistent with this opinion.

Costs are assessed to the appellant, Frizzell Construc-

tion Company, Inc.

Panel: ANDERSON, C.J., DROWOTA, BIRCH, J.J.,

BYERS, S.J.

l3a

APPENDIX B

[Filed Nov. 2, 1998]

IN THE COURT OF APPEALS

AT KNOXVILLE

FRIZZELL CONSTRUCTION COMPANY, INC.,

Plaintiff-Appellant,

Vv.

GATLINBURG, L.L.C.,

Defendant-Appellee.

C.A. NO. 03A01-9805-CH-00161 _

JUDGMENT

This appeal came on to be heard upon the record from

the Chancery Court of Sevier County, briefs and argu-

ment of counsel. Upon consideration thereof, this Court

is of opinion that there was no reversible error in the

trial court.

We affirm the judgment of the trial court in reserving

the issue of fraud in the inducement as a question to be

determined by the court. Costs of this appeal are as-

sessed to the appellant and this cause is remanded to the

trial court for such other and further action as may be

necessary.

Sait) Pa aban NNR tt SIN A RN Ut NK i gee AB

PER CURIAM

l4a

[Filed Nov. 2, 1998]

IN THE COURT OF APPEALS

AT KNOXVILLE

FRIZZELL CONSTRUCTION COMPANY, INC.,

Plaintiff-Appellant,

V.

GATLINBURG, L.L.C.,

Defendant-Appellee.

C.A. NO. 03A01-9805-CH-00161

OPINION

McMurray, J.

The facts of this case, as material to this appeal, are

relatively simple. The parties entered into a contract for

the construction of a hotel in Gatlinburg, Tennessee.

The contract was a standard Associated General Con-

tractors Construction Manager contract styled “Standard

Form of Agreement Between Owner and Construction

Manager.” The agreement contains two provisions that

are germane to the issues under consideration here.

ARTICLE 14

Assignment and Governing Law

2} ae

14.2 This Agreement shall be governed by the law of

the place where the project is located.

15a

ARTICLE 16

Arbitration

16.1 All claims, disputes and other matters in ques-

tions arising out of, or relating to, this Agreement or

the breach thereof, except with respect to the Archi-

tect/Engineer’s decision on matters relating to artistic

effect, and except for claims which have been

waived by the making or acceptance of final pay-

ment shall be decided by arbitration in accordance

with the Construction Industry Arbitration Rules of

the American Arbitration Association then obtaining

unless the parties mutually agree otherwise. This

agreement to arbitrate shall be specifically enforce-

able under the prevailing arbitration law.

We will first note that the “place where the project is

located” is Gatlinburg, Tennessee, therefore paragraph

14.2, Article 14, if effective, makes Tennessee law the

governing law concerning the contract. If this provision

is ineffective, then, in any event, Tennessee law governs

since the contract was entered into here and the project

is located here.

A dispute, relating to the contract, arose between the

parties. The dispute gave rise to a complaint in the

Chancery Court for Sevier County by Frizzell for the

purpose of enforcing a mechanic’s lien and for breach of

contract. Frizzell, the appellant here, specifically

charged in its complaint, (styled “Complaint to Enforce

Mechanic’s Lien and for Breach of Contract’’) that the

defendant, Gatlinburg, L.L.C., appellee here, “breached

the construction management contract by failing to pay

the amount owed under the construction contract.” A

judgment for damages over and above the amount

claimed to be subject to the mechanic’s lien was also

l6a

sought. Gatlinburg, L.L.C., filed its answer, a counter-

claim and a third party action. Thereafter, Frizzell

submitted a demand for arbitration. In its answer Gat-

linburg denied that it owed Frizzell as alleged in the

complaint but on the other hand, in its counterclaim,

sought damages from Frizzell. Frizzell filed a motion to

stay the court proceedings pending arbitration based on

the contract provision. Gatlinburg opposed the motion

and amended the counterclaim to allege that Frizzell

fraudulently induced Gatlinburg to enter into the con-

tract. It is this claim that constitutes the basis of this

appeal.

The court heard the motion to stay. The court noted in

its order that the “issue presented to the court is whether

the arbitration proceeding should go forward or whether

this court should take jurisdiction of all or some issues

as between Frizzell and Gatlinburg.” The court chose to

retain jurisdiction to consider the legal issue of fraud in

the inducement of the contract entered into by the parties

in the primary case and ordered the parties not to submit

this issue to the arbitrators. The court further deter-

mined that the arbitrators in the primary case should

resolve the construction disputes between those parties

and render a decision to the court.

This appeal resulted from this judgment of the trial

court. The appellant presents the following issues for

our consideration:

I. Whether the trial court erred in failing to find that

the contract between Frizzell and Gatlinburg involved

interstate commerce as defined under the Federal Arbi-

tration Act?

17a

II. Whether the trial court erred in holding that even if

the contract between Frizzell and Gatlinburg involved

interstate commerce that the Federal Arbitration Act did

not apply.

The issue of whether the arbitration provisions of a

contract require that a claim for fraud in the inducement

of the contract be submitted to arbitration has been

addressed and resolved in this jurisdiction. See City of

Blaine v. John Coleman Hayes & Assoc., 818 §.W.2d 33

(Tenn. App. 1991), infra. The court resolved the issue

against requiring the issue to be arbitrated. We, there-

fore, agree with the result reached by the trial court.

The Uniform Arbitration Act was passed by our Leg-

islature in 1983 and is now codified as T.C.A.

§ 29-5-301 — §29-5-320. The provisions of the act

pertinent to the controversy before us are T.C.A.

§ 29-5-302 which provides in pertinent part as follows:

29-5-302. Agreements to submit to arbitration -

Jurisdiction. - (a) A written agreement to submit

any existing controversy to arbitration or a provision

in a written contract to submit to arbitration any

controversy thereafter arising between the parties is

valid, enforceable and irrevocable save upon such

grounds as exist at law or in equity for the revocation

of any contract, .

City of Blaine v. John Coleman Hayes & Assoc., 818

S.W.2d 33 (Tenn. App. 1991), is a veritable treatise on

the subject of whether “fraud in the inducement” is

subject to arbitration. In Blain, Judge Crawford com-

pared and contrasted the various resolutions of the issue

in other jurisdictions including the position advanced by

the United States Supreme Court.

18a

In Blain, Judge Crawford speaking for this court

noted:

In 1983, when the Tennessee legislature passed the

Uniform Arbitration Act, they had full knowledge of

the long established right of a person to seek rescis-

sion of a contract procured by fraud. With this

knowledge, we find it logical for the legislature to

intend to except actions for rescission from a deci-

sion by arbitrators and giving the language of the

statute its usual and ordinary meaning, the legislature

did just that. This legislative intent is exemplified by

Justice Black in the Prima [Prima Paint Corp. v.

Flood and Conklin Mfg. Co., 388 U.S. 395 (1967)]

dissent. “Fraud, of course, is one of the most com-

mon grounds for revoking a contract. If the contract

was procured by fraud, then, unless the defrauded

party elects to affirm it, there is absolutely no con-

tract, nothing to be arbitrated.” 87 S.Ct. at 1810. It

would be difficult to improve on this language.

Blaine, at page 38.

It is well-settled in Tennessee contract law that fraud

in the inducement renders contracts voidable at the

instance of the party upon whom fraud was perpetrated.

It is clear that an individual induced by fraud to enter

into a contract may elect between two remedies. He

may treat the contract as voidable and sue for the equita-

ble remedy of rescission or he may treat the contract as

existing and sue for damages at law. Vance v. Schulder,

547 S.W.2d 927, 931 (Tenn. 1977); Derryberry v. Hill,

745 S.W.2d 287, 291 (Tenn. App. 1987); Graham v.

First Am. Nat’l Bank, 594 S.W.2d 723, 726 (Tenn. App.

1979). Thus, when a party to a contract seeks rescission

in a court of competent jurisdiction and alleges facts,

19a

which if proved to the requisite degree, would justify

rescission of a contract, the very existence of the con-

tract is in limbo until the issue is resolved. To require

arbitration pursuant to the terms of a contract concerning

the validity or very existence of the contract is to pre-

suppose the validity and existence of the contract at least

for some purposes. We do not understand this to be the

law in Tennessee. It has been held that fraud vitiates

every contract ab initio. Samuel v. King, 158 Tenn. 546,

14 S.W.2d 963 (1929). Therefore, if there is no con-

tract, there is no arbitration clause.

As to the issues as framed by the appellant, unless and

until it is established that there is a contract in existence,

a consideration of whether the contract is controlled by

or subject to the Federal Arbitration Act is premature.

Whether the contract should be rescinded and voided is

a question that can be answered only after a trial on the

merits. If it is rescinded, there is nothing to arbitrate.

On the other hand, if the contract is found to be valid

and binding, the disputes between the appellant and the

appellee are subject to arbitration.

20a

We affirm the judgment of the trial court in reserving

the issue of fraud in the inducement as a question to be

determined by the court. Costs of this appeal are as-

sessed to the appellant and this cause is remanded to the

trial court for such other and further action as may be

necessary.

/s/

Don T. McMurray, J.

CONCUR:

/s/

Houston M. Goddard, Presiding Judge

/s/

William H. Inman, Senior Judge

2la

APPENDIX C

[Dated May 8, 1998]

IN THE CHANCERY COURT FOR SEVIER

COUNTY, TENNESSEE

FRIZZELL CONSTRUCTION COMPANY, INC.

Plaintiff,

V.

SAMUEL K. COX, CONSTANCE COX

WALKER, WILLIAM H. COX,

GATLINBURG, L.L.C.,

TENNESSEE STATE BANK,

A. RANDOLPH SYKES,

Defendants.

v.

GATLINBURG, L.L.C.,

Defendant,

Counter-Plaintiff,

and Third-Party Plaintiff

¥.

UWE ROTHE, d/b/a ROTHE

ARCHITECTURE AND PLANNING

and WALTER SEEK,

Third-Party Defendants.

ORDER

This matter came on for hearing before the Honorable

Chancellor Telford Forgety on the Motion to Reconsider

22a

filed by Frizzell Construction Company, Inc. After

reviewing the Motion, Response, Memoranda and

attached exhibits thereto submitted by both parties and

after hearing arguments of counsel, the Court hereby

denies the Motion to Reconsider and incorporates herein

by reference its Memorandum Opinion attached hereto.

IT IS SO ORDERED.

/s/

CHANCELLOR TELFORD FORGETY

APPROVED FOR ENTRY:

/s/

C. PAUL HARRISON

Long, Ragsdale & Waters

1111 Northshore Drive

Knoxville, Tennessee 37919

/s/

BERNARD E. BERNSTEIN

CELESTE H. HERBERT

Bernstein, Stair & McAdams

530 S. Gay Street

Suite 600

Knoxville, Tennessee 37902

23a

IN THE CHANCERY COURT FOR SEVIER

COUNTY, TENNESSEE

FRIZZELL CONSTRUCTION COMPANY, INC.,

Plaintiff,

v.

SAMUEL K. COX, ET AL.

Defendants.

No. 97-8-208

TRANSCRIPT OF EVIDENCE

April 23, 1998

BEFORE: Hon. Telford E. Forgety, Presiding

* * *

THE COURT: You’re welcome.

Gentlemen and ladies, I appreciate your help in this

case. You’ve done a lot of good work, a lot of good

research. You’ve briefed the issue well. You’ve helped

me as much as I think it is possible to help me.

I’m going to overrule the motion to reconsider. I am

not satisfied, number one, that there’s interstate com-

merce here in this particular contract; that is the contract

between Frizzell and Gatlinburg, LLC. I’m not sure that

all of these other things that came later, that came after

the fact, make this contract involve interstate commerce

so to bring the agreement under the FAA.

24a

Even if that were not the case, I am not sure that even

if there were interstate commerce that given the Volt

decision of the United States Supreme Court that Ten-

nessee law on the issue of fraud in the inducement might

not yet be applicable in this day in time, as I observed

earlier.

I’ve looked at the Ejichleay case and studied it up.

And I’ve studied the others as well as I can. It’s clear to

me that the United States Supreme Court has backed

down from the broadest interpretation that it had been

giving to the Federal Arbitration Act in the Volt deci-

sion. It applied a California statute, which Counsel here

admits, and I think properly so, which is in conflict in

some respects with the Federal Arbitration Act.

That indicates to me that if the particular issue were

before the Tennessee Supreme Court today, the best

guess I can make is that given the City of Blaine v. John

Coleman Hayes decision that if the particular issue were

before the Tennessee Supreme Court today, would a

fraud in the inducement claim under Tennessee law be

_ required to be submitted to an arbitrator under the

Federal Arbitration Act or would the Volt decision apply

to allow the fraud in the inducement claim to be sub-

mitted to the Court as required in the City of Blaine v.

John Coleman Hayes. My conclusion is that the Su-

preme Court of Tennessee, if it were before it, would

look at it and say, “In light of Volt, it appears that that

fraud in the inducement claim would be saved to the

Court under Tennessee law.” I don’t know that that’s

correct.

As I said, I just wish that we had a case that hit us

directly between the eyes on that. We don’t. We have

25a

to put three or four things together. We've got to con-

sider three or four things.

The Eichleay decision comes pretty close, at least

based on the circumstances as they existed in 1982. But

the Eichleay case did not really address the issue of

fraud in the inducement claim. The issue there was, as

the Court said, are agreements to arbitrate irrevocable at

will. So they were dealing in the Eichleay case, and |

think that colored the decision some. They were dealing

with the situation where the question was, do we arbi-

trate at all, anything, as opposed to one particular issue

that’s saved to the Court, that is fraud in the inducement,

where all other issues are subject to arbitration. And |

think that colored the decision. Because, clearly, at that

time and clearly now, the national policy as stated in the

Federal Arbitration Act is that once you sign an arbitra-

tion contract you'll be required to arbitrate. Tennessee

has that statute.

So I’m not sure that if the Tennessee Supreme Court

had it today, even assuming interstate commerce, I’m

not sure that under the Volt decision they would say that

the issue of fraud in the inducement is yet one that must

be sent to the arbitrator under the FAA. So I'll overrule

the motion to reconsider.

Is there anything further?

MR. BERNSTEIN: No, Your Honor.

MR. HARRISON: That’s all, Your Honor.

MR. BERNSTEIN: Your Honor, we’ll write this in

and bring it back to you.

26a

THE COURT: Yes. Write that in and I'll sign it this

morning. I apologize to you gentlemen for not having

that order entered.

(End of proceedings.)

27a

APPENDIX D

[Entered March 23, 1998]

WHALEY & SONS, INC.,

Plaintiff,

V.

FRIZZELL CONSTRUCTION

COMPANY, INC., ET AL.

Defendants.

No. 97-10-303

ORDER

This cause came on to be heard before the Honorable

Telford Forgety, Chanceller, holding the Chancery

Court for Sevier County, Tennessee on the 6th day of

February, 1998.

The Court in Frizzell Construction Company, Inc., v.

Cox et al., No. 97-7-208 (hereafter the “Primary Case’’)

had before it for consideration a Motion For Stay of

Proceedings Pending Arbitration filed by Frizzell Con-

struction Company, Inc. (hereafter “Frizzell”); a Motion

for Stay of Arbitration Proceedings filed by Gatlinburg,

LLC (hereafter “Gatlinburg”), a Motion for Scheduling

Conference in the alternative, Motion For Consolidation

filed by Gatlinburg; and a Motion To Shorten Time for

Frizzell to respond to discovery filed by Gatlinburg.

At a hearing held on December 12, 1997, the Court

was advised that there were seven other pending cases

(hereafter “Subcontractor Cases”) arising out of the

construction of the Clarion Hotel in Gatlinburg, Tennes-

see, involving Frizzell as the general contractor and

28a

Gatlinburg as the owner. The Court directed counsel for

Frizzell and Gatlinburg to file a Motion to Consolidate

or to arrange for a scheduling conference pursuant to

Rule 16 of the Tennessee Rules of Civil Procedure.

Notice of this hearing on February 6, 1998 was duly sent

to counsel for all parties in all of the pending cases.

(Since all of these cases have separate case numbers, a

copy of this Order will be filed in each case.)

The record before the Court reflects that Frizzell filed

its Complaint against Gatlinburg on August 1, 1997.

Frizzell basically asserts a claim for monies due it under

the construction contract. Gatlinburg filed its Answer

and Counterclaim against Frizzell on October 14, 1997

and also filed at the same time a third-party complaint

naming as third-party defendants Uwe Rothe (the archi-

tect for the hotel) and Walter Seek (the structural engi-

neer for the hotel). Subsequently on November 3, 1997,

Frizzell filed an application for arbitration pursuant to

the contract between Frizzell and Gatlinburg. On

November 11, 1997, Frizzell filed in this Court a

Motion For Stay of Proceedings Pending Arbitration and

on January 2, 1998, Gatlinburg filed in this Court a

Motion for Stay of Arbitration Proceedings.

Thus, the issue presented to the Court is whether the

arbitration proceedings should go forward or whether

this Court should take jurisdiction of all or some of the

issues as between Frizzell and Gatlinburg. The Court

notes that none of the claims being asserted in the

Subcontractor cases are subject to arbitration and this

Court will have to deal with those claims.

Frizzell has argued that the arbitration clause in its

contract with Gatlinburg must be adhered to by this

Court and that it only filed the Primary Case against

29a

Gatlinburg in this Court in order to establish its lien

claim in a timely manner. Gatlinburg has advised the

Court and Frizzell has acknowledged that Gatlinburg has

furnished a bond to protect Frizzell on its alleged lien

claim.

Gatlinburg has argued that its counterclaim against

Frizzell asserts claims for fraud in the inducement,

misrepresentation, indemnification from other lien

claimants, construction deficiencies, delay damages and

an accounting. Further, Gatlinburg has argued that its

third-party complaint against Uwe Rothe and Walter

Seek are not subject to the arbitration proceedings

between Frizzell and Gatlinburg. Gatlinburg has also

pleaded and advised the Court that it will, at the appro-

priate time, name as third-party defendants Fireman’s

Fund (the bonding company) and Southern Cast Stone (a

supplier of exterior facing materials) to Frizzell.

Gatlinburg has urged this Court to retain overall juris-

diction of the Primary Case and the Subcontractor cases

now pending before it and to determine the legal issues

while referring the construction disputes in the Primary

Case to arbitration. By doing so, the Court could avoid

inconsistent findings that may result from the arbitrators

making certain decisions on construction matters and the

Court deciding some of those same issues between the

other parties. Further, that the Court can better deter-

mine the other legal issues that arise in these proceed-

ings.

Frizzell has urged this Court should not and cannot

interfere with the arbitration inasmuch as the parties

have provided for arbitration in their contract and have

engaged in interstate commerce.

30a

The Court has considered the argument of counsel, the

pleadings and affidavits filed and the entire record.

The Court recognizes that the arbitration that has been

initiated cannot resolve the Subcontractor cases that are

before the Court nor can the arbitration proceedings

resolve bond claims or product claims that are yet to be

asserted. Most importantly, the arbitrators (None of

whom are lawyers or judges. See affidavit of Cleste H.

Hebert) cannot resolve the fraud in the inducement

claim asserted by Gatlinburg. Accordingly, the Court

will need to reserve the determination of legal issues and

refer to arbitration the purely construction claims, all as

set forth below.

IT IS THEREFORE ORDERED, ADJUDGED AND

DECREED AS FOLLOWS:

1. The Court will retain jurisdiction to consider the

legal issue of fraud in the inducement of the contract

entered into by the parties in the Primary Case and the

parties are hereby ordered not to submit those issues to

be arbitrators.

2. The arbitrators in the Primary Case will deter-

mine the construction disputes as between those parties

and will render their decision to this Court and to the

parties.

3. When the arbitrators have made a determination

concerning construction disputes, the Court will then, if

necessary, consider the Subcontractor cases.

4. The Court will give all applicable effect to the

findings of the arbitrator and endeavor to fashion a

judgment which will provide relief as may be appropri-

ate between Gatlinburg LLC, Frizzell Construction

3la

Company, Inc. and its subcontractors in all of these

pending cases after the arbitration has been concluded so

that the judgment of the arbitrators and the judgment of

the Court shall be consistent as between Gatlinburg LLC

and Frizzell Construction Company, Inc.

5. The Court denies the Motion to Consolidate all

the above-styled pending actions and may schedule a

conference in the future if the Court deems it appropri-

ate.

6. The Motion of Gatlinburg to shorten time for

Response to Discovery is withdrawn by Gatlinburg.

32a

ENTER this 23 day of March, 1998.

APPROVED FOR ENTRY:

/s/

TELFORD FORGETY

CHANCELLOR

C. PAUL HARRISON

Long, Ragsdale & Waters

1111 Northshore Drive

Knoxville, Tennessee 37919

/s/

BERNARD E. BERNSTEIN

CELESTE H. HERBERT

Bernstein, Stair & McAdams

530 S. Gay Street, Suite 600

Knoxville, Tennessee 37902