BRUCKER v. McKINLAY TRANSPORT, INC

557 N.W.2d 536, 454 Mich. 8

• Court: Michigan Supreme Court
• Decided: January 28, 1997
• Docket: Docket 104940, 104941
• Status: Published

Opinion

Per Curiam.

The parties attempted to resolve this commercial dispute through arbitration. However, the agreement contained an invalid clause. For that reason, the Court of Appeals set aside a circuit court judgment that was based on the arbitration agreement.

We agree with the dissenting judge in the Court of Appeals that the remedy ordered by the court is inappropriate in this case. We therefore vacate the judgment of the Court of Appeals, and remand the case to the Court of Appeals for consideration of the issues raised by the parties in their briefs on appeal.

i

In May 1982, McKinlay Transport, Inc., bought the U.S. Truck Company, Inc., and several smaller trucking companies that were wholly owned by U.S. Truck. The sale was formalized with a thirty-six-page “stock purchase agreement.” 1 Among the signatories was plaintiff Wilber M. Bracker, Jr., who was representing the shareholders of U.S. Track.

Basically, the stock purchase agreement called for McKinlay to pay ninety percent of the “consolidated book value net worth” of U.S. Track. The agreement explained the manner in which accountants would determine that figure. Further, the agreement provided for arbitration if there were a dispute regarding the work of the accountants:

2.3 Dispute Over Accounting Matters. If Buyer shall dispute any accounting matter, notice in writing thereof shall be given to Accountants within 60 days from the receipt of the Examination referred to in Paragraph 2.1. Within 45 days after receipt of such notice, said dispute shall be submitted to arbitration by a national accounting firm chosen by Buyer and approved as to competency by Accountants. The decision of such arbitrator shall be final and binding and its fees shall be divided equally between Buyer and Seller. Any questions of contract 'interpretation shall be determined by the Circuit Court for the County of Macomb, State of Michigan, which shall be deemed a court of competent jurisdiction and proper venue to hear such disputes.

Such a dispute did arise. The auditor found the “book value net worth” to be $1,900,167, but McKinlay did not accept the figure. Instead, it exercised its right to arbitration.

McKinlay chose Deloitte, Haskins & Sells as the arbitrator. In November 1984, McKinlay and Deloitte were sued in circuit court by Gerald F. Whitmore, who was then representing the U.S. Track shareholders. 2 Mr. Whitmore sought injunctive and declaratory relief in the form of an order that would bar the selection of Deloitte. Mr. Whitmore alleged that McKinlay and Deloitte shared a “close business relationship” that would prevent Deloitte from functioning as an impartial arbitrator.

The circuit court disqualified Deloitte, and proceedings regarding the selection of an arbitrator continued for years. In June 1989, the Court of Appeals ruled that the circuit court did not err in disqualifying Deloitte. 3 In its opinion, the Court of Appeals also found that McKinlay could proceed to arbitration, rejecting Mr. Whitmore’s argument (presented to the circuit court in an unsuccessful motion for summary disposition) that McKinlay had waived its right to arbitration.

Following the June 1989 decision by the Court of Appeals, the parties stipulated in August 1989 that Seidman & Seidman would be the arbitrator. Seidman’s corporate successor, Bdo Seidman, later undertook the arbitration.

The claim against Deloitte was dismissed with prejudice in October 1989.

An early step in the arbitration proceedings was a February 1990 order, entered by stipulation, adopting “rules of arbitration.” Those rules included the following provisions:

7. ... All disputes concerning discovery, or lack thereof, shall be resolved by the Macomb County Circuit Court.

12. The arbitrator may submit any issues of Contract interpretation in writing to the Court.

13. At such time as the arbitrator determines that it has all of the information necessary for it to make a decision, it shall notify the parties that the hearing is closed.

14. The arbitrator shall have forty-five days from the date the hearing is closed in which to reach a decision. An extension of an additional forty-five days may be granted upon agreement of both parties.

15. In the event of a conflict between the requirements of Generally Accepted Accounting Practices (hereinafter “GAAP”) or the terms of the Contract, the terms of the Contract shall govern.

16. In the event any adjustment to the Consolidated Book Value of the U.S. Truck Company, Inc. (hereinafter “CBV”) rests on an interpretation of the contract disputed by the parties, the arbitrator shall submit its findings in the alternative, setting forth the manner in which the alternate interpretations affect the calculation.

17. The arbitrator shall compute a total adjustment, if any, to the CBV and submit it, along with its findings, in writing, to both parties by first class mail at the addresses set forth herein.

18. The parties shall have twenty days, from the date of mailing, in which to file, with the Court and the Arbitrator, an objection to the arbitrator’s findings.

19. In the absence of objections, judgment shall enter on the arbitrator’s findings.

20. In the event of objections, the Court shall consider and rule on the objections in light of the provisions of the Contract, the prevailing law, and these rules and either affirm the decision of the arbitrator in whole, accept one of the alternative calculations prepared by the arbitrator, or issue an interpretation of any provision of the Contract in dispute and resubmit the matter to the arbitrator for reconsideration of the matter in light of the Court’s interpretation.

21. The failure of any party to comply with the requirements of these rules or any order of the Court implement ing these rules shall constitute a waiver of the right to arbitration.

In February 1991, Bdo Seidman sent a seven-page letter to the circuit court framing two issues regarding the proper interpretation of the contract. Six weeks later, the circuit court rendered its opinion regarding those issues. Subsequent opinions and orders of the circuit court resolved Mr. Whitmore’s motion for settlement of the order and McKinlay’s motion for rehearing.

In December 1991, Bdo Seidman submitted its thirteen-page findings. With regard to one portion of the agreement (pension liability), Bdo Seidman presented two alternative calculations, depending on the circuit court’s interpretation of a paragraph of the stock purchase agreement.

Mr. Whitmore then filed a motion in which he asked the circuit court to adopt the second alternative calculation. McKinlay’s response to the motion included objections to the report of the arbitrator.

In March 1992, the circuit court accepted the second alternative calculation (the one preferred by Mr. Whitmore), and made other rulings regarding the report of the arbitrator. An April 1992 order denied McKinlay’s objections and granted Mr. Whitmore’s motion regarding the proper interpretation of the contract.

At this point, McKinlay filed a claim of appeal. 4

Mr. Whitmore then moved in the circuit court for entry of judgment and for an order allowing it to draw on a letter of credit that had been submitted to secure the purchase price. The circuit court granted the motion in May 1992. Judgment for Mr. Whitmore entered in June 1992 for an amount somewhat less than $3 million. 5

Following entry of the June 1992 judgment, McKinlay filed a second claim of appeal. 6

The Court of Appeals vacated the judgment of the circuit court in July 1995. 212 Mich App 334; 537 NW2d 474 (1995). Judge O’Connell dissented from the Court of Appeals opinion, and from its later denial of rehearing. 7

The plaintiff has applied to this Court for leave to appeal.

n

The Court of Appeals majority reasoned that the arbitration in this case was statutory arbitration under MCL 600.5001 et seq.) MSA 27A.5001 et seq. 8 That conclusion is drawn from the fact that paragraph nineteen of the previously quoted rules of arbitration stated that judgment could enter on the arbitrator’s findings. See Gordon Sel-Way, Inc v Spence Bros, Inc, 438 Mich 488, 495; 475 NW2d 704 (1991).

The majority concluded, however, that the arbitration agreement was invalid because it called for questions of contract interpretation to be decided by the circuit court. 212 Mich App 341-343. The Court of Appeals explained that statutory arbitration is governed by the statute and MCR 3.602. MCL 600.5021; MSA 27A.5021 provides that “arbitration shall be conducted in accordance with the rules of the supreme court,” and MCR 3.602 provides only a limited role for the circuit court. Thus, only the arbitrator can interpret the contract. Dick v Dick, 210 Mich App 576, 588-589; 534 NW2d 185 (1995); Kaleva-Norman-Dickson School Dist No 6 v Kaleva-Norman-Dickson School Teachers’ Ass’n, 393 Mich 583, 591; 227 NW2d 500 (1975).

The Court of Appeals vacated the circuit court’s judgment, apparently setting aside entirely the arbitration and its result:

To allow parties to create their own arbitration devices after invoking statutory arbitration would create uncertainty regarding the scope of the arbitrators’ authority and the scope of the authority of circuit courts. Further, the efficiency and reliability of arbitration, two important reasons why parties may wish to forgo the use of courts of law, would be disrupted if the parties could create their-own arbitration devices. Accordingly, we conclude that the arbitration agreement and the rules of arbitration adopted by the parties are not enforceable at law because they do not comply with the applicable court rule and statutes.

We vacate the trial court’s order of April 6, 1992, and the judgment and order of June 8, 1992. Should the parties agree to arbitration, then they must do so in accordance with the applicable court rule, MCR 3.602, and statutes, MCL 600.5001 et seq.; MSA 27A.5001 et seq. [212 Mich App 343.]

Writing in dissent, Judge O’Connell said that the case was much simpler than the majority seemed to believe:

I respectfully dissent. The present dispute is no Gordian knot, and requires no fatal sword stroke to resolve. Rather, by addressing the one flaw contained in the agreement, the involvement of the circuit court, the knot quickly unravels. [212 Mich App 343.]

Judge O’Connell thought it inexplicable that the majority cited Dick, since the remedy in Dick was to strike the legally unenforceable provision from the arbitration agreement, enforcing the remaining portions of the agreement. 212 Mich App 344. Judge O’Connell concluded:

I would treat the arbitration agreement presently in issue as this Court treated the arbitration agreement in dispute in Dick. I would strike the clauses that are contrary to the statutory arbitration act, MCL 600.5001 et seq.; MSA 27A.5001 et seq., that is, ¶ 20 and portions of ¶¶ 7 and 18. 1 We would then be left with a wholly valid and enforceable arbitration agreement, as was the result in Dick. The matter would be remanded to the arbitrator for prompt resolution of the issues unlawfully submitted to the circuit court. Further review would be limited to that provided for in the statutory arbitration act.

More generally, it is clear from the arbitration agreement that the intention of the parties was to arbitrate their dispute. For the majority to declare the entire agreement invalid only frustrates the intention of the parties, who are still litigating the sale of a business that took place thirteen years ago._

[Id.]

m

Because civil litigation can be lengthy, expensive, and stressful, it is employed only to resolve disputes that cannot be concluded by any other peaceful method. Thus, parties who can locate an alternative method of dispute resolution are encouraged to bypass the courts and use other appropriate means.

In locating an alternative means of dispute resolution, the parties are generally free to craft whatever method they choose. All sorts of private conciliation, mediation, and arbitration devices are available. What parties are not able to do, however, is reach a private agreement that dictates a role for public institutions.

An arbitration agreement (or a set of arbitration rules) that calls for entry of a circuit court judgment must conform to the statute and the court rule. The Court of Appeals is also correct that MCR 3.602 (which controls under MCL 600.5021; MSA 27A.5021) does not allow the parties to use the courts as a resource that will issue advisory opinions to guide the arbitrator through the more difficult portions of the task. 9 See Dick, supra. Thus, as explained by the Court of Appeals, paragraph 2.3 of the arbitration agreement and several of the “rules of arbitration” are invalid. 10

We agree with Judge O’Connell, however, that it would be unnecessary and improvident to reject entirely the arbitration agreement in this case. Our ruling today concerns an arbitration agreement executed in 1982, and implemented by rules of arbitration that were adopted by stipulation and executed without protest by the parties and the circuit court. From these events, we can discern neither prejudice to any party nor significant harm to the integrity of the court system. Accordingly, our analysis of the arbitration issue raised sua sponte by the Court of Appeals is prospective, and does not affect the stipulated manner of arbitration adopted by the parties in this case.

For these reasons, we vacate the judgment of the Court of Appeals, and remand the case to the Court of Appeals for consideration of the issues raised by the parties in their briefs on appeal. MCR 7.302(F)(1).

Mallett, C.J., and Brickley, Cavanagh, Boyle, and Weaver, JJ., concurred. Riley and Kelly, JJ., took no part in the decision of this case.

1 The parties executed a November 1982 supplement to the agreement. The present dispute does not concern the terms of the supplement.

2 Mr. Whitmore had assumed that role from Mr. Bracker, because the latter was experiencing health problems.

3 Whitmore v McKinlay Transport, Inc, unpublished opinion per curiam of the Court of Appeals, issued June 27, 1989 (Docket No. 98441).

4 Court of Appeals Docket No. 151588.

5 The judgment stated that it “may be presented to Michigan National Bank of Detroit, to effectuate a draw as contemplated under the Letter of Credit No. 7686-A.” McKinlay moved for a stay pending appeal, but it appears that the motion was denied by the circuit court. Later efforts at collection proved frustrating, and the file contains papers as late as 1993, reflecting Mr. Whitmore’s efforts in this regard.

6 Court of Appeals Docket No. 153991. During the pendency of this matter in the Court of Appeals, Mr. Whitmore died. The Court of Appeals granted a motion to substitute Mr. Brucker as the plaintiff.

7 Reh den November 3, 1995 (Docket Nos. 151588, 153991).

8 (1) All persons, except infants and persons of unsound mind, may, by an instrument in writing, submit to the decision of 1 or more arbitrators, any controversy existing between them, which might be the subject of a civil action, except as herein otherwise provided, and may, in such submission, agree that a judgment of any circuit court shall be rendered upon the award made pursuant to such submission.

(2) A provision in a written contract to settle by arbitration under this chapter, a controversy thereafter arising between the parties to the contract, with relation thereto, and in which it is agreed that a judgment of any circuit court may be rendered upon the award made pursuant to such agreement, shall be valid, enforceable and irrevocable save upon such grounds as exist at law or in equity for the rescission or revocation of any contract. Such an agreement shall stand as a submission to arbitration of any controversy arising under said contract not expressly exempt from arbitration by the terms of the contract. Any arbitration had in pursuance of such agreement shall proceed and the award reached thereby shall be enforced under this chapter.

(3) The provisions of this chapter shall not apply to collective contracts between employers and employees or associations of employees in respect to terms or conditions of employment. [MCL 600.5001; MSA 27A.5001.]

1 Paragraph 12 need not be struck. It provides only that “[t]he arbitrator may submit any issues of Contract interpretation to the Court” (emphasis supplied). Because the language is permissive, the statutory arbitration act is not necessarily violated by its inclusion._

9 An unresolved civil dispute can be heard in court if one party flies a complaint that states a claim on which relief can be granted. Either before or after the complaint is filed, the parties can simplify the dispute by a partial settlement, or by agreeing that part of the dispute will be resolved by arbitration. The remaining portion of the dispute can be resolved by a court if, again, there is a claim on which relief can be granted. Later enforcement of a partial settlement or arbitration award is subject to familiar principles of law, including MCL 600.5025; MSA 27A.5025:

Upon the making of an agreement described in [MCL 600.5001; MSA 27A.5001], the circuit courts have jurisdiction to enforce the agreement and to render judgment on an award thereunder. The court may render judgment on the award although the relief given is such that it could not or would not be granted by a court of law or equity in an ordinary civil action.

The problem in this instance is that the parties produced a sales agreement and arbitration rules that called on the circuit court to take a role unrelated to any properly pending litigation (recall that this case came to circuit court on the question, long ago resolved, whether McKinlay could select Deloitte as the arbitrator).

10 Mr. Brucker argues, on several bases, that this case involves common-law arbitration, not statutory arbitration. See F J Siller & Co v City of Hart, 400 Mich 578, 581; 255 NW2d 347 (1977), and Frolich v Walbridge-Aldinger Co, 236 Mich 425, 429; 210 NW 488 (1926). However, that distinction does not aid him in this case, since private parties remain unable to expand the authority of the circuit court.