Council of Smaller Enterprises v. Gates, McDonald & Co.

[This opinion has been published in Ohio Official Reports at 

80 Ohio St.3d 661

.]




  COUNCIL OF SMALLER ENTERPRISES, APPELLANT, v. GATES, MCDONALD &
                                 COMPANY, APPELLEE.
       [Cite as Council of Smaller Enterprises v. Gates, McDonald & Co.,
                                      

1998-Ohio-172

.]
Contracts—Arbitration—Ninety-day             demand      for    arbitration        provision—
        Presumption in favor of arbitration—Timeliness of demand for arbitration
        is itself arbitrable, when.
     (No. 96-1302—Submitted October 8, 1997—Decided January 14, 1998.)
APPEAL from the Court of Appeals for Cuyahoga County, Nos. 68510 and 69868.
                                  __________________
        {¶ 1} Appellant, Council of Smaller Enterprises (“COSE”), sponsors a
Workers’ Compensation Group Experience Rating Program as a service to its
member businesses in the Cleveland area. On January 1, 1992, COSE and appellee,
Gates, McDonald & Company (“Gates McDonald”), entered into a “Service
Agreement” under which Gates McDonald was to administer and run the program.
Article 2 of the agreement detailed the services to be provided by Gates McDonald.
Article 4 of the agreement, titled “Financial Matters,” detailed how Gates
McDonald was to be compensated for fulfilling its obligations under the agreement.
        {¶ 2} Article 6 of the agreement provided that the initial term of the
agreement was to end on June 30, 1993. Subsequent terms of the agreement
(“Renewal Terms”) were to run for twelve-month periods from July 1 to June 30
of the following year, with each such period defined as a “Rating Year.” The
agreement was subject to automatic renewal for the next rating year unless either
party gave notice of nonrenewal by October 1 of the current rating year.
                              SUPREME COURT OF OHIO




       {¶ 3} COSE gave notice of nonrenewal to Gates McDonald on September
21, 1993. In January 1994, COSE advised Gates McDonald that another company
had been selected to replace Gates McDonald as program administrator.
       {¶ 4} In February 1994, executives of COSE and Gates McDonald
exchanged a series of letters. In a letter dated February 8, 1994, the Gates
McDonald president, David K. Hollingsworth, claimed that COSE owed Gates
McDonald several fees for various types of services performed by Gates
McDonald. The COSE executive director, John J. Polk, responded in a letter dated
February 14, 1994, setting out COSE’s position that some of the claimed fees had
already been paid, and even if those fees had not been paid, that COSE was not the
responsible party for those fees under the terms of the Service Agreement. Polk
also agreed that some other fees were due, but expressed disagreement over the
amount of those other fees.
       {¶ 5} On February 18, 1994, Hollingsworth reasserted the claims for fees in
another letter to COSE. Polk responded on February 24, 1994, reiterating the points
made in the letter of February 14. The February 24 correspondence concluded with
the following paragraph:
       “COSE takes this matter very seriously and expects full compliance with
the Agreement. In order to resolve our differences concerning the obligations of
Gates McDonald under the Agreement, including the delivery of files and records
relating to the formation of the 1994 Groups and the claim of Gates McDonald for
additional fees, I believe it is necessary for representatives of Gates McDonald and
COSE to sit down together and discuss these issues. In this way, we should be able
to avoid the impasse that we are quickly approaching. Therefore, please call me at
your earliest convenience so that we can schedule such a meeting.”
       {¶ 6} A meeting between representatives of COSE and Gates McDonald
was held on April 6, 1994. At this meeting, Gates McDonald’s claims to the fees
were discussed. The issues were not resolved.




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                                January Term, 1998




       {¶ 7} On July 5, 1994, counsel for Gates McDonald sent a letter to COSE
demanding that the claims be submitted to arbitration pursuant to Section 7.7 of the
Service Agreement. Section 7.7 provides:
       “Arbitration.
       “(a) All disputes and controversies of every kind and nature between Gates
and COSE that may arise as to the existence, construction, validity, interpretation
or meaning, performance, non-performance, enforcement, operation, breach,
continuance, or termination of this Agreement shall be submitted to arbitration
pursuant to the following:
       “(i) Either party may demand such arbitration in writing within ninety (90)
days after the controversy arises * * *.
       “* * *
       “(b) The parties stipulate that the provisions hereof shall be a complete
defense to any suit, action, or proceeding instituted in any federal, state, or local
court or before any administrative tribunal with respect to any controversy or
dispute arising during the period of this agreement and which is arbitratable [sic]
as herein set forth. The arbitration provisions hereof shall, with respect to such
controversy or dispute, survive the termination or expiration of this Agreement.”
       {¶ 8} COSE, rather than acceding to the arbitration demand, on August 2,
1994 filed a complaint for a declaratory judgment in the Cuyahoga County Court
of Common Pleas, urging that Gates McDonald had failed to demand arbitration
within ninety days after the controversy arose, as required by Section 7.7(a)(i) of
the Service Agreement. COSE sought a declaration that Gates McDonald had
waived its claims to fees by its alleged failure to comply with the ninety-day
provision, and that Gates McDonald was thereby barred from arbitrating the claims,
and further was precluded from adjudicating the claims in court.




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                              SUPREME COURT OF OHIO




        {¶ 9} In its answer, Gates McDonald denied, inter alia, COSE’s allegations
that it had failed to make a timely demand for arbitration, and denied that it had
waived its claim to fees. Gates McDonald also counterclaimed for the fees.
        {¶ 10} COSE moved for judgment on the pleadings. COSE argued that it
was for the court, not the arbitrator, to determine whether Gates McDonald had
failed to comply with the ninety-day time limit, and further argued that the claims
had been waived. COSE also argued that Gates McDonald, through a paragraph in
the answer, had made a judicial admission that the demand for arbitration was
untimely. COSE pointed out that Gates McDonald had stated in its answer that a
“dispute existed” in February 1994, and that this statement was the equivalent of
acknowledging that the “controversy arose” at that time for purposes of Section 7.7
of the Service Agreement. COSE argued that this acknowledgment should be read
as an admission of untimeliness, since February 1994 was more than ninety days
before the demand for arbitration was made.
        {¶ 11} On January 5, 1995, the trial court granted COSE’s motion, without
issuing an opinion. The substantive portion of the trial court’s entry read in its
entirety, “Plaintiff’s Motion to Dismiss Defendant’s Counterclaim and Plaintiff’s
Motion for Judgment is granted. Final.”
        {¶ 12} Gates McDonald appealed the trial court’s judgment to the Court of
Appeals for Cuyahoga County. The court of appeals, in a split decision, reversed
the judgment of the trial court, holding that the trial court erred in entering judgment
for COSE, and further holding that the trial court should have declared that the
parties were required to submit to arbitration.
        {¶ 13} The cause is now before this court pursuant to the allowance of a
discretionary appeal.
                                __________________
        Squire, Sanders & Dempsey, L.L.P., Daniel J. O’Loughlin, John E. Lynch,
Jr., and Harold E. Farling, for appellant.




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                                 January Term, 1998




        Bricker & Eckler, Anne Marie Sferra, Harry Wright IV and Michael D.
Smith, for appellee.
                                __________________
        ALICE ROBIE RESNICK, J.
        {¶ 14} The issue for resolution is whether, in the circumstances presented
here, a court or an arbitrator determines the construction and consequences of the
ninety-day demand provision in the parties’ Service Agreement. For the reasons
that follow, we find that a presumption in favor of the arbitrability of the parties’
dispute over the interpretation of Section 7.7(a)(i) of the agreement applies in the
circumstances of this case, and that COSE, the party resisting arbitration, has failed
to overcome the presumption. We affirm the judgment of the court of appeals.
        {¶ 15} The parties do not disagree that the underlying issues regarding fees
are matters clearly within the scope of the agreement to arbitrate. The parties’
disagreement centers on the interpretation to be given to the section of the
agreement setting forth the ninety-day provision. COSE asserts that the ninety-day
arbitration demand provision is a “condition precedent” that qualifies the agreement
to arbitrate, and that indicates the parties’ intent to have a court, not an arbitrator,
construe Section 7.7(a)(i) of the agreement. Adoption of COSE’s position would
lead to the conclusion that the trial court therefore properly undertook to construe
Section 7.7(a)(i), and properly determined that Gates McDonald’s claim for the fees
was untimely, so that arbitration is unwarranted.
        {¶ 16} Gates McDonald, on the other hand, asserts that the parties intended
to have an arbitrator construe the meaning of Section 7.7(a)(i), and that, even if that
section would operate as a “condition precedent” to the arbitration of the fee
disputes, it is up to the arbitrator to make that determination. Adoption of Gates
McDonald’s position would lead to the conclusion that the parties must submit the
“dispute” or “controversy” over the ninety-day demand provision to arbitration,




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                                SUPREME COURT OF OHIO




with the arbitrator ruling on the implications of the ninety-day demand provision as
a threshold matter requisite to any consideration of the fee disputes on the merits.
          {¶ 17} Initially, our consideration of this case recognizes that the arbitration
clause agreed to by the parties in Section 7.7(a) of the Service Agreement is
extremely broad. That clause begins with the language that “[a]ll disputes and
controversies of every kind” shall be submitted to arbitration. The unqualified
breadth of this language supports Gates McDonald’s preferred construction of the
parties’ intent regarding the overall arbitration provision. At the same time, the
employment by the parties of this opening broad language lessens the strength of
COSE’s position regarding the parties’ intent to have the subsequent ninety-day
demand provision specifically qualify the earlier language of the clause.
          {¶ 18} Our consideration is further influenced by the decision of the United
States Supreme Court in John Wiley & Sons, Inc. v. Livingston (1964), 

376 U.S. 543, 556-557

, 

84 S.Ct. 909, 918

, 

11 L.Ed.2d 898, 908-909

, in which the court
stated:
          “Questions concerning the procedural prerequisites to arbitration do not
arise in a vacuum; they develop in the context of an actual dispute about the rights
of the parties to the contract or those covered by it.
          “* * *
          “Doubt whether grievance procedures or some part of them apply to a
particular dispute, whether such procedures have been followed or excused, or
whether the unexcused failure to follow them avoids the duty to arbitrate cannot
ordinarily be answered without consideration of the merits of the dispute which is
presented for arbitration.
          “* * *
          “Once it is determined * * * that the parties are obligated to submit the
subject matter of a dispute to arbitration, ‘procedural’ questions which grow out of
the dispute and bear on its final disposition would be left to the arbitrator.”




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                                      January Term, 1998




         {¶ 19} Although our decision is affected by the above concerns, the telling
question in this case concerns what the parties agreed to empower an arbitrator to
decide, as revealed by an examination of the parties’ agreement. The answer to this
question will resolve whether the disagreement over the ninety-day demand
provision is a “procedural question” growing out of the dispute and bearing on its
final disposition, so that it should be referred to the arbitrator in the sense discussed
in John Wiley & Sons.
         {¶ 20} In AT&T Technologies, Inc. v. Communications Workers of Am.
(1986), 

475 U.S. 643

, 

106 S.Ct. 1415

, 

89 L.Ed.2d 648

, the United States Supreme
Court summarized four general principles, developed in prior decisions of that
court, to be applied when considering the reach of an arbitration clause. The
essence of these general principles, set out primarily in the “Steelworkers Trilogy”
(Steelworkers v. Am. Mfg. Co. [1960], 

363 U.S. 564

, 

80 S.Ct. 1343

, 

4 L.Ed.2d 1403

;
Steelworkers v. Warrior & Gulf Navigation Co. [1960], 

363 U.S. 574

, 

80 S.Ct. 1347

, 

4 L.Ed.2d 1409

; Steelworkers v. Enterprise Wheel & Car Corp. [1960], 

363 U.S. 593

, 

80 S.Ct. 1358

, 

4 L.Ed.2d 1424

) is pertinent to our review, and provides a
framework for our inquiry.1
         {¶ 21} The first principle is that “ ‘arbitration is a matter of contract and a
party cannot be required to submit to arbitration any dispute which he has not
agreed so to submit.’ * * * This axiom recognizes the fact that arbitrators derive
their authority to resolve disputes only because the parties have agreed to submit
such grievances to arbitration.” AT&T Technologies, 

475 U.S. at 648-649

, 106




1. The Steelworkers Trilogy of cases, John Wiley & Sons, and AT&T Technologies all involved
interpretation of arbitration clauses in collective bargaining agreements. Although the case sub
judice does not arise in the collective bargaining context, it is now clear that the general principles
discussed reach beyond labor arbitration cases. See PaineWebber Inc. v. Elahi (C.A.1, 1996), 

87 F.3d 589, 594, fn. 6

 (recognizing that labor arbitration precedents can apply in a nonlabor arbitration
setting).




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                               SUPREME COURT OF OHIO




S.Ct. at 1418, 

89 L.Ed.2d at 655

, quoting Warrior v. 

Gulf, supra,

363 U.S. at 582

,

80 S.Ct. at 1353

, 

4 L.Ed.2d 1417

.
          {¶ 22} The second principle is that “the question of arbitrability—whether
a[n] * * * agreement creates a duty for the parties to arbitrate the particular
grievance—is undeniably an issue for judicial determination. Unless the parties
clearly and unmistakably provide otherwise, the question of whether the parties
agreed to arbitrate is to be decided by the court, not the arbitrator.” 

Id.,

475 U.S. at 649

, 

106 S.Ct. at 1418

, 

89 L.Ed.2d at 656

.
          {¶ 23} The third rule is, “in deciding whether the parties have agreed to
submit a particular grievance to arbitration, a court is not to rule on the potential
merits of the underlying claims.” 

Id.,

475 U.S. at 649

, 

106 S.Ct. at 1419

, 

89 L.Ed.2d at 656

.
          {¶ 24} The fourth principle is that “where the contract contains an
arbitration clause, there is a presumption of arbitrability in the sense that ‘[a]n order
to arbitrate the particular grievance should not be denied unless it may be said with
positive assurance that the arbitration clause is not susceptible of an interpretation
that covers the asserted dispute. Doubts should be resolved in favor of coverage.’
” 

Id.,

475 U.S. at 650

, 

106 S.Ct. at 1419

, 

89 L.Ed.2d at 656

, quoting Warrior v.

Gulf, supra,

363 U.S. at 582-583

, 

80 S.Ct. at 1353

, 

4 L.Ed.2d 1417

.
          {¶ 25} Appellant COSE argues that the ninety-day arbitration demand
provision contained in Section 7.7 of the Service Agreement should be read as
imposing a “condition precedent” on the duty to arbitrate, and that the terms of the
agreement reveal an intent by the parties not to confer jurisdiction upon an arbitrator
to decide a controversy if that condition precedent is not met. Accordingly, COSE
asserts that the issue here is a question of “arbitrability” and that the trial court ruled
correctly when it found that COSE did not have to arbitrate anything. As a
consequence of this argument, COSE’s position must necessarily be that the parties
agreed to have the court, rather than the arbitrator, determine the contours of the




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                                 January Term, 1998




parties’ compliance with Section 7.7(a)(i) of the agreement. In support of its
position, COSE cites the recent United States Supreme Court decision in First
Options of Chicago, Inc. v. Kaplan (1995), 

514 U.S. 938

, 

115 S.Ct. 1920

, 

131 L.Ed.2d 985

, and suggests that its position is “vindicated” by the Supreme Court’s
consideration in that case regarding whether a trial court or an arbitrator should
decide the “arbitrability” of a particular dispute.
        {¶ 26} When First Options is considered in its context, it does not support
COSE’s position. The key factor in First Options that distinguishes it from this
case is that in First Options, the parties resisting arbitration had not personally
signed the document containing the arbitration clause. See 

514 U.S. at 941

, 

115 S.Ct. at 1922

, 

131 L.Ed.2d at 991

. The Supreme Court contrasted the situation
before it with a situation in which the parties to a valid arbitration clause have a
contract providing for arbitration of some issues, and a party resists arbitration of
an issue on the assertion that the contract does not require arbitration of that
particular issue. 

Id.,

514 U.S. at 944-945

, 

115 S.Ct. at 1924-1925

, 

131 L.Ed.2d at 994

. The presumption in favor of arbitrability applies in the latter situation, which
is also present in the case sub judice.
        {¶ 27} In the First Options situation, on the other hand, the presumption is
against arbitrability because there is serious doubt that the party resisting arbitration
has empowered the arbitrator to decide anything, including the arbitrator’s own
scope of authority. 

Id.,

514 U.S. at 945

, 

115 S.Ct. at 1924-1925

, 

131 L.Ed.2d at 994

. The court in that instance is simply considering an aspect of the most
fundamental question of all arbitration cases—the first principle of AT&T
Technologies—that no party can be required to submit to arbitration when that party
has not agreed to do so.        The First Options conclusion regarding when a
presumption against arbitrability applies is inapplicable to this case. COSE does
not claim that the arbitration clause is invalid, and so accepts that the underlying
fee dispute is arbitrable, but rather claims that the ninety-day “condition precedent”




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                             SUPREME COURT OF OHIO




to arbitration was not complied with and thus arbitration is unavailable. The First
Options opinion actually reinforces the fourth principle of AT&T Technologies.
The presumption in favor of arbitrability applies in this case, so that the trial court
should have ordered that the disagreement over the ninety-day demand provision
be submitted to arbitration unless it could be determined with “positive assurance”
that the dispute was not susceptible of arbitration.
       {¶ 28} Having determined that the presumption in favor of arbitrability
applies here, we next consider whether COSE, the party opposing arbitration, has
overcome the presumption. In AT&T Technologies, the Supreme Court declined to
consider this question. After setting out the principles discussed above, and thereby
detailing the correct approach, the Supreme Court remanded the cause to the district
court for it to apply the analysis to the precise situation of that case. 

475 U.S. at 651-652

, 

106 S.Ct. at 1420

, 

89 L.Ed.2d at 657-658

. Based on the record before us,
and because the answer is readily apparent from that record, we proceed to consider
this question.
       {¶ 29} In the case sub judice, the narrow question to be determined is
whether the parties intended to have the court or the arbitrator determine the
construction of the ninety-day demand provision. Our inquiry is significantly
affected by the broad scope of the arbitration clause here — the parties have agreed
to arbitrate “[a]ll disputes and controversies of every kind and nature * * * that may
arise as to the existence, construction, validity, interpretation or meaning,
performance, non-performance, enforcement, operation, breach * * *” of the
agreement.
       {¶ 30} In applying the standard set forth in AT&T Technologies that the
party resisting arbitration must meet in order to overcome the presumption in favor
of arbitrability, we ask “whether, because of express exclusion or other forceful
evidence, the dispute over the interpretation of [the ninety-day demand provision]
is not subject to the arbitration clause.” 

Id.,

475 U.S. at 652

, 

106 S.Ct. at 1420

, 89




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                                January Term, 1998




L.Ed.2d at 657-658. Our inquiry is “ ‘strictly confined’ * * * to whether the parties
agreed to submit disputes over the meaning of [the ninety-day demand provision]
to arbitration. Because the * * * agreement contains a standard arbitration clause,
the answer must be affirmative unless the contract contains explicit language stating
that disputes respecting [the ninety-day demand provision] are not subject to
arbitration, or unless the party opposing arbitration      * * * adduces ‘the most
forceful evidence’ to this effect from the bargaining history.” Id., 

475 U.S. at 654

-
655, 

106 S.Ct. at 1421

, 

89 L.Ed.2d at 659-660

 (Brennan, J., concurring).
       {¶ 31} We apply general contract law, influenced by the presumption of
arbitrability detailed above, to answer the question. “[T]he basic objective * * * is
* * * to ensure that commercial arbitration agreements, like other contracts,        ‘
“are enforced according to their terms,” ’ * * * and according to the intentions of
the parties.” First Options, 

514 U.S. at 947

, 

115 S.Ct. at 1925

, 

131 L.Ed.2d at 995

.
       {¶ 32} COSE can cite no “explicit language” providing that disputes
respecting Section 7.7(a)(i) are not subject to arbitration. COSE can point only to
the language of the ninety-day demand provision, and claim that the language itself
evidences an intent not to submit this dispute to arbitration. However, the major
weakness in COSE’s argument is that someone, either the court or the arbitrator,
must determine when a “controversy arose” in order to effectuate the intent of the
parties as to that section. The language employed in Section 7.7(a)(i) is not so clear
on what demands are untimely so as to be self-executing. Moreover, Gates
McDonald does not agree, and has never agreed, that its demands are untimely.
       {¶ 33} In this case, the language of Section 7.7(a)(i) is itself in need of
interpretation before it can be implemented, and that interpretation is in dispute.
COSE’s argument that a timely demand is a condition precedent to arbitration does
not help it on this key point—that a legitimate dispute exists over whether the
demand was timely. As the parties have empowered the arbitrator to hear “all
disputes and controversies of every kind and nature,” what the parties intended if




                                         11
                              SUPREME COURT OF OHIO




the factual situation of this case arose must be determined by the arbitrator. In
addition, COSE presented no evidence at all of negotiating history with respect to
this decisive question. Although the ninety-day demand provision may indeed be
a “condition precedent” to arbitration of the fee disputes, COSE has not
demonstrated an intent to exclude the dispute surrounding Section 7.7(a)(i) from
the reach of the arbitration clause, and so has not overcome the presumption in
favor of arbitrability.
        {¶ 34} When all the considerations above are taken into account, this case
is another example of the application of the general observation made in John Wiley
& Sons, 

376 U.S. at 557

, 

84 S.Ct. at 918

, 

11 L.Ed.2d at 909

, that matters regarding
procedural questions growing out of the parties’ dispute and bearing on its final
disposition are best left to the determination of the arbitrator.
        {¶ 35} Our decision here is in accord with that of most courts of appeals in
this state that have considered this issue. In Independence Bank v. Erin Mechanical
(1988), 

49 Ohio App.3d 17, 18

, 

550 N.E.2d 198, 200

, the court stated, “[A] clause
in a contract providing for dispute resolution by arbitration should not be denied
effect ‘ “unless it may be said with positive assurance that the arbitration clause is
not susceptible of an interpretation that covers the asserted dispute. * * *” ’
Gibbons-Grable v. Gilbane Bldg. Co. (1986), 

34 Ohio App.3d 170, 173

, 

517 N.E.2d 559, 562

 (quoting from Siam Feather & Forest Products Co. v. Midwest Feather
Co. [S.D.Ohio 1980], 

503 F.Supp. 239, 241

, affirmed [C.A.6, 1981], 

663 F.2d 1073

). Any doubts should be resolved in favor of coverage under the contract’s
arbitration clause. Id.” See, also, e.g., Bd. of Library Trustees, Shaker Hts. Pub.
Library v. Ozanne Constr. Co., Inc. (1995), 

100 Ohio App.3d 26

, 

651 N.E.2d 1356

;
Didado v. Lamson & Sessions Co. (1992), 

81 Ohio App.3d 302

, 

610 N.E.2d 1085

.
        {¶ 36} In its second proposition of law, COSE argues that Gates McDonald
made a statement in its answer that should be taken as a judicial admission that
Gates McDonald’s arbitration demand was untimely. Gates McDonald contends




                                          12
                                January Term, 1998




that it has never admitted the untimeliness of its arbitration demand. In line with
our discussion above, this point of disagreement is for the arbitrator to decide; it is
not for the courts. Consequently, because any discussion of this issue would take
us beyond the scope of our consideration, we do not address it. Furthermore, our
decision here should not be read as any comment on the construction to be given to
Section 7.7(a)(i). The parties’ arguments regarding the interpretation to be given
to that provision should be addressed to the arbitrator.
       {¶ 37} For all the foregoing reasons, the judgment of the court of appeals is
affirmed. This cause is remanded to the trial court for a declaration that the parties
must submit to arbitration.
                                                                   Judgment affirmed
                                                                and cause remanded.
       MOYER, C.J., PFEIFER and LUNDBERG STRATTON, JJ., concur.
       COOK, J., concurs in judgment only.
       DOUGLAS and F.E. SWEENEY, JJ., dissent.
                               __________________
       DOUGLAS, J., dissenting.
       {¶ 38} I respectfully dissent. I would reverse the judgment of the court of
appeals and reinstate the judgment of the trial court.
       F.E. SWEENEY, J., concurs in the foregoing dissenting opinion.
                               __________________




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