Determining the Scope of Arbitration

Keeping the courts out of contracts subject to arbitration


 Debbi Conrad  |    December 10, 2018
Determining the Scope of Arbitration

We frequently hear more conversation and emphasis upon alternate dispute resolution. Parties, including REALTORS¬ģ, are encouraged to utilize alternate dispute resolution techniques such as ombudsman and mediation services as well as arbitration before any litigation is filed.

Alternative dispute resolution

An ombudsman is an individual appointed to resolve disputes through constructive communication and problem-solving, advocating for consensus and understanding. See ombudsman procedures at www.nar.realtor/ae/manage-your-association/local-and-state-association-ombudsman-services. 

Mediation is a structured negotiation facilitated by a neutral third person who assists the parties to arrive at a mutually agreeable settlement by clarifying issues in a dispassionate and focused manner. By providing a forum in which the parties can tell their sides of the story in a nonconfrontational way, the mediator helps find common ground on which to resolve the dispute. See mediation resources at www.nar.realtor/about-nar/policies/mediation. 

Arbitration is a legal technique for the resolution of disputes outside the courts. A neutral third party holds an informal hearing and imposes a legally binding decision. Arbitration is less expensive and time-consuming than litigation. Parties who commit to binding arbitration give up their legal right to litigate the dispute in the future. See www.nar.realtor/arbitration-dispute-resolution. 

‚ÄúNew Professional Standards Tool for You,‚ÄĚ in the June 2015 Wisconsin Real Estate Magazine at www.wra.org/WREM/June15/Ombudsman.¬†

More and more contracts include arbitration provisions. While the main idea is for parties to resolve their dispute using an arbitrator and avoid going to court, parties at times are resistant and unwilling to accept the outcome when it is not in their favor. However, a circuit court will enforce an arbitration agreement and the resulting award as long as a given dispute falls within the agreement’s scope. What is or is not within the scope of an agreement, however, has not always been clear. 

For example, in First Weber Group, Inc. v. Synergy Real Estate Group LLC, 2015 WI 34, the Wisconsin Supreme Court held the timeliness of an arbitration request under the REALTOR¬ģ association arbitration rules is determined by the arbitrator and not the court. The court specifically rejected the argument that procedural matters, such as timeliness, should be decided judicially. When a dispute is within the agreement‚Äôs scope, then defenses to arbitration, such as untimeliness, estoppel or waiver, are determined by the arbitrators. See a summary of the case on page 3 of the November 2015 Legal Update, ‚ÄúCase Law Update Fall 2015,‚ÄĚ at www.wra.org/LU1511.¬†

In a recent Wisconsin case, the property owners contracted for design services regarding a new home they were building, and their contract included an arbitration provision. The property owners likely did not envision the far-reaching application of that provision when they became tangled in a sticky dispute with their builder and the design firm when their newly constructed house foundation developed cracks and was ‚ÄúRed Tagged.‚ÄĚ

The property owners purchased an existing residence they planned to tear down to make way for their new home. They also entered into a design consultant agreement (Agreement), whereby the design company would provide residential design services to the property owners for the construction of their new home. The individual design consultant (Consultant) they worked with to negotiate the Agreement was also primarily responsible for performing the design services, but others employed by the design company, including licensed architects, worked on the project.

The Agreement included a binding arbitration provision: 

Disputes between the parties in which the amount in controversy exceeds $5,000.00 (exclusive of costs, fees and interest) shall be resolved through arbitration pursuant to Chapter 788, Wis. Stats., conducted before a single arbitrator, who shall be appointed by the Chief Judge of Dane County Circuit Court and who shall be compensated by the non-prevailing party in the proceeding as determined by the arbitrator.

After demolishing the existing residence, the property owners entered into a separate contract with a builder to begin construction on their new home. In early 2016, the builder poured a foundation on the lot, even though the design company had not yet finished the final plans. After bids on the completed plans came in, the property owners complained the foundation was cracked and notified the village. The village issued a ‚ÄúRed Tag‚ÄĚ on the project requiring all construction cease pending evaluation. The builder engaged several engineers who pronounced the foundation buildable, with slight modifications, and the Red Tag was rescinded. Nonetheless the property owners continued to insist the foundation was defective, and construction was stopped. At this point, the property owners complained they had allegedly been defrauded by the Consultant because he was not an architect.

On June 9, 2016, the builder sued the property owners in circuit court for breach of contract and $115,680.00 in money damages. The property owners filed a counterclaim against the builder, and a third-party complaint against the Consultant, individually, but not the design company. They alleged the Agreement was procured by fraud because the Consultant allegedly represented himself as an architect specializing in residential home design in order to secure the Agreement, when he is not a licensed architect. They alleged intentional misrepresentation and violation of Wis. Stat. § 100.18 and concluded the Agreement was void and unenforceable. The property owners sought $200,000 in consequential damages including money for the impaired property value, demolition fees, survey fees, investigation and consultant costs, wage loss, transportation and accommodation costs, and legal fees. The Consultant moved to compel arbitration under the provision in the Agreement.

The circuit court held for the property owners, finding the fraud and misrepresentation claims against the Consultant individually were not subject to the arbitration clause in the Agreement as claimed by the Consultant; his motion to stop the litigation and compel arbitration instead was denied. The circuit court indicated the Agreement was basically incidental and immaterial to the fraud claims and were unrelated to performance under the Agreement. 

On appeal to the court of appeals, the court observed ‚ÄúWisconsin has a clearly established public policy to enforce arbitration agreements ‚Ķ and there is a ‚Äėstrong presumption of arbitrability where the contract in question contains an arbitration clause.‚Äô‚ÄĚ The court was persuaded by the federal case law cited by the Consultant. Those cases held a claim based on misrepresentation in the inducement of a contract was specifically subject to arbitration when the contract contained an arbitration clause. The case law also indicated when a company is bound under a valid arbitration clause, its agents, employees and representatives are also covered, and an agent is entitled to the protection of the company‚Äôs arbitration clause when the claims against the individual are based on conduct as an agent.¬†

The court rejected the property owners’ arguments that the arbitration provision should not apply because the alleged misrepresentations were made before the parties signed the Agreement and because the Consultant was not acting within the scope of his design company role when he allegedly induced them to enter into the Agreement. The court held the Consultant could invoke the arbitration provision in the Agreement to resolve the property owners’ fraud allegations and granted the Consultant’s motion to compel arbitration.

Thus the appeals court upheld and followed the holdings of other federal and state cases: challenges to the validity of a contract as a whole must be arbitrated when the contract has an arbitration provision, and agents and employees may compel arbitration under a contract between their employer and a third party, even if the individual is not named in the contract, if the individual is acting within the scope of their company position. 

This adds to the sweeping coverage of arbitration provisions in Wisconsin contracts, signaling once again the arbitration provision is not limited only to issues regarding the performance of the contract, but also applies to issues and defenses relating to timeliness as well as fraud when the contract is created. 

See Thomas Zimmer Builders, LLC v. Roots (Ct. App. 2018, No. 2017AP2037) at www.wicourts.gov/ca/opinion/DisplayDocument.pdf?content=pdf&seqNo=222928. 

Wis. Stat. § 100.18 Fraudulent representations

In order to prevail on a § 100.18 claim, the plaintiff must prove: (1) the defendant made a misrepresentation of fact to the public with the intent to induce a sale; (2) the representation was untrue, deceptive or misleading; and (3) the misrepresentation caused a pecuniary loss. This statute is intended to deter sellers from making false and misleading representations in sales promotions in an effort to induce a sale. § 100.18 lawsuits can be brought only with respect to representations made before a contract is entered into. Although on its face this statute seems to apply only to advertising practices, it protects the public from all untrue, deceptive or misleading representations made in sales promotions, including representations made in face-to-face sales where no media advertising is involved.
Pursuant to ¬ß 100.18(11)(b), a person suffering a pecuniary loss due to a ¬ß 100.18(1) violation, ‚Äúshall recover such pecuniary loss, together with costs, including reasonable attorney fees.‚ÄĚ A party does not recover double damages under ¬ß 100.18(11)(b). See the statute at docs.legis.wisconsin.gov/statutes/statutes/100/18.

Intentional misrepresentation

The basic elements in misrepresentation are: (1) the defendant must make a material factual representation, (2) which is not true, and, (3) the plaintiff must believe the representation is true and reasonably rely on the representation to his or her detriment. In a claim for intentional misrepresentation, there are two additional elements. First, the defendant must have known the representation was not true or recklessly made the statement not caring whether it was true or false. Second, the defendant must make the representation with the intent to defraud and cause a party to act upon it. See pages 1-4 of the February 2005 Legal Update, ‚ÄúCommon Practice Pitfalls,‚ÄĚ at www.wra.org/LU0502.

Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA. 

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