Saturday, February 3, 2018

Signature Required: The Nuances in the Tennessee Uniform Arbitration Act (TUAA) in Residential Construction, Interstate Commerce and the Federal Arbitration Act (FAA)

By: I’Ashea Myles-Dihigo, Esq.

Arbitration continues to be the preferred method in the resolution of many construction dispute cases. Many residential general contractors and others working in the residential construction industry place a general arbitration agreement in their contracts in an effort to control the venue for dispute resolution. Because arbitration requires a written agreement, it is usually easier to  negotiate the terms of the arbitration before the dispute arises. Therefore, clients should be advised to give some attention to the language used when drafting such agreements to avoid costly disputes regarding the interpretation on the back end. Clients should also be advised to give attention to any state statutory schematics that may determine if a particular arbitration agreement is enforceable or not. So, what happens if you don’t want to arbitrate, or like many industry professionals, don’t pay attention to the paperwork? Do you still have to arbitrate, or can you force another party to do so?

The answer to those questions depends on the type of contract you are dealing with when it comes to residential construction. In Tennessee, Tennessee Code Annotated § 29-5-302 (a) governs arbitration agreements relative to residential construction. It states in pertinent part, “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; provided, that for contracts relating to farm property, structures or goods, or to property and structures utilized as a residence of a party, the clause providing for arbitration shall be additionally signed or initialed by the parties.” Tenn. Code Ann. § 29-5- 302(a). The legislature in the state of Tennessee, as in many other states, intended to try to ensure that parties to a written contract understand full well that by entering into a [residential] contract, they are agreeing to resolve future disputes by arbitration and are waiving their right to pursue claims in state or federal court. Hubert, et al. v. Turnberry Homes, LLC, No. M2005-00955-COA-R3-CV, 2006 Tenn. App. LEXIS 648, *22 (Tenn. Ct. App. 2006).

In the case of Hubert, et al. v. Turnberry Homes, LLC, the Plaintiffs hired Turnberry Homes to construct a new house for them. Id. at *2. Once the construction was finished, they were dissatisfied with the work, and they sued the builder. Id. Turnberry filed a motion to compel arbitration and to stay the litigation pursuant to the FAA. Id. at *3. As a part of its motion, Turnberry filed an affidavit which identified various areas of interstate commerce that the building project touched. Id. The trial court ultimately denied Turnberry’s motion. Id. at *4.

When Turnberry appealed the ruling of the trial court, the Court of Appeals addressed the interplay between the FAA and TUAA. Under the TUAA, the legislature intended to provide a heightened duty requirement when seeking to enforce arbitration agreements relating to farm property, structures or goods, or to property and structures utilized as a residence of a party. Id. at *13-14. In those cases, the clause providing for arbitration shall be additionally signed or initialed by the parties. Id. However, the Court held that where the state has adopted the UAA's enforcement provision without modification, there was no conflict between the FAA and the state's arbitration act. Id. at *15. However, as in Tennessee, where the state legislature has placed additional restrictions on the enforcement of arbitration agreements that are not present in the FAA or the UAA, cases will arise where a state court will be required to enforce an agreement to arbitrate under the terms of the FAA but be prohibited from doing so under the state arbitration statute. Id. But Turnberry is distinguishable because it involved a purchase and sale agreement which, on its face, involves interstate commerce. What about other arbitration agreements in Tennessee that relate to farm property, structures or goods, or to property and structures utilized as a residence of a party but don’t touch interstate commerce?

The Court of Appeals took up this exact issue in Wells v. Tennessee Home Safe Inspections, LLC. In that case, Ms. Wells entered into a contract and an addendum to the contract which was an agreement to arbitrate as part of her home inspection contract with Tennessee Home Safe Inspections (THSI). Wells v. Tenn. Home Safe Inspections, LLC, No. M2008-00224-COA-R3-CV, 2008 Tenn. App. LEXIS 802, *1-2, (Tenn. Ct. App. 2008). Ms.Wells signed the addendum, and her realtor signed as well; however, no representative from THSI signed the addendum. Id. at *2. Ms. Wells sued THSI when she purchased a home and used THSI as the inspector because they failed to identify some issues with the home. Id. THSI filed a motion to compel arbitration in the Circuit Court. Id. When that motion was denied by the court, it appealed to the Court of Appeals. Id. The Court distinguished this case from Turnberry when it held that, “there is nothing in the record to suggest that the home inspection contract at issue involved interstate commerce.” Id. at *8. Where there is no conflict between the FAA and the UAA or state statute, the state’s statute will apply to the arbitration agreement. Turnberry, 2006 Tenn. App. LEXIS 648 at *15. Therefore, the Wells Court held that that home inspections do not involve interstate commerce, and the FAA did not apply. Wells, 2008 Tenn. App. LEXIS 802 at *8. Where the FAA does not apply to an arbitration agreement, the state statute does apply. Turnberry, 2006 Tenn. App. LEXIS 648 at *15. Therefore, the Wells Court held that the heightened duty requirements set forth in Tennessee Code Annotated § 29-5-302(a) require that in contracts involving a party's residence, the arbitration clause must be "additionally signed or initialed by the parties." Wells 2008 Tenn. App. LEXIS 802 at *6. Because THSI failed to sign the arbitration agreement with Ms. Wells, the arbitration agreement was unenforceable and Ms. Wells did not have to submit to arbitration. Id. at *9.

Therefore, for those who want to make the most of the arbitration process, it is critically important for the client to know the type of contract that they are dealing with and what the statutes in your specific state say about enforcement. In Tennessee, the law is clear, the FAA will apply to purchase agreements involving interstate commerce, but in other agreements, that do not involve interstate commerce, the TUAA’s heightened duty requirements will apply to certain agreements involving residences…so to be on the safe side, make sure to have everyone sign the arbitration agreement.

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