Shepler Construction v. Gary And Susan Leonard ( 2013 )


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    IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
    DIVISION ONE
    SHEPLER CONSTRUCTION, INC.,
    No. 68227-0-1
    Respondent,
    ORDER GRANTING
    MOTION TO PUBLISH
    GARY LEONARD and SUSAN KIRALY-
    LEONARD, and the marital community
    thereof,                                                                                         o
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    Appellants                                                     H2
    PHH MORTGAGE SERVICES                                                                      I
    CORPORATION, a New Jersey                                                                      >-tJrvi
    corporation,
    Defendant.                                                        —       o-
    o
    Gary Leonard and Susan Kiraly-Leonard, appellants, filed a motion to publish in
    part. Associated General Contractors of Washington and Paul R. Cressman Jr., who
    are nonparties, filed a motion to publish.       We called for an answer and Shepler
    Construction Inc., respondent, filed a motion to extend time to file its answer. We grant
    that motion, and accept Shepler's answer. A panel of the court having reconsidered its
    prior determination not to publish the opinion, and finding that it is of precedential value
    and should be published; now, therefore it is hereby
    ORDERED that the written opinion filed June 3, 2013, shall be published and
    printed in the Washington Appellate Reports.
    DATED this       ^
    '             - Km,
    day of.                    ,2013.
    IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
    SHEPLER CONSTRUCTION, INC.,
    No. 68227-0-1
    Respondent,
    DIVISION ONE
    v.
    PUBLISHED OPINION
    GARY LEONARD and SUSAN KIRALY-
    LEONARD, and the marital community
    thereof,
    Appellants
    PHH MORTGAGE SERVICES
    CORPORATION, a New Jersey
    corporation,
    Defendant.                        FILED: June 3, 2013
    Appelwick, J. — Shepler and the Leonards appear before this court on their third
    appeal in this case. In 2006, this court reversed a summary judgment order dismissing
    the Leonards' construction defect counterclaims.        In 2009, we held that both parties
    waived arbitration, affirming the trial court's denial of the Leonards' motion to compel
    arbitration.      We noted that the parties did not waive their underlying claims.
    r^J^evgtheless, the trial court on remand barred the Leonards from asserting any
    SgouoJerclaim
    •<__                that should have been submitted to arbitration under the contract's dispute
    ;u-<
    --cr^fesdjEition provision. We reverse.
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    No. 68227-0-1/2
    FACTS
    In 2000, Gary Leonard and Susan Kiraly-Leonard contracted with Shepler
    Construction, Inc., to build a custom home on San Juan Island.1 The fixed price
    contract contained a dispute resolution mechanism and a provision for Shepler to
    remedy nonconforming work before final payment. Shepler made an express warranty
    that work would be "substantially completed in a workmanlike manner." The contract
    did not contain any disclaimer of implied warranties or any provision limiting remedies.
    In 2001, a dispute arose regarding Shepler's performance and the Leonards'
    payment.      Shepler sent letters to the Leonards recommending that they initiate the
    dispute resolution process.      The Leonards admit that they did not respond to the
    requests for dispute resolution of their claims.
    After filing a mechanic's lien against the Leonards' property, Shepler filed suit to
    enforce the lien and obtain damages for breach of contract.             The Leonards filed
    affirmative defenses and counterclaims, including a construction defect claim alleging
    that Shepler breached the contract by failing to complete construction in a workmanlike
    manner.      The trial court granted Shepler's motion for summary judgment on the
    Leonards' construction defect counterclaim. After holding a trial on enforcement of the
    mechanic's lien, the court entered judgment and awarded attorney fees in Shepler's
    favor.    The Leonards appealed the dismissal of their counterclaims on summary
    judgment. Leonard v. Shepler Constr., Inc., noted at 
    132 Wash. App. 1054
    , 
    2006 WL 1
    The underlying facts of this case are detailed at length in this court's two
    previous opinions. Shepler Constr., Inc. v. Leonard, noted at 153 Wn. App 1035, 
    2009 WL 5153672
    , at *1-2; Leonard v. Shepler Constr., Inc., noted at 
    132 Wash. App. 1054
    ,
    
    2006 WL 1
    217216, at *1-2. We repeat only those facts necessary to this opinion.
    No. 68227-0-1/3
    1217216, at *2. In 2006, we reversed and remanded for trial, holding that a genuine
    issue of material fact existed as to whether Shepler breached its contractual obligation
    to perform in a workmanlike manner. IcL at *3.
    In 2008, Shepler again filed for summary judgment, arguing that the Leonards'
    counterclaims should be dismissed, because they breached the contract by failing to
    seek arbitration. The trial court initially denied the motion. Upon Shepler's motion for
    reconsideration, the trial court granted summary judgment on March 31, 2008. The
    court ordered:
    The Leonards are barred from bringing any claim before this court
    that should have been determined by submittal to binding arbitration under
    the contract[']s dispute resolution provision. All causes of actions or
    counterclaims relating to Shepler Construction's performance under the
    parties agreement, and specifically those asserting that Shepler
    Construction's work was not performed in accordance with the contract
    between the parties, applicable building codes, and in good and
    workmanlike manner, are therefore dismissed.
    The Leonards did not directly appeal the grant of summary judgment.
    On April 11, 2008, the Leonards filed a motion for reconsideration of the
    summary judgment order or, alternatively, to compel arbitration. The court denied the
    motion for reconsideration, finding that it was not timely. But, the court determined that
    the Leonards' right to bring a timely motion to compel arbitration at a later date was
    preserved. On May 21, 2008, the Leonards filed a motion to compel arbitration, which
    the court denied. The Leonards appealed from that denial.        Shepler Constr., Inc. v.
    Leonard, noted at 153 Wn. App 1035, 
    2009 WL 5153672
    .
    On appeal before this court, Shepler argued that the Leonards waived arbitration
    and were therefore estopped from invoking it. JcL at *2. We held that both parties
    No. 68227-0-1/4
    waived arbitration, jd. at *3. Neither party initiated notice of arbitration as provided by
    chapter 7.04A RCW. ]d Neither party asserted a right to arbitration in their answers to
    the pleadings of the other party. IdL Both parties conducted discovery and engaged in
    substantial litigation, including the prior appeal of the counterclaims, 
    id. Seven years
    passed and substantial case development occurred before the Leonards asserted the
    right to arbitrate, jd Therefore, the trial court did not err in denying their motion to
    compel arbitration. 
    Id. The Leonards
    argued in the same appeal that the trial court erred in dismissing
    their counterclaims on summary judgment. kL They did not directly appeal the March
    summary judgment order, but asked that we consider it under RAP 2.4(b). jd. We
    declined to do so. jd. But, we added in footnote one that "[t]he arbitration clause did
    not provide that it was the exclusive remedy for breach. As noted above, the parties
    waived the arbitration clause by litigating, not the underlying claims." ]d. at *3 n.1.
    The case was tried a second time on August 8-10, 2011. Citing footnote one of
    our 2009 opinion, the Leonards requested that evidence of construction defects be
    admitted at least for a recoupment or offset defense, or more broadly for the purpose of
    their underlying counterclaims, jd. The court recognized, "I want to make sure that I
    follow The Court of Appeal's mandate, and I'm having a difficult time considering that
    the footnote is a mandate." But, the court continued, "I believe that the mandate here is
    exactly as [Shepler's counsel] has indicated and that is to determine... the amount
    owed under the charge orders ... but it's not to consider construction defects, and I will
    so rule."
    No. 68227-0-1/5
    Affirming the March 2008 summary judgment order, the trial court barred the
    Leonards' counterclaims for construction defects.     In a November 9, 2011, decision
    letter, the court reiterated that the "Leonards' refusal to comply with the dispute
    resolution procedure set forth in the contract waived any claim of construction defect."
    (citing Absher Constr. co. v. Kent Sch. Dist. No. 415, 
    77 Wash. App. 137
    , 
    890 P.2d 1071
    (1995)). The trial was limited to Shepler's claims for compensation and foreclosure, and
    the Leonards' counterclaims for incomplete work or offsets. The court entered judgment
    and awarded attorney fees and costs in Shepler's favor.
    The Leonards appeal and argue that the trial court erred in dismissing their
    construction defect counterclaims.
    DISCUSSION
    We review summary judgment orders de novo. Hadley v. Maxwell, 
    144 Wash. 2d 306
    , 310-11, 
    27 P.3d 600
    (2001). Summary judgment is proper only when there are no
    genuine issues of material fact and the moving party is entitled to judgment as a matter
    of law. CR 56(c); Peterson v. Groves, 
    111 Wash. App. 306
    , 310, 
    44 P.3d 894
    (2002).
    The legal effect of a contract is a question of law reviewed de novo. Litho Color, Inc. v.
    Pac. Emp'rs Ins. Co., 
    98 Wash. App. 286
    , 295, 
    991 P.2d 638
    (1999).
    I.   Summary Judgment Dismissal of the Leonards' Counterclaims
    We unambiguously held in 2009 that both Shepler and the Leonards waived
    arbitration by litigating. Shepler. 
    2009 WL 5153672
    , at *3. In the same opinion, we
    noted that "[t]he arbitration clause did not provide that it was the exclusive remedy for
    breach. As noted above, the parties waived the arbitration clause by litigating, not the
    underlying claims." ]d at *3 n.1. The trial court was persuaded that the Leonards'
    No. 68227-0-1/6
    breach of the agreement by failing to seek arbitration required dismissal of all their
    claims that should have been arbitrated, and was not affected by our determination that
    Sheplerwaived arbitration.2 This was error.
    The agreement between the Leonards and Shepler stated:
    If a dispute arises between owner and contractor as to the
    performance of contractor's obligations under this agreement, such
    disputes shall be resolved as follows:
    Each party shall employ a contractor of his or her choice to
    evaluate the work completed. The contractors then will select a third
    contractor to act as an impartial arbiter. This contractor shall, likewise,
    inspect the construction to determine if the work has been performed in
    accordance with this agreement, applicable building codes and in a good
    workmanlike manner as provided hereinabove.              If two of the three
    contractors determine that the work is not in conformity with the provisions
    of this agreement, then they shall state in writing the work in need of repair
    or replacement and contractor shall undertake to perform same as soon
    as reasonably practical. Contractor shall be responsible for owner's fees
    and costs associated with this arbitration as well as the impartial
    contractor's fees and costs. If no remedial work is recommended by the
    contractors, then the owner shall pay for the costs of the arbitration. The
    owner shall forthwith pay the amounts due to the contractor as established
    by a majority of the arbiters.
    The Leonards assert that, because the dispute resolution provision does not use the
    words "exclusive," "sole," or "only," it is not the only remedy for their counterclaims.
    Shepler contends that use of the word "shall" throughout the provision means it is
    mandatory and therefore the exclusive remedy for the Leonards' counterclaims. Failure
    2 The Leonards never directly appealed the March 2008 summary judgment
    order. Shepler. 
    2009 WL 5153672
    , at *2. Nor did they file a written motion to
    reconsider or vacate after our 2009 decision. However, both parties agreed at oral
    argument that we have discretion to review the summary judgment order, because it did
    not become final until the second trial in August 2011. RAP 2.4(a); Franz v. Lance. 
    119 Wash. 2d 780
    , 781, 
    836 P.2d 832
    (1992).
    No. 68227-0-1/7
    to arbitrate, Shepler argues, barred suit on the Leonards' claims and was not subject to
    waiver by Shepler.
    Most contract terms will be viewed as mandatory in the sense that the parties
    agreed that they will be bound by them and expect that they will be enforced by the
    court. However, this does not mean that contract terms cannot be waived or modified.
    It is also well established that parties may contract for an exclusive remedy that limits
    their rights, duties, and obligations.   Graoch Assocs. #5 Ltd. P'ship. v. Titan Constr.
    Corp.. 
    126 Wash. App. 856
    , 865, 
    109 P.3d 830
    (2005).         But, the contract must clearly
    indicate the parties' intent to make the stipulated remedy exclusive,      jd at 865-66
    (holding that one year warranty was not an exclusive remedy for defective construction
    where the contract did not so state); see also Torgerson v. One Lincoln Tower. LLC.
    
    166 Wash. 2d 510
    , 522, 
    210 P.3d 318
    (2009) ("[P]rovisions limiting remedies in a
    consumer transaction must be explicitly negotiated between buyer and seller and be set
    forth with particularity.").
    Shepler relies on Absher and Mike M. Johnson. Inc. v. Spokane County, 
    150 Wash. 2d 375
    , 
    78 P.3d 161
    (2003). This reliance is misplaced. Absher and Mike M.
    Johnson are distinguishable from the contract at issue here, because the contracts in
    those cases explicitly provided that failure to follow dispute resolution procedures
    constituted a waiver of those claims. Mike M. 
    Johnson. 150 Wash. 2d at 380
    ; 
    Absher. 77 Wash. App. at 139-40
    . In Absher. Kent School District awarded Absher a contract to build
    an elementary 
    school. 77 Wash. App. at 139
    . Absher was required to give the district
    written notice of any claims within 14 days after the events giving rise to claims, enter
    into structured dispute resolution procedures, and mediate remaining disputes before
    No. 68227-0-1/8
    any lawsuit could be commenced.       Id The contract specified that failure to provide
    written notice constituted an absolute waiver of any claims arising from or caused by
    delay. Jd at 140. As a result, the court held that Absher waived its claims by failing to
    follow the dispute resolution procedures, jd at 146.
    Similarly, in Mike M. Johnson, the county awarded Mike M. Johnson Inc. (MMJ)
    bids to construct two sewer 
    projects. 150 Wash. 2d at 378
    . The two contracts required
    that MMJ give signed, written notice of protest of work, jd at 379. The contracts stated
    that MMJ completely waived any claims for protested work by failing to follow this
    procedure, jd at 380. If protest procedures failed to provide a satisfactory resolution,
    another provision required a mandatory formal claim procedure, jd MMJ's failure to
    submit required information supporting its claims constituted a waiver of those claims.
    
    Id. The contract
    required full compliance with the claim procedures as "a contractual
    condition precedent to the Contractor's right to seek judicial relief." ]d When disputes
    arose, MMJ failed to follow both the protest and formal claim procedures before filing a
    complaint for additional compensation.    Id at 384. As a result, the Supreme Court
    affirmed that trial court's dismissal of MMJ's claims. ]d at 384, 393. In contrast, the
    contract here does not state that Leonards' failure to follow the dispute resolution
    procedures expressly waives their right to pursue those claims in court.
    Even mandatory remedies are subject to waiver.       See Mike M. 
    Johnson. 150 Wash. 2d at 389
    (a party to a contract may waive a contract provision meant for its
    benefit).   In Otis Housing, the Washington Supreme Court held that the defendants
    waived a mandatory arbitration clause when they failed to raise it as a defense in an
    unlawful detainer action, but subsequently attempted to invoke it in a later action. Otis
    8
    No. 68227-0-1/9
    Housing Ass'n. Inc. v. Ha. 
    165 Wash. 2d 582
    , 589, 
    201 P.3d 309
    (2009). The arbitration
    clause read:
    In the event that a dispute should arise under this agreement, as a
    condition precedent to suit, the dispute shall be submitted to arbitration in
    the following manner: The party seeking arbitration shall submit to the
    other party a statement of the issue(s) to be arbitrated and shall designate
    such party's nominated arbitrator.
    Otis Housing Ass'n. Inc. v. Ha. noted at 
    138 Wash. App. 1058
    , 
    2007 WL 1567675
    , at *1.
    This clause explicitly makes arbitration a condition precedent to suit. But, the contract
    nowhere precluded waiver or required waiver by the other party to be in writing. Though
    the facts differ, Otis Housing stands for the proposition that even where arbitration is a
    precondition to suit, arbitration may be waived by the conduct of the parties, absent
    language to the contrary. 
    See 165 Wash. 2d at 587
    ; see also Detweiler v. J.C. Penney
    Cas. Ins. Co.. 
    110 Wash. 2d 99
    , 101, 111-12, 
    751 P.2d 282
    (1988) (holding that insurer
    waived uninsured motorist endorsement requiring arbitration of liability and damages
    where it never demanded arbitration during four years of litigation).      Moreover, Otis
    Housing recognized waiver of contract language even more restrictive than the
    language in the contract before us.
    Absher and Mike M. Johnson are further distinguishable, because Kent School
    District and Spokane County never waived the contractors' compliance with the dispute
    resolution procedures. Mike M. 
    Johnson. 150 Wash. 2d at 391-92
    ; 
    Absher. 77 Wash. App. at 139-40
    . In Absher. the contract required any waiver of the claim procedures to be in
    
    writing. 77 Wash. App. at 139-40
    . Kent School District never signed a written waiver or
    evidenced any intent to waive the contract's mandatory claim procedures. ]d at 144.
    No requirement of written waiver appears in the contract at issue here.          Likewise,
    No. 68227-0-1/10
    Spokane County never showed any intent to waive MMJ's compliance with the
    contractual claim procedures, so the Supreme Court found no question of material fact.
    Mike M. 
    Johnson. 150 Wash. 2d at 391-92
    . Because the school district and the county did
    not waive arbitration, they could use it as a defense to preclude Absher and MMJ's
    claims that should have been arbitrated.
    In contrast, we have already plainly held as a matter of law that both parties here
    waived arbitration.    Shepler. 
    2009 WL 5153672
    , at *3.           As we explained then,
    Washington courts have long held that the contractual right to arbitration may be waived
    through a party's conduct if the right is not timely invoked. See, e.g.. Ives v. Ramsden.
    
    142 Wash. App. 369
    , 382-84, 
    174 P.3d 1231
    (2008); Hailing v. Barton. 
    101 Wash. App. 954
    ,
    962, 
    6 P.3d 91
    (2000). The right to arbitrate is waived by conduct inconsistent with any
    other intention but to forego a known right. Verbeek Props.. LLC v. GreenCo Envtl..
    Inc.. 
    159 Wash. App. 82
    , 87, 
    246 P.3d 205
    (2010). Simply put, a party waives a right to
    arbitrate if it elects to litigate instead of arbitrate. Otis 
    Housing. 165 Wash. 2d at 588
    . The
    Leonards filed their counterclaims in 2002.      Shepler did not assert arbitration as a
    defense or move to dismiss the Leonards' arbitrable claims on that basis until 2008.
    Both parties waived the dispute resolution clause by conduct. Our decision became the
    law of the case, "effective and binding on the parties to the review and governing] all
    subsequent proceedings in the action in any court."         RAP 12.2; see also State v.
    Strauss. 
    119 Wash. 2d 401
    , 412-13, 
    832 P.2d 78
    (1992).
    The trial court erred in dismissing the Leonards' counterclaims. Because we are
    reinstating the Leonards' counterclaims, we need not reach their alternative estoppel,
    laches, and affirmative defense arguments.
    10
    No. 68227-0-1/11
    II.      Jury Demand and Transfer to a New Judge
    The Leonards made a jury demand based on their counterclaim for damages, but
    the trial court struck the demand after dismissing their counterclaims. The Leonards
    request that we mandate a jury trial on remand, or at a minimum, mandate that the trial
    court revisit their jury demand. The Leonards also ask that we grant a new trial on all
    issues.
    The parties dispute whether the action is primarily legal or equitable in nature,
    with Shepler's lien foreclosure claim being equitable and the Leonards' construction
    defect counterclaims being legal in nature. Where an action is neither purely legal nor
    purely equitable in nature, the trial court must determine whether it is primarily legal or
    equitable in nature. Auburn Mech.. Inc. v. Lvdig Constr.. Inc.. 
    89 Wash. App. 893
    , 898,
    
    951 P.2d 311
    (1998).       In making this determination, the trial court has considerable
    discretion and should consider the seven factors described in Brown v. Safeway Stores.
    Inc.. 
    94 Wash. 2d 359
    , 368, 
    617 P.2d 704
    (1980). Any doubt should be resolved in favor of
    a jury trial, in deference to the constitutional nature of the right. Auburn Mech.. 89 Wn.
    App. at 898.     On remand, the trail court should revisit the Leonards' jury demand to
    determine whether a jury trial is warranted based on the primary relief requested.
    The Leonards also request that we transfer the case to a different judge on
    remand. They contend that the judge has already expressed erroneous views in the
    case. The cited statements do not compel us to replace the trial judge. We decline to
    do so.
    11
    No. 68227-0-1/12
    III.   Attorney Fees
    The contract has a prevailing party fee provision.           The Leonards are the
    prevailing party in this appeal. We vacate the trial court's award of fees and costs to
    Shepler, pending the new trial. Any fees awardable to the Leonards for this appeal shall
    be determined if they are the ultimate prevailing party following trial.
    We reverse and remand for further proceedings.
    WE CONCUR:
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