Peterson & Simpson v. IHC Health Services

2009 UT 54
This opinion is subject to revision before final
publication in the Pacific Reporter.
IN THE SUPREME COURT OF THE STATE OF UTAH
----oo0oo----
Peterson & Simpson, a Utah 	Nos. 20080507
Partnership and 	20080420
Lawrence R. Peterson,
Appellees and
Cross-Appellants,
v.
IHC Health Services, Inc., 	F I L E D
Appellant and
Cross-Appellee. 	August 4, 2009
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Third District, Salt Lake
The Honorable Vernice S. Trease
No. 060900480
Attorneys: 	Roger P. Christensen, Karra J. Porter, Salt Lake
City, for Appellees
David L. Arrington, Philip M. Ballif, Thomas J.
Burns, Michael S. Malmborg, Salt Lake City,
for Appellant
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WILKINS, Justice:
INTRODUCTION
¶1 	This case centers on the interpretation of the
arbitration clause of a contract entered into by IHC Health
Services, Inc. (IHC) and Peterson & Simpson (Peterson).
Appellant and Cross-Appellee IHC asks us to determine whether the
district court erred in ordering the parties to select
arbitrators for their underlying dispute by a procedure
formulated by the court. 	Appellee and Cross-Appellant Peterson
asks us to determine whether the district court erred in finding
that all of its claims are subject to arbitration.

Nos. 20080507, 20080420 	2
BACKGROUND
¶2 	For almost twenty years, IHC employed the law firm of
Peterson & Simpson to represent IHC in the collection of
delinquent accounts. 	In 1996, the parties memorialized the terms
of their relationship in a written contract. 	The contract
contains an arbitration clause which provides: “In the event of
any dispute arising under this agreement that cannot be settled
by informal means, the parties agree to submit the dispute to
binding arbitration according to the Utah Arbitration Act and the
Commercial Arbitration Rules of the American Arbitration
Association.”
¶3 	A dispute arose between the parties when IHC changed
its policy regarding the collection of delinquent accounts. 	As
Peterson was compensated on a contingency fee basis, this change
in policy severely impacted Peterson financially. 	Peterson filed
a complaint in the Third District Court in January 2006 alleging
(1) breach of the express provisions of the contract, (2) breach
of the covenant of good faith and fair dealing, and (3)
intentional injury to contract rights. 	In response, IHC filed a
Motion to Compel Arbitration. 	Peterson subsequently stipulated
that its first claim should be arbitrated, but maintained that
its second and third claims were not subject to arbitration.
¶4 	While this motion was pending, Peterson attempted to
initiate arbitration on the first claim by sending a letter to
IHC’s counsel that included a draft of an Arbitration Agreement
which set out a procedure for arbitration. 	IHC failed to respond
to this letter either before or after the August 2007 hearing on
the motion.
¶5 	The district court granted IHC’s Motion to Compel
Arbitration in an order issued in October 2007, finding that the
arbitration clause of the contract is “very broad and indicates
an agreement by the parties to arbitrate ‘any dispute that arises
under the agreement,’ including any dispute developing from or
resulting from the agreement or originating from the Agreement,
without any limitation.” 	Thus, the court ruled that all of
Peterson’s claims were subject to arbitration. 	The district
court further found that “[t]he rules of the Utah Arbitration Act
and the Commercial Arbitration Rules of the American Arbitration
[Association] apply to resolve any disputes between the parties
arising under or relating to the Agreement.” 	Following this
order Peterson still received no response to its letter from IHC
and arbitration did not proceed.

1 The district court cited a former version of the statute,
Utah Code section 78-31a-109 (2002). 	As the language of the
statute was not changed when the section was renumbered in 2008,
we use the current numbering throughout this opinion.
3 	Nos. 20080507, 20080420
¶6 	On October 26, 2007, Peterson filed a Motion for Relief
Re: Arbitration, arguing that IHC was not cooperating with
Peterson’s attempts to move forward with arbitration. 	A hearing
was held on February 21, 2008, and a supplemental hearing on
March 24, 2008. 	The court granted Peterson’s motion and, finding
that it had authority to make a provisional ruling under Utah
Code section 78B-11-109, 1 ordered the parties to select
arbitrators by the following procedure:
a. 	On or before April 25, 2008, the parties
should (i) agree on a number of arbitrators;
the number may be one, three or some other
agreed number; and (ii) agree on the identity
of the arbitrators.
b. 	If the parties are unable to agree on the
arbitrators by April 25th, each party shall
submit to the Court two names for potential
arbitrators. 	The Court will then pick one
name submitted by each party, and will also
pick a third arbitrator from the two
remaining names. 	The names will be
identified to the parties by minute entry
order from the Court.
IHC appeals this ruling. 	Peterson cross appeals the district
court’s October 2007 ruling that all of its claims are subject to
arbitration.
ANALYSIS
¶7 	We first discuss whether the district court had
authority under the Utah Arbitration Act to prescribe a method
for the selection of arbitrators. 	We next turn to the issue of
which of Peterson’s claims fall within the scope of the
contract’s arbitration clause.
I. 	THE PARTIES AGREED ON A METHOD FOR SELECTING ARBITRATORS
WHICH MUST BE FOLLOWED
¶8 	When the parties to a dispute have contracted to settle
their dispute in arbitration, the role of the courts is extremely
limited. 	Section 78B-11-112 of the Utah Arbitration Act

Nos. 20080507, 20080420 	4
specifies the narrow circumstances under which a court is
authorized to interfere in the appointment of arbitrators. 	That
section provides:
If the parties to an agreement to arbitrate
agree on a method for appointing an
arbitrator, that method must be followed,
unless the method fails. 	If the parties have
not agreed on a method, the agreed method
fails, or an arbitrator appointed fails or is
unable to 	act and a successor has not been
appointed, the court, on motion of a party to
the arbitration proceeding, shall appoint the
arbitrator.
Utah Code Ann. § 78B-11-112(1) (2008).
¶9 	In construing this statute, we look first and foremost
to the statute’s plain language. 	Dale T. Smith & Sons v. Utah
Labor Comm’n, 2009 UT 19, ¶ 7, 208 P.3d 533. 	We consult other
sources only if the plain language of the statute is ambiguous.
Otter Creek Reservoir Co. v. New Escalante Irrigation Co., 2009
UT 16, ¶ 14, 203 P.3d 1015.
¶10 	IHC argues that by referencing the American Arbitration
Association (AAA) rules in the arbitration clause of the contract
IHC and Peterson agreed on a method for the selection of
arbitrators which Peterson was required to follow and which the
district court was required to enforce. 	Peterson disagrees.
There is no evidence in the district court’s decision that the
court made a determination of whether the parties had agreed on a
selection method. 	Rather, the record of the February 21, 2008
hearing indicates that the court deliberately avoided deciding
whether the AAA rules applied. 	Such avoidance is not permissible
under the statute.
¶11 	The plain language of the statute states that if the
parties have agreed to a method for selecting arbitrators, that
method “must” be followed. 	Utah Code Ann. § 78B-11-112(1). 	On
the other hand, if no method has been agreed upon, the court may
assume the responsibility for selection. 	Thus, the statute
clearly contemplates that a court must first evaluate the
contract to determine whether the parties have agreed to a
selection method. 	If the court finds that they have, the court
has no alternative but to enforce it. 	The statute provides for
only one exception to this rule; the agreed upon method need not
be applied if the method “fails.” 	Id.

5 	Nos. 20080507, 20080420
¶12 	This determination has not yet taken place in this
case. 	Rather, the district court found justification for its
ruling under Utah Code section 78B-11-109, which grants a court
the authority, prior to the appointment of an arbitrator, to
“enter an order for provisional remedies to protect the
effectiveness of the arbitration proceeding to the same extent
and under the same conditions as if the controversy were the
subject of a civil action.” 	Id. § 78B-11-109(1). 	This was
error. 	The authority granted in section 78B-11-109 is not
reached until after a determination has been made under section
78B-11-112 that the parties have not agreed to any method for the
appointment of arbitrators.
¶13 	Therefore, while we consider the relevance of the
pertinent sections of the Utah Arbitration Act, the underlying
issue is one of straightforward contract interpretation.
“Arbitration is a contractual remedy for the settlement of
disputes . . . .” 	Lindon City v. Engineers Constr. Co., 636 P.2d
1070, 1073 (Utah 1981) (internal quotation marks omitted). 	The
parties are free to structure their agreement in any manner they
desire. 	We respect the parties’ freedom to contract by enforcing
arbitration agreements “according to their terms and [ensuring
that] arbitration proceedings [are] conducted in the manner to
which the parties have agreed.” 	Buckner v. Kennard, 2004 UT 78,
¶ 18, 99 P.3d 842. 	As with any contract, we determine what the
parties have agreed upon by looking first to the plain language
within the four corners of the document. 	Cent. Fla. Invs., Inc.
v. Parkwest Assocs., 2002 UT 3, ¶ 12, 40 P.3d 599. 	When
interpreting the plain language, “we look for a reading that
harmonizes the provisions and avoids rendering any provision
meaningless.” 	Encon Utah, LLC v. Fluor Ames Kraemer, LLC, 2009
UT 7, ¶ 28, 210 P.3d 263. 	If we find the language unambiguous,
we interpret the contract as a matter of law. 	Cent Fla. Invs.,
Inc., 2002 UT 3, ¶ 12. 	We find ambiguity only where the language
of the contract “is reasonably capable of being understood in
more than one sense.” 	Id. (internal quotation marks omitted).
¶14 	Here, the plain language of the contract clearly
indicates that the parties agreed on a method of selecting
arbitrators. 	The arbitration clause states, “In the event of any
dispute arising under this agreement that cannot be settled by
informal means, the parties agree to submit the dispute to
binding arbitration according to the Utah Arbitration Act and the
Commercial Arbitration Rules of the American Arbitration
Association.” 	A plain reading of the clause unequivocally
indicates that the parties have agreed that if a dispute should
arise between them, they would first attempt to settle that
dispute by informal means. 	Should informal means fail, the

Nos. 20080507, 20080420 	6
parties agreed that they would arbitrate their dispute in
accordance with the rules set forth by the Utah Arbitration Act
and the AAA.
¶15 	By specifically naming the Utah Arbitration Act and the
Commercial Arbitration Rules of the AAA, the parties have agreed
to adopt these rules as part of the contract. 	It is immaterial
that the contract does not use the exact words of adoption
suggested by the AAA. 	Incorporation by reference requires that
“the reference . . . be clear and unequivocal, and alert the non-
drafting party that terms from another document are being
incorporated.” 	Hous. Auth. v. Snyder, 2002 UT 28, ¶ 19, 44 P.3d
724 (internal quotation marks omitted). 	Additionally, the party
“must consent thereto, and the terms of the incorporated document
must be known or easily available to the contracting parties.”
Consol. Realty Group v. Sizzling Platter, Inc., 930 P.2d 268, 273
(Utah Ct. App. 1996)(internal quotation marks omitted). 	These
requirements are satisfied here. 	Therefore, arbitration must be
conducted according to the Utah Arbitration Act and AAA rules.
Any other reading would render the plain language of the contract
meaningless.
¶16 	Additionally, we find no ambiguity in the arbitration
clause. 	Peterson has not advanced any rational alternative
interpretation of the contract language and we find none.
Ambiguity might have arisen in the event that the provisions of
the Utah Arbitration Act conflicted with the provisions of the
AAA, but such is not the case here. 	The Utah Arbitration Act
includes no method for the selection of arbitrators beyond its
provision that a court may appoint arbitrators if the parties
have not agreed on a method of selection or if that method fails.
Utah Code Ann. § 78B-11-112(1). 	The AAA Commercial Arbitration
Rules, on the other hand, contain a detailed, step by step
procedure for selecting arbitrators. 	In brief, under AAA rules,
the claimant must first file two copies of a demand for
arbitration along with two copies of the contract “at any office
of the AAA.” 	AAA Commercial Arb. R. 4(a)(ii) (2007).
Immediately following this filing,
[t]he AAA shall send simultaneously to each
party to the dispute an identical list of 10
. . . names of persons chosen from the
National Roster. 	The parties are encouraged
to agree to an arbitrator from the submitted
list and to advise the AAA of their
agreement. . . . 	If the parties are unable
to agree upon an arbitrator, each party to
the dispute shall have 15 days from the
transmittal date in which to strike names

7 	Nos. 20080507, 20080420
objected to, number the remaining names in
order of preference, and return the list to
the AAA.
Id. R. 11(a)-(b). 	The AAA then selects arbitrators from these
lists. 	Id. 	Thus, no conflict exists between the Utah
Arbitration Act and the AAA rules, and the contract is
unambiguous.
¶17 	Because the plain language of the arbitration clause
clearly incorporates the AAA rules, and because the arbitration
clause is unambiguous, we find that the parties have agreed on a
method of selecting arbitrators as a matter of law. 	That method
is the method outlined in the AAA rules. 	We further find that
the agreed upon method has not failed for the purposes of section
78B-11-112(1) of the Utah Arbitration Act. 	The method has had no
opportunity to fail as it has not as yet been attempted. 	As a
misunderstanding of a contract is a mistake of law, we reverse
and vacate the provisional order mandating a procedure for the
selection of arbitrators. 	We remand and instruct the parties to
proceed according to AAA rules.
II. 	ALL OF PETERSON’S CLAIMS ARE SUBJECT TO ARBITRATION
¶18 	We now turn to the question of which of Peterson’s
claims are subject to arbitration. 	Whether a district court
correctly interpreted the scope of an arbitration clause is a
question of law which we review for correctness. 	See Bybee v.
Abdulla, 2008 UT 35, ¶ 7, 189 P.3d 40; Docutel Olivetti Corp. v.
Dick Brady Sys., Inc., 731 P.2d 475, 479 (Utah 1986). 	A
determination of which claims the parties intended to be subject
to arbitration requires that we interpret the arbitration clause
of the contract. 	This we do as a matter of law unless we find
ambiguity in the plain language of the agreement. 	Cent. Fla.
Invs., Inc., 2002 UT 3, ¶ 12.
¶19 	The language of the arbitration clause is not
ambiguous. 	The parties have agreed to arbitrate “any dispute
arising under this agreement that cannot be settled by informal
means.” 	We find that all of Peterson’s claims fit neatly under
the plain meaning of “arising under this agreement.” 	We
therefore affirm the ruling of the district court on cross-
appeal.
A. 	Peterson’s Claim of Interference with Contract Rights Arises
Under the Agreement

Nos. 20080507, 20080420 	8
¶20 	Peterson claims that IHC intentionally injured its
contract rights when it backed away from its traditional policy
of vigorous collection of delinquent accounts. 	The nature of
this dispute clearly contemplates application of the contract.
In order to determine if IHC has intentionally interfered with
Peterson’s contract rights, the arbitrator will have to evaluate
the terms of the contract as well as the rights and duties of the
parties under the contract. 	Thus, this claim arises under the
agreement.
B. 	Peterson’s Claim of Breach of the Covenant of Good Faith and
Fair Dealing Arises Under the Agreement
¶21 	Peterson claims that IHC breached the implied covenant
of good faith and fair dealing. 	Good faith is a judicially
recognized, common law duty. 	As we have previously held, “A
claim for breach of the implied covenant of good faith and fair
dealing . . . is based on judicially recognized duties not found
within the four corners of the contract. 	These duties, unlike
the duties expressly stated in the contract, are not subject to
alteration by the parties.” 	Christiansen v. Farmers Ins. Exch.,
2005 UT 21, ¶ 10, 116 P.3d 259 (internal citation omitted).
Thus, by law, good faith and fair dealing are implied terms of
every contract. 	Id. 	They are recognized as included terms
regardless of whether or not they are expressly stated in the
contract language. 	“They exist whenever a contract is entered,
and are imposed on the parties ‘consistent with the agreed common
purpose’ of the contract.” 	Id. (quoting St. Benedict’s Dev. Co.
v. St. Benedict’s Hosp., 811 P.2d 194, 200 (Utah 1991))(internal
citation omitted). 	As the duties of good faith and fair dealing
arise out of the relationship between the parties created by the
contract and have no independent existence outside of the
contract, a claim for the breach of the covenant of good faith
arises under the contract.
¶22 	Our decision today is consistent with our former
decision in Christiansen v. Farmers Insurance Exchange. 	In
Christiansen, plaintiffs asserted “breach of both the express
terms of their insurance contract and the implied covenant of
good faith and fair dealing.” 	Id. ¶ 1. 	Under the terms of the
agreement between the parties, the breach of express contract
claims were sent to arbitration. 	Id. 	Respondents then “filed
. . . a motion for a protective order to prevent further
discovery related to the bad faith claim until after a breach of
the express contract was established.” 	Id. 	The district court
denied the motion, holding that the good faith claim was
severable from the express contract claim and could therefore be
pursued in litigation concurrent with the arbitration on the

9 	Nos. 20080507, 20080420
express contract claim. 	Id. 	We affirmed, holding that the
respondent had “failed to demonstrate good cause for a protective
order because the claims of breach of express contract and bad
faith are premised on distinct duties that give rise to divergent
and severable causes of action.” 	Id. ¶¶ 10, 14. 	Whether good
faith claims are severable from arbitrable contract claims is a
determination entirely dependant on the language of the
arbitration clause at issue. 	In the case we decide today, the
parties agreed to arbitrate “any dispute arising under this
agreement that cannot be settled by informal means.” 	Such was
not the case in Christiansen.
¶23 	Further, at the time the Christiansen dispute reached
this court, arbitration on the express breach of contract claim
had concluded. 	Id. ¶ 6. 	“[B]ecause the breach of express
contract claim [had] been resolved by arbitration, the question
of whether any other issues in the Christiansens’ court action
should have been stayed [was] moot . . . .” 	Id. 	As the
Christiansen arbitration had been fully resolved but had not
addressed the bad faith claim, it was appropriate for the bad
faith claim to be pursued in litigation.
III. 	DIRECTION TO THE DISTRICT COURT
¶24 	We clarify our ruling for the sake of the lower courts
which will have to proceed in conformity with the law as we
explain it today. 	When presented with a question regarding an
arbitration agreement, the court must first determine whether the
parties have agreed to a method for the selection of arbitrators.
If the arbitration clause at issue specifies a method, the court
must direct the parties to apply that method. 	If the party
seeking to bring a claim chooses not to follow the agreed upon
method, that party has no avenue available in court; the method
agreed upon between the parties in the arbitration agreement is
the only option for addressing a claim.
¶25 	The court’s next step is a determination of the scope
of the arbitration agreement. 	This requires an interpretation of
the agreement for a finding as to which claims are subject to
arbitration. 	Appropriate matters are then referred to
arbitration. 	Should the arbitrator later determine that any of
the referred claims do not fit under the arbitration clause, the
parties may then pursue that matter through the courts.
CONCLUSION
¶26 	We find that IHC and Peterson contractually agreed upon
a method for the selection of arbitrators. 	Under section 78B-11-

Nos. 20080507, 20080420 	10
112(1) of the Utah Arbitration Act, the court must direct that
method be applied. 	We further find that all of Peterson’s claims
arise out of the contract and are all, therefore, subject to
arbitration.
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¶27 	Associate Chief Justice Durrant, Justice Parrish,
Justice Nehring, and Judge Taylor concur in Justice Wilkins’
opinion.
¶28 	Having disqualified herself, Chief Justice Durham does
not participate herein; District Judge James R. Taylor sat.