Asphalt Contractors, Inc. v. Kanza Construction, Inc. et al

Filing 24

ORDER GRANTING 16 Motion to Compel Arbitration, this action is STAYED pending completion of the arbitration proceedings. The Clerk of the Court is directed to administratively close this action for statistical purposes. The parties are ORDERED to provide the Court on or before January 25, 2012, with a joint report of the status of the arbitration proceedings, as further set out. Signed by Judge Kristi K. DuBose on 7/27/2011. (clr)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
NORTHERN DIVISION
ASPHALT CONTRACTORS, INC.,
Plaintiff,
v.
KANZA CONSTRUCTION, INC., and
GARRET RINER,
Defendants.

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CIVIL ACTION NO. 2:11-0170-KD-M

ORDER
This action is before the Court on the motion to compel arbitration and stay and
memorandum in support filed by defendant Kanza Construction, Inc. (Kanza), the response filed
by plaintiff Asphalt Contractors, Inc. (AC), and Kanza’s reply (docs. 16, 20, 23). Upon
consideration and for the reasons set forth herein, Kanza’s motion to compel arbitration is
GRANTED and this action is STAYED pending completion of the arbitration proceedings. See
9 U.S.C. § 3.
Accordingly, the Clerk of the Court is directed to administratively close this action for
statistical purposes. The parties are ORDERED to provide the Court on or before January 25,
2012, with a joint report of the status of the arbitration proceedings.
AC, an Alabama corporation, sued Kanza, a Kansas corporation, and Garret Riner, a
citizen of Kansas, in the Circuit Court of Dallas County, Alabama for breach of the subcontract
agreement between AC and Kanza. The subcontract was negotiated and signed by Riner on
behalf of Kanza. Kanza and Riner removed the action to this Court.
After removal, Kanza filed the pending motion to compel arbitration pursuant to the

Federal Arbitration Act (FAA), 9 U.S.C. § 1-14, on basis that the subcontract agreement between
Kanza and AC is a transaction involving commerce and contains a valid arbitration clause. The
clause sets forth as follows:
25. ARBITRATION. Contractor may, at its option, choose to have any dispute
arising or related to this Subcontract resolved through arbitration in Topeka,
Kansas consistent with the procedures currently accepted by the American
Arbitration Association.
(Doc. 16-1, p .9).
Kanza argues that the contract dispute at issue falls within the scope of the arbitration
clause because “any” dispute related to the subcontract is subject to resolution in arbitration.
Kanza also argues that the FAA creates a strong federal policy in favor of arbitration and that
doubts should be resolved in favor of arbitration. Kanza also argues that it has not waived its
option to arbitrate. In support Kanza argues that it has not litigated to a point inconsistent with
intent to arbitrate, that AC has not shown substantial prejudice if now compelled to arbitrate, and
that the subcontract does not give AC any right to unilaterally modify the subcontract to remove
Kanza’s option to arbitrate.
AC argues that Kanza has waived its option to demand arbitration. AC argues that under
the totality of the circumstances, Kanza acted inconsistently with its right to arbitration because
it did not express an intent to arbitrate in its prior correspondence with AC or court documents
until Kanza amended its answer. AC argues that Kanza’s actions were prejudicial because AC
has now incurred litigation expenses.
The parties do not dispute that the FAA applies, that AC’s claims against Kanza and
Riner arise out of or are related to the subcontract, or that the arbitration clause is valid. Thus,
the Court must determine whether AC has met its burden of establishing that Kanza waived its
option to compel arbitration and that this court should deny Kanza’s motion. “Because federal
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law favors arbitration, any party arguing waiver of arbitration bears a heavy burden of proof.’”
Stone v. E.F. Hutton & Co., 898 F.2d 1542, 1543 (11th Cir. 1990) (citation omitted).
When the defense of waiver is raised in this context, the Court of Appeals for the
Eleventh Circuit has explained as follows
When arbitration agreements are governed by the Federal Arbitration Act
(“FAA”), as is the agreement in this case, “as a matter of federal law, any doubts
concerning the scope of arbitrable issues should be resolved in favor of
arbitration, whether the problem at hand is the construction of the contract
language itself or an allegation of waiver, delay, or a like defense to arbitrability.”
Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103
S.Ct. 927, 941, 74 L.Ed.2d 765 (1983) (emphasis added).
...
An agreement to arbitrate, “just like any other contract ..., may be waived.”
Burton-Dixie Corp. v. Timothy McCarthy Constr. Co., 436 F.2d 405, 407 (5th
Cir.1971). [ ] When determining whether a party has waived its right to arbitrate,
this Court applies a two-part test: “First, we decide if, ‘under the totality of the
circumstances,’ the party ‘has acted inconsistently with the arbitration right,’ and,
second, we look to see whether, by doing so, that party ‘has in some way
prejudiced the other party.’ ” [Ivax Corp. v. B. Braun of Am., Inc., 286 F.3d 1309,
1315-16 (11th Cir.2002)] (quoting S & H Contractors, Inc. v. A.J. Taft Coal Co.,
906 F.2d 1507, 1514 (11th Cir.1990)).
...
We have held that participating in litigation can satisfy the first prong of the
waiver test “when a party seeking arbitration substantially participates in litigation
to a point inconsistent with an intent to arbitrate.” Morewitz v. W. of Eng. Ship
Owners Mut. Prot. & Indem. Ass'n, 62 F.3d 1356, 1366 (11th Cir. 1995); see also
S & H Contractors, 906 F.2d at 1514 (“[A] party that substantially invokes the
litigation machinery prior to demanding arbitration may waive its right to
arbitrate.” (alterations and internal quotation marks omitted)). In other words, a
party has acted inconsistently with its right to arbitrate where its conductincluding participation in litigation-manifests an intent to avoid or to waive
arbitration. See Ivax Corp., 286 F.3d at 1319 & n. 21, 1320. . . .
...

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When the inconsistent conduct prong is satisfied by substantial participation in
litigation, we evaluate the prejudice prong by “consider[ing] the length of delay in
demanding arbitration and the expense incurred by [the] party [alleging prejudice]
from participating in the litigation process.” S & H Contractors, 906 F.2d at 1514.
We might also consider the extent of “[t]he use of pre-trial discovery procedures
by a party seeking arbitration,” to determine if the inconsistent conduct
“sufficiently prejudice[d] the legal position of an opposing party so as to
constitute a waiver of the party's right to arbitration.” Stone, 898 F.2d at 1543.
Citibank, N.A. v. Stok & Associates, P.A., 387 Fed.Appx. 921, 923-924 (11th Cir. 2010)
(footnotes 1 and 2 omitted).
To apply the two-pronged test for waiver, the court must first decide whether Kanza
acted inconsistently with its right to invoke arbitration. On February 8, 2011, before filing the
lawsuit, AC sent a demand letter to Kanza. In the letter, AC stated that Kanza had three days to
notify AC whether Kanza would seek resolution through arbitration. AC warned Kanza that if
no notice of arbitration was received, then AC would assume Kanza waived its option to invoke
the arbitration provision, and AC would file suit (doc. 20, Exh. A, Affidavit of Jack Owen).1
Kanza did not respond.
On March 1, 2011, AC filed a complaint against Kanza and served a request for
production (doc. 1-1). On March 31, 2011, AC filed an amended complaint (doc. 1-1). On April
5, 2011, before filing an answer or other responsive pleading, Kanza removed to this court (doc.
1, notice of removal). On April 24, 2011, Kanza filed its answer and that same day the court
entered a preliminary scheduling order (docs. 7, 10). On May 16, 2011, Kanza filed its amended
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The letter stated as follows: “Paragraph 25 of the Subcontract gives the Contractor
(Kanza) the option to have any dispute arising or related to the Subcontract resolved through
arbitration. You have three (3) days to notify us that Kanza seeks resolution by way of
arbitration. Failing receipt of notice that Kanza exercises the option for arbitration, we will
assume that Kanza waives that option and will proceed to file suit for damages in an appropriate
forum.” (doc. 20-3).

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answer (doc. 15). On May 25, 2011, Kanza filed the pending motion to compel arbitration and
stay proceedings (doc. 16). On June 7, 2011, the parties filed a joint motion to extend the
preliminary scheduling order deadlines including the deadline for the parties to meet and file
their report of parties’ planning meeting and the motion was granted (docs. 21, 22). Therefore,
no report was filed, no Rule 16(b) Scheduling Order entered, and formal discovery has not
commenced in this court.2
Viewing the totality of the circumstances, the Court finds that Kanza has not substantially
participated “in litigation to a point inconsistent with an intent to arbitrate.” Morewitz, 62 F.3d at
1366. The parties have not engaged in any formal discovery. The docket indicates that a request
for production was served with the complaint but no formal discovery commenced after removal.
Thus, the litigation consists primarily of a complaint, notice of removal, an answer and an
amended answer. In regard to the latter, only nineteen days lapsed between Kanza’s first answer
and its second answer amended to raise the issue of arbitration (docs. 7, 15). Although Kanza
did not respond to AC’s demand letter and state its intent to arbitrate at that time, that letter
operated to put Kanza on notice of AC’s intent to file a lawsuit. AC’s assumption that Kanza
waived its option by not responding to the demand letter does not convert Kanza’s failure to
respond within three (3) days into a waiver of arbitration, especially since the arbitration clause
did not set such a time frame for exercising the option. Nor does the lapse of time between the
demand letter and the amended answer constitute substantial participation in litigation
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The preliminary scheduling order required the parties to meet and file their report of
parties’ planning meeting on or before June 9, 2011 and to exchange their initial disclosures
within twenty-one (21) days after the parties’ planning meeting. The order also explained that
discovery pursuant to Rules 30, 31, 33, 34, and 36 of the Federal Rules of Civil Procedure could
not commence before the parties’ meeting except in limited circumstances not applicable to this
action (doc. 10).

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inconsistent with an intent to arbitrate, largely because the parties did not engage in any formal
discovery during that time period.
The court having determined that AC did not meet its burden to show that Kanza acted
inconsistently with its right to exercise its option to arbitrate the dispute, i.e., the inconsistent
conduct prong is not met, the court need not address whether AC was prejudiced by Kanza’s
actions. Morewitz, 62 F.3d at 1366 (“Waiver occurs when a party seeking arbitration
substantially participates in litigation to a point inconsistent with an intent to arbitrate and this
participation results in prejudice to the opposing party.”) (emphasis added); cf. Stok, 387
Fed.Appx. at 924 (“When the inconsistent conduct prong is satisfied by substantial participation
in litigation, we evaluate the prejudice prong . . . “); Dorward v. Macy's Inc., 2011 WL 2893118,
9 (M.D. Fla. July 20, 2011) (“Having found that, as a matter of law, defendant did not act
inconsistently with its arbitration right merely by requesting an extension of time to reply, the
Court need not address the issue of prejudice.”).
DONE and ORDERED this 27 day of July, 2011.

s / Kristi K DuBose
KRISTI K. DuBOSE
UNITED STATES DISTRICT JUDGE

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