PECK ORMSBY CONSTRUCTION COMPANY v. City of Rigby et al

Filing 96

AMENDED MEMORANDUM ORDER Re: Motions to Dismiss and to Compel Arbitration. Western's motion to dismiss Peck Ormsby's bond claim is GRANTED; Western's motion to dismiss Rigby's maintenance bond claim is GRANTED; Parkson's moti on to dismiss Rigby's indemnification claim is GRANTED; Parkson's motion to compel arbitration of Rigby's breach of contract claim is DENIED; and the stay of discovery entered by the court on 8/22/11 is LIFTED. Signed by Judge William B. Shubb. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by jm)

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UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF IDAHO

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----oo0oo----

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PECK ORMSBY CONSTRUCTION
COMPANY, a Utah corporation,

NO. CIV. 1:10-545 WBS

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Plaintiff,

AMENDED MEMORANDUM AND ORDER
RE: MOTIONS TO DISMISS AND TO
COMPEL ARBITRATION

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v.
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CITY OF RIGBY, an Idaho
municipal corporation; PARKSON
CORPORATION, a Delaware
corporation; and WESTERN
SURETY COMPANY, a South Dakota
corporation,

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Defendants.

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AND RELATED COUNTERCLAIMS AND
CROSS-CLAIMS.
/

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----oo0oo---Plaintiff Peck Ormsby Construction Company (“Peck

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Ormsby”) brought this action against defendants City of Rigby

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(“Rigby”), Parkson Corporation (“Parkson”), and Western Surety

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Company (“Western”) arising from a construction project in Rigby

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for which Peck Ormsby is the general contractor and Parkson is a
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subcontractor.

After the court granted Parkson’s and Western’s

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motions to dismiss with leave to amend, Peck Ormsby filed an

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amended complaint and then a Second Amended Complaint (“SAC”),

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alleging a claim for breach of contract against Rigby and a bond

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claim against Western.

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a counterclaim for breach of contract against Peck Ormsby and

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cross-claims against Parkson for breach of contract and

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indemnification and a bond claim against Western.

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55.)

(Docket Nos. 44, 54, 64.)

Rigby brought

(Docket No.

Currently before the court are Parkson’s and Western’s

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motions to dismiss the claims against them and Parkson’s motion

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to compel arbitration of Rigby’s breach of contract claim.

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I.

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Factual and Procedural Background
In January of 2008, Rigby and Peck Ormsby entered into

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an agreement (the “Prime Contract”) whereby Peck Ormsby agreed to

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construct a wastewater treatment plant in Rigby.

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One of the components of the plant, a cloth filtration system,

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would be made by a subcontractor, who was required under the

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Prime Contract to provide a written guarantee to Rigby that the

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filtration system would meet particular specifications.

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Am. Answer, Crosscl. & Countercl. ¶ 15 (Docket No. 55).)

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(SAC ¶¶ 7, 11.)

(Rigby’s

On April 29, 2008, Peck Ormsby and Parkson entered into

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an agreement (the “Purchase Order”) whereby Parkson would supply

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the filtration system.

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language in the Purchase Order was modified by an agreement (the

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“Letter Agreement”) signed by Parkson and Peck Ormsby earlier on

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April 29, 2008, declaring that “Parkson is not in privity of

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contract with the Owner [Rigby].”

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Parkson provided Rigby a “Performance Guarantee” for its

(SAC ¶ 9, 13.)

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Parkson alleges that the

(Rothenberg Decl. Ex. A at 2.)

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equipment “as required by the technical specifications [of the

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Prime Contract’s technical specifications]” in July of 2008.

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(Mot. for Recons. at 7.)

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On August 15, 2008, Keller Associates (“Keller”), the

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engineer for the project, reviewed and approved Parkson’s

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submittals for the filtration system.

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filtration system was installed and operational by August 18,

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2009.

(SAC ¶ 14.)

The

(Id. ¶ 15.)
On September 9, 2009, Peck Ormsby received a letter

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from Keller stating that the filtration system did not meet the

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specified performance criteria.

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the letter to Parkson.

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(Id. ¶ 16.)

Peck Ormsby sent

(Id. ¶ 17.)

On April 16, 2010, pursuant to a Change Order to the

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Prime Contract extending the time of final completion for the

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project, Parkson as principal and Western as surety executed a

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Maintenance Bond to guarantee the filtration system against

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defects in material or workmanship, naming Peck Ormsby and Rigby

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as dual obligees.

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(Id. ¶¶ 19-20.)

On July 20, 2010, Peck Ormsby received a “rejection

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letter” from Rigby and Keller formally rejecting the filtration

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system “based on five (5) reasons indicating that the Equipment

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is defective.”

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letter, but has not repaired the alleged defects.

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23.)1

(Id. ¶ 21.)

Parkson acknowledged receipt of the
(Id. ¶¶ 22-

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The parties have requested that the court consider
certain documents in deciding the motions to dismiss. As a
general rule, “a district court may not consider any material
beyond the pleadings in ruling on a Rule 12(b)(6) motion.” Hal
Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555
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II.

Discussion
A.

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Motions to Dismiss
On a motion to dismiss, the court must accept the

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allegations in the complaint as true and draw all reasonable

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inferences in favor of the plaintiff.

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U.S. 232, 236 (1974), overruled on other grounds by Davis v.

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Scherer, 468 U.S. 183 (1984); Cruz v. Beto, 405 U.S. 319, 322

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(1972).

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contain sufficient factual matter, accepted as true, to ‘state a

Scheuer v. Rhodes, 416

“To survive a motion to dismiss, a complaint must

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claim to relief that is plausible on its face.’”

Ashcroft v.

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Iqbal, 556 U.S. 662, ---, 129 S. Ct. 1937, 1949 (2009) (quoting

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Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

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“plausibility standard,” however, “asks for more than a sheer

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possibility that a defendant has acted unlawfully,” and “[w]here

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a complaint pleads facts that are ‘merely consistent with’ a

This

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n.19 (9th Cir. 1989). However, the court may consider documents
on which the complaint necessarily relies if their authenticity
is not disputed. See Lee v. City of Los Angeles, 250 F.3d 668,
688 (9th Cir. 2001). On that ground and because the parties have
so agreed, the court will consider documents related to the Peck
Ormsby-Parkson agreement (Purchase Order Acknowledgment;
Parkson’s Quotation, including Standard Conditions of Sale,
Quotation Addendum, and General Arrangement Drawing; and Addenda
to Purchase Order cover letter and Supplier Purchase Order), and
Western’s Maintenance Bond. (Rothenberg Decl. Exs. A-C (Docket
No. 13); Micheli Decl. Ex. A (Docket No. 16).)
In deciding the motion to compel arbitration, the court
“may consider the pleadings, documents of uncontested validity,
and affidavits submitted by either party.” Macias v. Excel Bldg.
Servs. LLC, 767 F. Supp. 2d 1002, 1007 (N.D. Cal. 2011) (quoting
Ostroff v. Alterra Healthcare Corp., 433 F. Supp. 2d 538, 540
(E.D. Pa. 2006)). The parties request that the court consider
the documents comprising the Prime Contract between Rigby and
Peck Ormsby, the Purchase Order between Peck Ormsby and Parkson,
and the Performance Guarantee. (Mastin Decl. Ex. A (Docket No.
60); Ritchie Aff. Exs. A-F (Docket No. 72).) Accordingly, the
court will consider these documents in deciding the motion to
compel arbitration.
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defendant’s liability, it ‘stops short of the line between

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possibility and plausibility of entitlement to relief.’”

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(quoting Twombly, 550 U.S. at 556-57).

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1.

Id.

Western’s Motions to Dismiss Rigby’s Maintenance

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Bond Cross-Claim and Peck Ormsby’s Bond Claim

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The bond pursuant to which Peck Ormsby and Rigby bring

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their claims against Western states that Parkson “is required to

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guarantee the work installed under [the Purchase Order] against

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defects in materials or workmanship, which may develop during the

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period of one year ending April 20, 2010.”

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(Docket No. 16-3).)

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recovery pursuant to the bond on the ground that Parkson failed

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to repair the filtration system after being informed in the

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September 9, 2009, letter and the July 20, 2010, rejection letter

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that the filtration system did not meet the performance

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standards.

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(Mitcheli Decl. Ex. A

Peck Ormsby and Rigby sue Western for

Both Peck Ormsby and Rigby fail to plead liability with

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the requisite specificity.

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the letters sent to Parkson informed it of “defects in materials

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or workmanship”; indeed, it appears from the allegations that the

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filtration system had no actual defects but simply failed to meet

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the performance standards set out in the Purchase Order and Prime

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Contract.2

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performance standards.

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construed to apply to performance issues, the parties have not

There is no indication that either of

Western’s maintenance bond does not incorporate those
Even if the term “defect” could be

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The court notes that it is unlikely Western would have
acted as surety to a bond in April of 2010 if Parkson had already
been informed of a defect in September of 2009.
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provided any allegations regarding the type of defect that

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occurred.

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possibility to plausibility of entitlement to relief.

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The bond claims simply do not cross the line from

Because Western cannot be held liable unless Parkson

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failed to meet its obligations under the bond, see Asociacion de

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Azucareros de Guatemala v. U.S. Nat’l Bank of Or., 423 F.2d 638,

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641 (9th Cir. 1970), the court will dismiss Peck Ormsby’s and

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Rigby’s bond claims against Western.

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previously been given leave to amend in order to plead these

Peck Ormsby and Rigby have

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claims with the requisite specificity, but have failed to do so;

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accordingly, the court will not give leave to amend a second

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time.

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2.

Parkson’s Motion to Dismiss Rigby’s

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Indemnification Claim

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Rigby seeks indemnification from Parkson for any

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damages Peck Orsmby recovers on its breach of contract claim

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against Rigby.

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must allege (1) an indemnity relationship, (2) actual liability

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of the indemnitee to a third party, and (3) a reasonable

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settlement amount.

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284 (1988).

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relationship, it has not alleged that it has been found liable to

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Peck Ormsby or that a settlement has been reached.

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time, Rigby cannot bring a claim for indemnification against

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Parkson.

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To state a claim for indemnification, a plaintiff

Chenery v. Agri-Lines Corp., 115 Idaho 281,

Even if Rigby has properly alleged an indemnity

Until that

Rigby argues that it is required to assert the claim

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now, even though it admits no settlement has taken place.

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However, Rigby’s claim against Parkson is permissive, not
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compulsory.

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666 F.2d 361, 363 (9th Cir. 1982).

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claim for indemnity against Parkson if and when judgment is

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entered against Rigby, the court will dismiss this claim.

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B.

See Fed. R. Civ. P. 13(a), (g); Peterson v. Watt,
Because Rigby may bring a

Parkson’s Motion to Compel Arbitration of Rigby’s

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Breach of Contract Claim

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The Prime Contract between Rigby and Peck Ormsby

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provides that the subcontractor installing the filtration system

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would be required to “provide a written guarantee that the

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installed filter system will produce an effluent that meets the

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suspended solids requirements of this specification, based on the

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specified wastewater quality entering the filtration process.”

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(Ritchie Aff. ¶ 5, Ex. D (Docket No. 70-5).)

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between Peck Ormsby and Parkson states that Parkson agrees “to

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execute to [Peck Ormsby] and/or [Rigby], a guarantee in writing

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for [Parkson’s] work.”

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Agreement executed prior to the Purchase Order states that:

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(Id. Ex. E.)

The Purchase Order

However, the Letter

Parkson agrees to be bound to the Contract in accordance
with the technical and general portions of the documents
that form a part of the Prime Contract only to the extent
they are applicable to the supply and delivery of the
material, equipment and workmanship under the Contract
and in accordance with the terms and conditions of the
Seller’s Quotation and the Drawings and Specifications as
amended during the Submittal process. Parkson is not in
privity of contact with the Owner. Therefore, no terms
and conditions between you and the Owner govern Parkson.

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(Rothenberg Decl. Ex. A at 2.)

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Parkson provided the Performance Guarantee to Rigby “as

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required by the technical specifications [of the Prime Contract’s

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technical specifications],” (Mot. for Recons. at 7), in July of

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2008, stating that Parkson would provide a filtration system that
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would meet express performance and design specification standards

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for effluent.

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Guarantee also contains an arbitration clause and Florida choice

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of law provision.

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Performance Guarantee provided by Parkson for breach of contract,

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and Parkson moves to compel arbitration of the claim.

(Ritchie Aff. ¶ 7, Ex. F.)

(Id.)

The Performance

Rigby now sues Parkson under the

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The Federal Arbitration Act (“FAA”) provides that a

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party may seek an order to compel arbitration from a district

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court where another party fails, neglects, or refuses to

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arbitrate.

9 U.S.C. § 4.

The Act “leaves no place for the

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exercise of discretion by a district court, but instead mandates

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that district courts shall direct the parties to proceed to

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arbitration on issues as to which an arbitration agreement has

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been signed.”

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218 (1985).

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to determining (1) whether a valid agreement to arbitrate exists

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and, if it does, (2) whether the agreement encompasses the

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dispute at issue.”

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207 F.3d 1126, 1130 (9th Cir. 2000).

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has failed to comply with a valid arbitration agreement, the

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district court must issue an order compelling arbitration.

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v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282, 285 (9th Cir.

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1988), overruled on other grounds by Ticknor v. Choice Hotels

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Int’l, Inc., 265 F.3d 931 (9th Cir. 2001).

Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213,

“The court’s role under the Act is therefore limited

Chiron Corp. v. Ortho Diagnostic Sys., Inc.,
Upon a showing that a party

Cohen

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Although the FAA sets forth a policy favoring

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arbitration, “a party cannot be required to submit to arbitration

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in any dispute which he has not agreed so to submit.”

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Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S.
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United

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574, 582 (1960); see also Three Valleys Mun. Water Dist. v. E.F.

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Hutton & Co., 925 F.2d 1136, 1139 (9th Cir. 1991).

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a party has submitted to arbitration is first and foremost a

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matter of contractual interpretation that must hinge on the

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intent of the parties.

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Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473

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U.S. 614, 626 (1985).

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Thus, whether

United Steelworkers, 363 U.S. at 582;

Rigby does not dispute Peck Ormsby’s contention that
the arbitration clause, if valid, encompasses the breach of

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contract claim; Rigby only argues that the arbitration clause in

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the Performance Guarantee did not constitute a valid agreement

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because Rigby never signed the Performance Guarantee or consented

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to arbitrate future disputes with Parkson.

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The commonly accepted meaning of “guarantee” is “[t]he

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assurance that a contract or legal act will be duly carried out.”

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Black’s Law Dictionary 772 (9th ed. 2009).

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“performance” is defined to mean “[t]he successful completion of

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a contractual duty.”

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the term ‘performance guarantee’ is an assurance or promise that

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a contractual obligation will be fulfilled.”

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Props, LLC, Civil Nos. 1:10cv98, 1:10cv198, 2011 WL 1131057, at

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*7 (W.D.N.C. Mar. 25, 2011).

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Id. at 1252.

The term

Thus, “the plain meaning of

In re Versant

Parkson was allegedly required by the Purchase Order to

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give Rigby a Performance Guarantee.

Parkson argues that it was

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not bound by the terms of the Purchase Order incorporating the

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Prime Contract because the Letter Agreement expressly states that

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“no terms and conditions between you [Peck Ormsby] and the Owner

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[Rigby] govern Parkson.”

(Rothenberg Decl. Ex. A at 2.)
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However, the Letter Agreement also states that “Parkson

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agrees to be bound to the [Purchase Order] in accordance with the

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technical and general portions of the documents that form a part

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of the Prime Contract only to the extent that they are applicable

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to the supply and delivery of the material, equipment and

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workmanship under the [Purchase Order] . . . .”

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Contract’s technical specifications on the provision of cloth

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filter equipment requires the subcontractor to provide Rigby with

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a Performance Guarantee.

(Id.)

(Ritchie Aff. Ex. D ¶ 1.04.)

The Prime

This

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contractual language, combined with Parkson’s statement that it

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provided the Performance Guarantee to Riby “as required by the

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technical specifications of [the Prime Contract],” (Mot. for

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Recons. at 7), suggests that the portion of the Prime Contract

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requiring a Performance Guarantee has been incorporated under the

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terms of the Letter Agreement.

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privity of contract between Parkson and Rigby, Parkson was

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obligated to Peck Ormsby to provide Rigby with a Performance

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Guarantee.

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was fulfilling a preexisting obligation.3

Regardless of whether there was

By giving Rigby the Performance Guarantee, Parkson

Under Idaho contract law, a party cannot unilaterally

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amend an agreement by adding an arbitration clause unless the

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original contract expressly provided that party with the right to

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make such a modification.

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Idaho 1, 3 (2008).

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clause in the Performance Guarantee it was contractually

MBNA Am. Bank, N.A. v. Fouche, 146

Parkson unilaterally placed an arbitration

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In deciding this motion, the court makes no judgment
regarding the merits of the underlying breach of contract claim.
See United Computer Sys., Inc. v. AT & T Corp., 298 F.3d 756, 766
(9th Cir. 2002).
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obligated to give to Rigby without the right to do so.

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At oral arguments on the Motion for Reconsideration,

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Parkson argued for the first time that there are three exceptions

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to the pre-existing duty rule.4

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-- that Parkson had no pre-existing duty to Rigby -- has already

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been addressed by this court.

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presents is that the Uniform Commercial Code (“UCC”) has

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abolished the pre-existing duty rule for the sale of goods.

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U.C.C. § 2-209; Idaho Code Ann. § 28-2-209(1).

The first articulated exception

The second exception that Parkson

See

It is not clear

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that UCC § 2-209 applies in this case because it covers

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“agreement[s] modifying a contract,” U.C.C. § 2-209(1), not the

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unilateral inclusion of a contract provision.

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there was neither an agreement nor a pre-existing contract to

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modify.

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suggests that the Performance Guarantee should not be considered

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an “agreement” under UCC § 2-209.

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denies that it was in privity of contract with Rigby prior to the

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Performance Guarantee, the Performance Guarantee did not modify a

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pre-existing contract.

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existing duty rule does not govern this case.

In this case,

Rigby never signed the Performance Guarantee, which

Further, as Parkson also

Thus, UCC § 2-209's abolition of the pre-

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Even if UCC § 2-209 applied in this case, its

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application here would be contrary to the FAA’s requirement that

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parties expressly agree to submit to arbitration.

See United

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The court was led to believe that support for these
three exceptions was provided in a letter brief presented by
Parkson at oral arguments. Based upon this representation, the
court granted Rigby permission to file a letter brief in response
to Parkson’s submission. Upon later review of Parkson’s letter
brief, the court discovered that it did not in fact present
support for the three exceptions.
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Steelworkers of Am., 363 U.S. at 582.

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authority, nor has Parkson cited cases, supporting the

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application of UCC § 2-209 to unilaterally imposed arbitration

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provisions.

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The court is aware of no

Courts have occasionally upheld the unilateral

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inclusion of arbitration provisions under UCC § 2-207.

See,

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e.g., Dixie Aluminum Prods. Co. v. Mitsubishi Int’l Corp., 785 F.

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Supp. 157, 160-61 (N.D. Ga. 1992) (finding inclusion of

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arbitration clause in confirming document did not materially

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alter agreement where there was no unfair surprise because the

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document had been used in prior dealings between the parties).

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Unlike UCC § 2-209, which applies to the modification of pre-

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existing contracts, UCC § 2-207 allows for the possibility that

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additional terms added to a written confirmation between

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merchants may form part of the original contract.

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arbitration provisions included in written confirmations are not

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automatically binding under UCC § 2-207.

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Aikman Corp., 453 F.2d 1161, 1169 n.8 (6th Cir. 1972) (finding

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the validity of an arbitration provision in a written

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confirmation rests upon the particular facts of the case).

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However,

See Dorton v. Collins &

Courts interpreting whether UCC § 2-207 permits a

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unilaterally imposed arbitration provision must first determine

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whether the arbitration provision materially alters the

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underlying contract.

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is influenced by whether the inclusion of the arbitration term

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presents an unfair surprise based on the parties’ prior dealings

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or industry standards.

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Elecs., 828 F. Supp. 178, 183-84 (S.D.N.Y. 1993) (holding that

U.C.C. § 2-207(2)(b).

Such a determination

See, e.g., Hatzlachh Supply v. Moishe’s

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arbitration provision was not a material alteration where the

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buyer had previously received 42 invoices that all included the

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arbitration provision); Dixie Aluminum Prods., 785 F. Supp. at

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160-61 (finding arbitration provision had been used in prior

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dealings between the parties).

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The occasional allowance of unilaterally imposed

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arbitration provisions under UCC § 2-207 does not suggest that

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such provisions should be upheld under UCC § 2-209's pre-existing

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duty rule.

Under UCC § 2-207, the court asks whether the

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arbitration provision unilaterally included in a written

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confirmation should be considered part of the underlying

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contract.

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duty rule covers agreements modifying existing, finalized

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contracts.

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for mutual agreements under UCC § 2-209, has no place in the

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application of UCC § 2-207 to unilaterally included provisions

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because the contract finalized by the written confirmation

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constitutes the consideration.

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test under UCC § 2-209 as there is under UCC § 2-207 because,

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presumably, the mutual intention of the parties under UCC § 2-209

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is to alter the existing contract.

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Under UCC § 2-209, the elimination of the pre-existing

A discussion of consideration, which is not necessary

There is no “materially alter”

UCC § 2-207 governs contract provisions added by a

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party unilaterally, whereas UCC § 2-209 governs provisions that

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alter a pre-existing contract based on mutual agreement.

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Parkson claims that the Performance Guarantee created a mutual,

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binding agreement between itself and Rigby.

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mutual intention to arbitrate disputes in this case because Rigby

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never signed the Performance Guarantee or in any way agreed to
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Here,

However, there is no

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arbitrate disputes with Parkson.

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The final exception proposed by Parkson to the pre-

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existing duty rule is triggered when the promisee undertakes to

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do something in addition to what he already is obligated to do

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under his pre-existing duty.

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undertake testing and recommend solutions if the equipment it

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provided were to fail, it made additional promises to Rigby that

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were not found in the technical specifications of the Prime

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Contract.

Parkson claims that by agreeing to

This exception does not apply in this case as it

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governs contract modifications mutually agreed upon by the

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parties.

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Airways, 944 F.2d 983, 991 (applying the exception “if the

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bargained-for performance rendered by the promisee includes

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something that is not within the requirements of the pre-existing

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duty”); Great Plains Equip, Inc. v. Nw. Pipeline Corp., 132 Idaho

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754, 769-70 (1999) (applying the exception after finding that the

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parties implicitly agreed to the contract modification).

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Allowing such a unilateral contract modification to impose

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arbitration would permit Parkson to circumvent the FAA

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requirement that the parties expressly agree to arbitrate their

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claims.

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See, e.g., Care Travel Co., Ltd. v. Pan Am. World

Parkson provided the Performance Guarantee to Rigby

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under its pre-existing duty to Peck Ormsby.

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the Performance Guarantee nor affirmatively agreed to the

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arbitration provision contained within it.

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agreed to arbitrate disputes with Parkson, the court will deny

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Rigby never signed

Because Rigby never

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Parkson’s motion to compel arbitration.5

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IT IS THEREFORE ORDERED that:

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(1) Western’s motion to dismiss Peck Ormsby’s bond

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claim be, and the same hereby is, GRANTED;

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(2) Western’s motion to dismiss Rigby’s maintenance
bond claim be, and the same hereby is, GRANTED;
(3) Parkson’s motion to dismiss Rigby’s indemnification

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claim be, and the same hereby is, GRANTED;
(4) Parkson’s motion to compel arbitration of Rigby’s

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breach of contract claim be, and the same hereby is, DENIED; and
(5) The stay of discovery entered by the court on

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August 22, 2011, is hereby LIFTED.

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DATED:

November 7, 2011

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In the event that the court is not persuaded to change
its mind, Parkson requests further clarification of the effect of
the court’s ruling on Parkson and Rigby’s contractual
relationship. This determination is outside the scope of the
original order. This Amended Order only addresses the
invalidation of the arbitration provision of the Performance
Agreement and does not address the validity of any other
provision.
15