M.A. Mortenson Company v. Saunders Concrete Company, Inc. et al
Filing
45
MEMORANDUM OPINION AND ORDER granting in part and denying in part 2 Motion to Compel (Written Opinion). See order for details. Signed by Judge Donovan W. Frank on 07/08/2011. (rlb)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
M. A. Mortenson Company, a Minnesota
corporation,
Civil No. 11-935 (DWF/FLN)
Plaintiff,
v.
MEMORANDUM
OPINION AND ORDER
Saunders Concrete Company, Inc., a New York
Corporation, and Hartford Fire Insurance
Company, a Connecticut corporation,
Defendants.
________________________________________________________________________
Evan A. Fetters, Esq., and James J. Hartnett, IV, Esq., Faegre & Benson LLP, counsel for
Plaintiff.
Scott G. Harris, Esq., and Elizabeth C. Kramer, Esq., Leonard Street and Deinard, PA,
counsel for Defendant Saunders Concrete Company, Inc.
Thomas J. Radio, Esq., Hinshaw & Culbertson LLP, and Andrew S. Kent, Esq., Wolff &
Samson PC, counsel for Defendant Hartford Fire Insurance Company.
________________________________________________________________________
INTRODUCTION
This matter is before the Court on a Motion to Compel Arbitration and Stay
Litigation brought by Plaintiff M. A. Mortenson Company (“Mortenson”). For the
reasons set forth below, the motion is granted in part and denied in part.
BACKGROUND
Mortenson is a Minnesota corporation that was the prime contractor hired to
construct the Hardscrabble Wind Project, consisting of 37 Wind Turbine Generators,
located in Herkimer County, New York (the “Project”). (Compl. ¶ 5 & Ex. D ¶ 7.)
Defendant Saunders Concrete Company, Inc. (“Saunders”) is a ready mix concrete supply
business in Nedrow, New York. (Decl. of Tracy Saunders ¶ 1.) Mortensen entered into a
Subcontract Agreement with Saunders, effective on or about May 24, 2010, pursuant to
which Saunders agreed to supply concrete for use in construction of the Project (the
“Subcontract”). (Compl. ¶ 7.) Defendant Hartford Fire Insurance Company (“Hartford”),
as surety to Saunders, provided a performance bond guaranteeing Saunders’ faithful
performance of its work pursuant to the Subcontract (the “Bond”). (Id. ¶ 8.)
Mortenson alleges that Saunders breached the Subcontract by defectively
performing its work and exposed Mortenson to damages in excess of $6.4 million. (Id.
¶¶ 10-15.) On or about November 12, 2010, Mortenson declared that Saunders was in
default under the Subcontract. (Id. ¶ 13.) Mortenson then called upon Hartford to
perform under its Bond, but Hartford has not reimbursed Mortenson for any of the costs
allegedly incurred as a result of Saunders’ default. (Id. ¶¶ 16-17.)
The Subcontract contains the following dispute resolution provisions:
21. DISPUTES.
21.1 If arbitration of disputes is provided for in the Contract Documents,
and if Mortenson, in its sole discretion, elects to demand arbitration with
Subcontractor individually, or as part of joint proceedings with Owner or
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others, any dispute arising between Mortenson and Subcontractor under the
Agreement, including breach thereof, shall be decided by arbitration in the
manner provided for in the Contract Documents. If Mortenson elects to
demand arbitration with Subcontractor individually, and subject to
applicable law, arbitration proceedings shall be held in Minneapolis,
Minnesota, or such other place as Mortenson may designate.
21.2 If the Contract Documents do not provide for arbitration and if
Mortenson, in its sole discretion, elects to demand arbitration with
Subcontractor individually, or as part of joint proceedings with Owner or
others, any dispute arising between Mortenson and Subcontractor under the
Agreement, including breach thereof, shall be decided by arbitration in
accordance with the then current Construction Industry Arbitration Rules of
the American Arbitration Association. Subject to applicable law,
arbitration proceedings shall be held in Minneapolis, Minnesota, or such
other place as Mortenson may designate. The award rendered by the
arbitrator pursuant to Paragraphs 21.1 or 21.2 shall be final, and judgment
may be entered upon it in accordance with applicable law in any court
having jurisdiction thereof.
21.3 If the Contract Documents provide administrative procedures for
resolution of disputes, Subcontractor agrees to comply with such procedures
and submit any claims or disputes to Mortenson in such manner and time as
will permit Mortenson to comply with such administrative procedures.
Subcontractor agrees not to institute (and to stay) legal or other proceedings
against Mortenson until such administrative procedures and remedies have
been exhausted, and agrees to fully reimburse Mortenson for costs and
expenses, including reasonable attorney’s fees, incurred by Mortenson in
the enforcement of this Paragraph.
21.4 Any claim by Subcontractor involving, in whole or in part, acts, errors
or omissions of Owner or Architect, or other agents or representatives of
Owner, as determined by Mortenson in its sole discretion, shall be subject
to and governed by this Paragraph. Such claim shall be submitted in
writing to Mortenson in such time and manner as will permit Mortenson to
comply with the Contract Documents. Such claim shall contain a written
entitlement narrative and an itemization of pricing for review and approval
by Mortenson. If Mortenson, in its sole discretion, determines not to
approve such written claim, Subcontractor shall revise and resubmit such
claim. If Mortenson, in its sole discretion, decides not to proceed with such
claim, Subcontractor, to the extent it determines to pursue such claim, shall
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be obligated to pursue such claim directly against Owner, and
Subcontractor agrees not to institute (and to stay) legal or other remedies
against Mortenson until all legal proceedings against Owner with respect to
such claim are final and complete. If Mortenson, in its sole discretion,
decides to proceed with such claim, Subcontractor agrees not to institute
(and to stay) legal or other remedies against Mortenson until all legal
proceedings against Owner with respect to such claim are final and
complete. Subcontractor’s right of recovery, arising from acts, errors or
omissions of Owner or Architect, or other agents or representatives of
Owner, shall be limited solely to that dollar amount and other relief, which
is recovered from Owner and Mortenson shall not be liable to Subcontractor
for any monies or other relief except those paid to Mortenson by Owner for
the benefit of Subcontractor. Subcontractor hereby agrees to make no claim
to further payment beyond the Subcontract Price arising out of the acts,
errors, or omissions of Owner or Architect, or other agents or
representatives of
owner, other than to the extent that Mortenson may receive funds from
Owner on behalf of Subcontractor, which funds shall be paid by Mortenson
to Subcontractor less costs and expenses incurred by Mortenson in
prosecuting such claims.
(Compl. ¶ 7, Ex. A at 9-10.)
Mortenson filed a demand for arbitration, pursuant to paragraph 21.2 of the
Subcontract, on March 31, 2011 (the “Demand”). (Compl. ¶ 19.) The Demand named
Saunders and Hartford as Respondents. (Compl. ¶ 20, Ex. C.) Saunders did not
participate in the arbitration and instead commenced an action in New York state court on
April 7, 2011 alleging various claims against Mortenson relating to the Subcontract and
the Project. (Compl. ¶ 22.) On April 8, 2011, Saunders filed a motion to stay arbitration
in New York state court. (Id. ¶ 23.)
Mortenson initiated the action in this Court on April 14, 2011 and filed the
currently pending Motion to Compel Arbitration and Stay Litigation on Friday,
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April 15, 2011. That same day, Saunders filed an Order to Show Cause in the New York
state action requesting that the arbitration proceedings be temporarily stayed and
enjoined. The New York state court signed the Order to Show Cause and filed it on
Monday, April 18, 2011. After the Order to Show Cause was filed, but still on April 18,
Mortenson filed a Notice for Removal, removing the action to the Northern District of
New York.
This Court held a hearing on the pending Motion to Compel Arbitration and Stay
Litigation on May 19, 2011. At that time, the parties disputed the legal effect of the
Order to Show Cause issued by the New York state court before removal. On that same
day, in the Northern District of New York, Saunders filed an emergency motion seeking a
stay of arbitration pending a decision on a motion for a permanent injunction. Saunders
Concrete Co. v. M.A. Mortenson Co., No. 5:11-cv-428 (N.D.N.Y.), Doc. No. 8. After the
hearing before this Court concluded, but still on May 19, the court in the Northern
District of New York issued an order granting Saunders’ motion for a temporary
restraining order and setting a hearing on Saunders’ motion for a permanent injunction for
May 26, 2011. Id., Doc. No. 10. On May 20, 2011, this Court stayed Mortenson’s
Motion to Compel Arbitration and Stay Litigation. (Doc. No. 36.)
On May 26, 2011, the court in the Northern District of New York denied
Saunders’ motion to stay the arbitration proceedings and then stayed the proceedings in
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that action.1 Saunders Concrete Co. v. M.A. Mortenson Co., No. 5:11-cv-428
(N.D.N.Y.), Doc. No. 18. This Court then requested additional briefing from the parties,
which has been received. The Court now addresses the substance of Mortenson’s
pending motion.
DISCUSSION
I.
Personal Jurisdiction
As an initial matter, Saunders argues that it is not subject to personal jurisdiction in
the District of Minnesota. Saunders contends that it has not consented to the jurisdiction
of Minnesota courts and lacks the minimum contacts necessary for the assertion of
personal jurisdiction over it in Minnesota.
The Subcontract provides, however, that arbitration proceedings shall be held in
Minneapolis, Minnesota. (Compl. ¶ 18, Ex. A ¶ 21.2.) “Implying consent to personal
jurisdiction from the forum selection clause in an agreement to arbitrate is necessary to
implement the statutory requirement that an arbitration hearing must be held ‘within the
district in which the petition for an order directing such arbitration is filed.’” St. Paul
Fire & Marine Ins. Co. v. Courtney Enters., 270 F.3d 621, 624 (8th Cir. 2001) (quoting 9
U.S.C. § 4). Because the Court respectfully rejects Saunders’ assertion that the
arbitration agreement in the Subcontract is unenforceable, as discussed below, the Court
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Due to the Northern District of New York court’s decision to stay that action, that
part of Mortenson’s current motion that seeks a stay of the litigation in New York is
denied as moot.
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concludes that Saunders is subject to personal jurisdiction in Minnesota.
II.
Motion to Compel Arbitration
When considering a motion to compel arbitration, the Court is required to
determine whether: (1) a valid agreement to arbitrate exists between the parties; and
(2) the specific dispute is within the scope of that agreement. See Green Tree Fin. Corp.
v. Bazzle, 539 U.S. 444, 452 (2003); Pro Tech Indus., Inc. v. URS Corp., 377 F.3d 868,
871 (8th Cir. 2004). “The scope of an arbitration agreement is given a liberal
interpretation, with any doubts resolved in favor of arbitration.” Medcam, Inc. v. MCNC,
414 F.3d 972, 975 (8th Cir. 2005). A motion to compel arbitration should be granted if
the arbitration clause is “susceptible of an interpretation that covers the asserted dispute.”
Id. (citations omitted).
Here, Mortenson asserts that the Subcontract with Saunders contains a valid
arbitration clause. Mortenson asserts that the scope of the arbitration clause covers the
claims raised in Mortenson’s Demand and the claims alleged by Saunders in New York
state court. Mortenson also asserts that Hartford is bound by the Subcontract’s arbitration
clause because the Subcontract is incorporated into the Bond.
A.
Saunders
Saunders asserts that there is no valid agreement to arbitrate. Saunders contends
that the arbitration agreement is void under New York2 statutory law; that the arbitration
(Footnote Continued on Next Page)
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agreement is invalid as unconscionable; and that the arbitration agreement was an integral
part of, and substantially related to, a fraudulent scheme by Mortenson. Saunders also
asserts that even if a valid agreement to arbitrate exists, certain claims at issue between
the parties fall outside the scope of that agreement. The Court addresses each argument
in turn.
1.
N.Y. Lien Law § 34
Saunders contends that the Subcontract’s arbitration agreement violates Section 34
of the New York Lien Law, which provides in part that: “Notwithstanding the provisions
of any other law, any contract, agreement or understanding whereby the right to file or
enforce any lien created under article two is waived, shall be void as against public policy
and wholly unenforceable.” N.Y. Lien Law § 34. Saunders asserts that Section 34
invalidates contracts that contain a pay-if-paid provision that forces a subcontractor to
assume the risk that an owner will pay the general contractor. Saunders contends that
Paragraph 21.4 of the Subcontract is such a pay-if-paid clause, that Article 21 of the
Subcontract, entitled “Disputes,” is the parties’ arbitration agreement, and that the
presence within Article 21 of Paragraph 21.4 renders the arbitration agreement void.
Mortenson asserts that Paragraph 21.4 is not a pay-if-paid clause but instead is a
pass-through clause, which permits a subcontractor to assert claims for extra work for
which it blames the owner directly against the owner. Mortenson contends that the
(Footnote Continued From Previous Page)
2
The parties agree that the Subcontract is governed by New York law.
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language “arising from acts, errors or omissions of Owner or Architect” within Paragraph
21.4 makes it clear that that provision only limits recovery on claims for compensation
over and above the Subcontract price. Mortenson asserts in addition that Paragraph 21.4
is not part of the parties’ arbitration agreement, which Mortenson contends is Paragraph
21.2. Mortenson also contends that Paragraph 21.4 is severable from the remainder of the
Subcontract, leaving Paragraph 21.2 enforceable.
The Court respectfully disagrees with Mortenson’s assertion that the language of
Paragraph 21.4 makes it clear that that provision only limits recovery on claims for
compensation over and above the Subcontract price. The Court need not decide,
however, whether Paragraph 21.4 runs afoul of Section 34 of the New York Lien Law
because Paragraph 21.2 is a separate provision containing a specific agreement to
arbitrate. “[A] party’s challenge to another provision of the contract, or to the contract as
a whole, does not prevent a court from enforcing a specific agreement to arbitrate.”
Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772, 2778 (2010).
Saunders contends that the New York statutory provision should be construed to
invalidate all of Article 21, but the Supreme Court has made clear that “as a matter of
substantive federal arbitration law, an arbitration provision is severable from the
remainder of the contract.” Id. at 2786 (quoting Buckeye Check Cashing, Inc. v.
Cardegna, 546 U.S. 440, 445 (2006)). Thus, only a challenge to the validity of Paragraph
21.2 is relevant to the Court’s determination whether the parties’ arbitration agreement is
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enforceable. Rent-A-Center, 130 S. Ct. at 2778. Because N.Y. Lien Law § 34 is not
implicated by Paragraph 21.2, that statute is inapplicable here.
2.
Unconscionability
Saunders asserts that under New York law, arbitration agreements that are both
procedurally and substantively unconscionable are not enforceable. Saunders asserts that
the arbitration agreement here is procedurally unconscionable because Saunders had no
ability to negotiate it. Saunders argues that the arbitration agreement is substantively
unconscionable because it contains three material infirmities: it contains pay-if-paid
language; it gives Mortenson the sole discretion to choose whether to arbitrate its claims
against Saunders or litigate them in a court of law; and it imposes an undue burden on
Saunders by requiring arbitration in Minnesota of disputes respecting a project
constructed in upstate New York by New York laborers and materialmen.
Mortenson asserts that each of the unconscionability arguments presented by
Saunders has been rejected by courts when addressing commercial arbitration clauses.
Mortenson argues that the inability to negotiate the terms of an arbitration agreement does
not render that agreement procedurally unconscionable under New York law, relying on
Nayal v. HIP Network Servs. IPA, Inc., 620 F. Supp. 2d 566, 571-72 (S.D.N.Y. 2009).
Mortenson asserts that Mortenson’s sole discretion under the arbitration agreement to
choose whether or not to arbitrate also does not render the agreement unenforceable,
citing Doctor’s Assocs. v. Distajo, 66 F.3d 438, 451-52 (2d Cir. 1995). As to Saunders’
argument that requiring it to arbitrate disputes in Minnesota constitutes an undue burden,
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Mortenson relies on Carnival Cruise Lines v. Shute, 499 U.S. 585 (1991), in which the
Supreme Court upheld a forum selection clause that required cruise passengers living in
Washington to litigate disputes with the cruise line in Florida.
As discussed above, the Court has already concluded that the alleged pay-if-paid
language in Paragraph 21.4 does not invalidate the arbitration agreement in Paragraph
21.2. The Court agrees with Mortenson that Saunders’ additional unconscionability
arguments have been largely rejected by the courts and are not a basis for invalidating the
parties’ arbitration agreement here.
3.
Fraud in the Inducement
Saunders asserts that the arbitration agreement in the Subcontract was part and
parcel of an overall fraudulent scheme by Mortenson. Saunders contends that when fraud
in the inducement is alleged, the issue of arbitrability is decided in the first instance by
the court whenever a substantial relationship or nexus is shown between the arbitration
provision and the alleged fraud or misrepresentation. Saunders contends that here
Mortenson sought to obtain labor and materials based upon a series of false
representations, to deny payment for the labor and materials, and then to use the
arbitration agreement to browbeat Saunders into accepting settlement.
Mortenson asserts that federal courts may adjudicate issues of fraud only when
there is some substantial relationship between the fraud or misrepresentation and the
arbitration clause in particular. Mortenson contends that Saunders’ fraud claim here
attacks the Subcontract as a whole and therefore is arbitrable. In particular, Mortenson
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notes that the complaint filed by Saunders in New York state court contains no allegation
that Saunders was fraudulently induced to enter into the arbitration clause of the
Subcontract. Mortenson relies on Garten v. Kurth, 265 F.3d 136 (2d Cir. 2001), in which
the Second Circuit held that a claim of fraud in the inducement requires more than the
allegation that the arbitration clause is an element of the fraud scheme and instead must
include particularized facts specific to the arbitration provision. See id. at 143.
The Court finds that Saunders’ allegations are insufficient to show the existence of
any misrepresentation or fraud related to the arbitration clause itself. Accordingly, the
Court concludes that Saunders’ fraud in the inducement defense is arbitrable and does not
invalidate the parties’ arbitration agreement.
4.
Scope
Saunders asserts that the scope of the arbitration agreement does not cover all of
the claims at issue between the parties. Saunders’ argument here is primarily directed at
its claims asserted in the New York litigation. That litigation has since been stayed, and
those claims are not before this Court. The Court therefore need not address the question
of whether the claims asserted by Saunders in New York are within the scope of the
arbitration agreement. Saunders also contends, however, that to the extent Mortenson’s
Demand alleges negligence and property damage against Saunders, those claims fall
outside the arbitration agreement.
Mortenson asserts that the arbitration agreement governs any dispute arising under
the Subcontract and so covers the claims raised in the Demand. The Demand does not
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identify specific claims, but instead alleges that Saunders supplied defective concrete,
negligently performed demolition work related to the defective concrete, refused to
participate in further repair efforts, and was declared to be in breach of the Subcontract.
The Demand then seeks an award of Mortenson’s costs due to the alleged property
damage and defective work of Saunders, as well as other costs as provided by the
Subcontract.
The Court concludes that Mortenson’s claim against Saunders as set forth in the
Demand arises under the Subcontract and is therefore subject to arbitration. Accordingly,
having concluded that a valid agreement to arbitrate exists and that the Demand is within
the scope of that agreement, the Court grants Mortenson’s motion to compel arbitration as
to Saunders.
B.
Hartford
Hartford asserts that no arbitration agreement applies to Mortenson’s bond claim
against Hartford. Hartford asserts that it is not a party to the Subcontract and that the
Bond does not contain an agreement to arbitrate. Hartford argues in addition that the
arbitration agreement only applies to disputes between Mortenson and Saunders that arise
under the Subcontract and thus does not reach disputes between Mortenson and Hartford
under the Bond. Hartford contends that the incorporation of a contract by reference in a
surety bond does not obligate the surety to arbitrate claims and defenses under the bond,
relying on Fidelity and Deposit Co. of Maryland v. Parsons & Whittemore Contractors
Corp., 48 N.Y.2d 127 (1979).
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Mortenson asserts that because the Bond incorporates the Subcontract by
reference, the Subcontract’s arbitration provision obligates Hartford to arbitrate disputes
with Mortenson. Mortenson asserts that under New York law, a surety may be compelled
to arbitrate any dispute with the bond obligee when its performance bond incorporates by
reference a subcontract containing a broad arbitration clause, relying on Liberty Mut. Ins.
Co. v. N. Picco & Sons Contracting Co., Civ. No. 05-217, 2008 WL 190310 (S.D.N.Y.
Jan. 16, 2008).
The Court concludes that Hartford cannot be compelled to arbitrate disputes
between Hartford and Mortenson arising under the Bond. In Liberty Mut. Ins., the surety
had entered into a takeover agreement and completed the project pursuant to the terms
and conditions of the underlying contract. 2008 WL 190310, at *1-2. The surety was
then suing as a subrogee and was therefore limited to the relief available to the subrogor.
Id. at *11. That case is thus distinguishable. Here, Mortenson’s claims against Hartford,
as set forth in the Demand, are based on the allegation that Hartford has failed to perform
under the Bond. The arbitration agreement between Mortenson and Saunders, while
incorporated in the Bond between Mortenson and Hartford, by its own terms only governs
“any dispute arising between Mortenson and [Saunders] under the [Subcontract].”
(Compl. ¶ 18, Ex. A ¶ 21.2.) The dispute between Mortenson and Hartford arising under
the Bond is thus beyond the scope of the arbitration agreement.
C.
Retention of Jurisdiction
Mortenson requests that the Court retain jurisdiction pending the outcome of the
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arbitration. The Court notes, however, that Mortenson, in its Complaint, did not assert
any claims but instead set forth a series of allegations and then requested that the Court
order arbitration between the parties. The Court has now ruled on Mortenson’s request
for arbitration. Since there are no remaining claims pled against Saunders or Hartford,
the Court will not retain jurisdiction over this matter.
CONCLUSION
Accordingly, based on the files, records, and proceedings herein, and for the
reasons set forth above, IT IS HEREBY ORDERED that:
1.
Mortenson’s Motion to Compel Arbitration and Stay Litigation (Doc.
No. [2]) is GRANTED IN PART and DENIED IN PART as follows:
a.
Mortenson’s motion to compel arbitration as to the claims
raised in its Demand against Saunders is GRANTED;
b.
Mortenson’s motion to compel arbitration as to the claims
raised in its Demand against Hartford is DENIED;
c.
Mortenson’s motion to stay the action commenced by
Saunders in New York is DENIED as moot;
d.
Mortenson’s request that the Court retain jurisdiction over this
matter pending the outcome of arbitration is DENIED; and
e.
Mortenson’s Complaint and Petition to Compel Arbitration
and to Stay Litigation (Doc. No. [1]) is DISMISSED WITHOUT
PREJUDICE.
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LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated: July 8, 2011
s/Donovan W. Frank
DONOVAN W. FRANK
United States District Judge
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