CIP CONSTRUCTION COMPANY v. WESTERN SURETY COMPANY
Filing
19
MEMORANDUM OPINION AND ORDER signed by CHIEF JUDGE THOMAS D. SCHROEDER on 07/20/2018, that Western's motion to disregard CIPC's surreply (Doc. 15 ) is DENIED. FURTHER that Western's motion dismiss or alternatively stay the proceedi ngs pending arbitration award (Doc. 5 ) is GRANTED to the following extent: exercising its discretionary authority, the court STAYS these judicial proceedings pending resolution of the arbitration between CIPC and UFI. The parties shall submit a joint report as to the status of the pending arbitration proceeding no later than August 13, 2018, which shall include a recommendation as to whether to continue or dissolve the stay. (Taylor, Abby)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
CIP CONSTRUCTION COMPANY,
)
)
)
)
)
)
)
)
)
Plaintiff,
v.
WESTERN SURETY COMPANY,
Defendant.
1:18cv58
MEMORANDUM OPINION AND ORDER
THOMAS D. SCHROEDER, Chief District Judge.
This is a construction dispute involving the claim of a
general contractor, CIP Construction Company (“CIPC”), against its
subcontractor’s
surety,
Western
Surety
Company
(“Western”).
Western now moves to dismiss or, alternatively, to stay judicial
proceedings and seeks to compel CIPC to pursue its claims in
arbitration.
(Doc. 5.)
surreply brief.
Western also moves to disregard CIPC’s
(Doc. 15.)
and are ready for decision.
The motions have been fully briefed
(Docs. 7, 11, 13, 14, 17 and 18.)
For the reasons set forth below, the court will consider the
surreply, deny the motion to dismiss or stay insofar as it is made
pursuant to Federal Rule of Civil Procedure 12(b)(1) and the
Federal Arbitration Act (“FAA”), 9 U.S.C. § 3, but exercise its
discretion to stay these judicial proceedings pending the outcome
of the ongoing arbitration between CIPC and its subcontractor.
I.
BACKGROUND
CIPC
is
the
general
contractor
and
owner
of
Bellemeade
Village, a construction project in Greensboro, North Carolina (the
“project”).
(Doc. 1 ¶¶ 5, 6.)
CIPC contracted with United
Forming, Inc. (“UFI”), a subcontractor, to complete the reinforced
concrete for the project (the “subcontract”).
2.)
(Id. ¶ 8; Doc. 1-
Additionally, Western issued a performance bond to CIPC on
which Western is the surety, UFI is the principal, and CIPC is the
obligee (the “performance bond”).
(Doc. 1 ¶ 5; Doc. 1-1.)
Western’s performance bond incorporates the subcontract “by
reference.”
(Doc.
1-1
¶
1.)
The
subcontract
contains
an
arbitration provision, which states in relevant part:
Arbitration. In the event of a dispute between the
parties with respect to the terms of this Agreement or
the parties’ performance under this Agreement (a
“Dispute”), the parties will submit the Dispute to
arbitration pursuant to the provisions of the North
Carolina Revised Uniform Arbitration Act . . . .
(Doc. 1-2 ¶ 34.)
and UFI.
The subcontract defines the “parties” as CIPC
(Id. ¶ 1.)
The performance bond contains a judicial
resolution provision, which states in relevant part:
Any proceeding, legal or equitable, under this Bond may
be instituted in any court of competent jurisdiction in
the location in which the work or part of the work is
located and shall be instituted within two years after
a declaration of Contractor Default . . . .
(Doc. 1-1 ¶ 11.)
The present dispute arose between CIPC and UFI under the
2
subcontract, and UFI served CIPC with a written arbitration demand.
(Doc. 5-3; Doc. 7 at 4.)
CIPC gave Western written notice that
UFI had refused to perform under the subcontract and was in
default.
(Doc. 1 ¶¶ 29, 31.)
CIPC demanded that Western fulfill
its duties under the performance bond and honor UFI’s obligations
under the subcontract.
(Id. ¶ 31; Doc. 1-6.)
Western responded
that it was ready to meet its obligations under the performance
bond once UFI’s liability had been determined in arbitration.
(Doc. 1 ¶ 35, Doc. 7 at 4.)
CIPC filed the present action on February 1, 2018.
Western
now moves to dismiss, or alternatively to stay, the action and
compel arbitration, contending that the subcontract’s arbitration
provision governs this dispute.
(Doc. 5.)
Pursuant to the
parties’ agreement filed in connection with Western’s motion to
dismiss, CIPC and UFI began an evidentiary hearing before an
arbitrator concerning their dispute on June 18, 2018, and they
anticipate an award by July 23, 2018.
II.
(Doc. 5-4 at 4.)
ANALYSIS
Western argues that CIPC’s dispute against it arising under
the performance bond must be arbitrated and that the court should
therefore dismiss or, alternatively, stay this lawsuit pursuant to
the FAA
or
via
the
court’s
discretionary
power,
resolution of CIPC’s arbitration with Western.
contends
that
its
obligation
under
3
the
pending
the
Western further
performance
bond
is
dependent on UFI’s liability, which will be determined in the
ongoing arbitration.
response,
CIPC
(Doc. 7 at 4, 8; Doc. 13 at 2, 9.)
contends
that
the
arbitration
clause
in
In
the
subcontract is not incorporated into the performance bond and that
its claim against Western may proceed.
A.
Motion to Compel Arbitration
1.
Western
Subject Matter Jurisdiction
moves
to
dismiss,
or
alternatively
stay,
the
proceedings and compel arbitration, pursuant to Federal Rule of
Civil
Procedure
Rule
12(b)(1),
the
North
Carolina
Revised
Arbitration Act, N.C. Gen. Stat. §§ 1-569.1, et seq., and the FAA,
9 U.S.C. § 3.
Western’s argument is based on the contention that
the court lacks subject matter jurisdiction to entertain the action
because all issues before the court are subject to arbitration.
A court must consider its subject matter jurisdiction as a
“threshold matter” prior to addressing the merits of the case.
Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94–95
(1998); Holloway v. Pagan River Dockside Seafood, Inc., 669 F.3d
448, 452 (4th Cir. 2012).
A plaintiff bears the burden of proving
subject matter jurisdiction.
Evans v. B.F. Perkins Co., a Div. of
Standex Int'l Corp., 166 F.3d 642, 647 (4th Cir. 1999).
When
subject matter jurisdiction is challenged pursuant to Federal Rule
of Civil Procedure 12(b)(1), “the district court is to regard the
pleadings as mere evidence on the issue, and may consider evidence
4
outside the pleadings without converting the proceeding to one for
summary
judgment.”
Id.
(quoting
Richmond,
Fredericksburg
&
Potomac R. Co. v. United States, 945 F.2d 765, 768 (4th Cir. 1991)
(internal citations omitted)).
The court should only grant the
Rule 12(b)(1) motion “if the material jurisdictional facts are not
in dispute and the moving party is entitled to prevail as a matter
of law.”
Id. (quoting Richmond, Fredericksburg & Potomac R. Co.,
945 F.2d at 768).
In
challenging
this
court’s
subject
matter
jurisdiction,
Western relies on the Fourth Circuit's decision in Choice Hotels
Int'l, Inc. v. BSR Tropicana Resort, Inc., for the proposition
that the dismissal of a complaint for lack of subject matter
jurisdiction is proper when all the issues before the court are
arbitrable.
(Doc. 7 at 8 (citing Choice Hotels Int'l, Inc. v. BSR
Tropicana Resort, Inc., 252 F.3d 707, 709-10 (4th Cir. 2001)).
Western similarly argues that the text of § 4 of the FAA supports
its
interpretation
that
the
jurisdiction over the dispute.
court
lacks
subject
matter
(Id.); see 9 U.S.C. § 4 (providing
that an aggrieved party may petition a “district court which, save
for such agreement, would have jurisdiction under title 28 . . .
for an order directing that such arbitration proceed in the manner
provided for in such agreement”).
While the Fourth Circuit in Choice Hotels recognized that
dismissal may be a proper remedy under the FAA where all matters
5
are subject to arbitration, the court did not address whether a
binding arbitration agreement would divest the court of subject
matter jurisdiction. Choice Hotels, 252 F.3d at 709–10. Western’s
reliance on the Fifth Circuit’s opinion in Alford v. Dean Witter
Reynolds, Inc. is similarly misplaced.
1992).
975 F.2d 1161 (5th Cir.
In Alford, the Fifth Circuit held that the district court
properly acted within its discretion when it dismissed an action
pursuant to the FAA where all claims were subject to arbitration.
Id. at 1164.
As the Fifth Circuit recently clarified, however, “a
dismissal may be appropriate ‘when all of the issues raised in the
district court must be submitted to arbitration,’” but “agreements
to arbitrate implicate forum selection and claims-processing rules
not subject matter jurisdiction.”
Ruiz v. Donahoe, 784 F.3d 247,
249–50 (5th Cir. 2015) (quoting Alford, 975 F.2d at 1164).
Though
neither
party
has
addressed
the
Western’s argument is contrary to other case law.
issue
further,
For example, in
DiMercurio v. Sphere Drake Ins., PLC, the First Circuit held that
an arbitration agreement does not divest the court of subject
matter jurisdiction, recognizing that “[a]greements to arbitrate
are now typically viewed as contractual arrangements for resolving
disputes
rather
jurisdiction.”
than
as
an
appropriation
of
202 F.3d 71, 76 (1st Cir. 2000).
a
court's
Notably, the
court considered and rejected similar statutory arguments based on
the language of 9 U.S.C. § 4, holding that Western’s interpretation
6
reflected an outmoded view of a federal court’s jurisdiction and
conflicted with the other statutory provisions in the FAA.
76-77.
Id. at
While noting that § 4 authorizes a party to petition the
court, “which, save for the agreement would have jurisdiction,” 9
U.S.C. § 4, the court held that legislative history indicated that
“the
drafters
understood
that
the
problem
was
not
really
jurisdictional, but rather that the jurisdiction concept was an
illogical remnant of ancient English law.”
Id. at 76 (citing H.R.
Rep. No. 96, 68th Cong., lst Sess., 1–2 (1924)).
In addition, the
court noted that other more recently enacted provisions of the FAA
affirm the court’s jurisdiction to hear such disputes and its
ultimate
authority
arbitration.
over
a
case
even
after
a
referral
to
Id. at 77 (citing 9 U.S.C. §§ 204, 207); 9 U.S.C.
§ 204 (“An action or proceeding over which the district courts
have jurisdiction . . . may be brought in any such court in which
save for the arbitration agreement an action or proceeding with
respect to the controversy between the parties could be brought
. . . . (emphasis added)), § 207 (permitting a party to seek an
order confirming arbitrator’s award).
Courts
have
generally
not
regarded
the
presence
of
an
arbitration agreement as a proper basis for a challenge to the
court’s subject matter jurisdiction. See, e.g., City of Benkelman,
Nebraska v. Baseline Eng'g Corp., 867 F.3d 875, 880–81 (8th Cir.
2017)
(“[A]n
arbitration
agreement
7
has
no
relevance to
the
question of whether a given case satisfies constitutional or
statutory definitions of jurisdiction”); Auto. Mechanics Local 701
Welfare & Pension Funds v. Vanguard Car Rental USA, Inc., 502 F.3d
740, 743 (7th Cir. 2007) (“Enforcement of a forum selection clause
(including an arbitration clause) is not jurisdictional . . . .”);
Hardie v. United States, 19 F. App'x 899, 906 (Fed. Cir. 2001)
(“Arbitration
agreements
are
properly
viewed
as
contractual
arrangements for resolving disputes, not as documents divesting a
court of jurisdiction.”); 5B Charles Alan Wright & Arthur R.
Miller, Federal Practice and Procedure § 1350 (3d ed. 2018) (“The
presence of an arbitration clause has also not been regarded as a
basis for a subject matter jurisdiction challenge under Rule
12(b)(1).”). 1
Indeed, any finding that the court lacked subject
1
In an unpublished opinion, the Fourth Circuit previously suggested that
dismissal for lack of subject matter jurisdiction may be appropriate.
Silkworm Screen Printers, Inc. v. Abrams, 1992 WL 317187, at *6 (4th
Cir. 1992). There, the court vacated a district court’s denial of a
defendant’s motion to dismiss and to stay proceedings pending
arbitration,
providing
the
district
court
with
the
following
instructions:
If the district court finds that Silkworm agreed to arbitrate,
it should enter an order directing arbitration in accordance
with the agreement. It may either dismiss Silkworm's
complaint for lack of subject matter jurisdiction or stay its
proceedings pending arbitration and consideration of the
award pursuant to Article V of the Convention.
Id.
Because unpublished opinions have no precedential value in this
circuit, Collins v. Pond Creek Mining Co., 468 F.3d 213, 219 (4th Cir.
2006), and CIPC has pleaded sufficient facts to invoke the court’s
jurisdiction, Silkworm does not require dismissal on jurisdictional
grounds. See Bayer CropScience AG v. Dow AgroSciences LLC, No. 2:12CV47,
2012 WL 2878495, at *8 (E.D. Va. July 13, 2012) (acknowledging
8
matter
jurisdiction
would
appear
to
preclude
the
court
from
entering any order compelling CIPC to arbitrate the dispute –
relief Western seeks.
Flores v. Gmri, Inc., No. 1:15-CV-1073,
2016 WL 7264845, at *3 (M.D.N.C. Dec. 15, 2016).
Even though the FAA does not provide an independent source of
federal question jurisdiction, Moses H. Cone Mem'l Hosp. v. Mercury
Constr. Corp., 460 U.S. 1, 25 n.32 (1983), CIPC has established
that the court may properly hear this claim under its diversity
jurisdiction.
Western
has
arbitration
(Doc. 1 ¶ 3.); see 28 U.S.C. § 1332. 2
failed
clause
to
demonstrate
divests
this
that
court
of
Because
the
subcontract’s
its
jurisdiction,
Western’s motion to dismiss on that basis will therefore be denied.
See City of Benkelman, 867 F.3d at 881; DiMercurio, 202 F.3d at
76-79; Flores, 2016 WL 7264845, at *3 (denying motion to dismiss
for lack of subject matter jurisdiction, but granting alternative
motion to compel arbitration and stay pending arbitration); Bayer
CropScience AG v. Dow AgroSciences LLC, No. 2:12CV47, 2012 WL
2878495, at *13 (E.D. Va. July 13, 2012) (same).
conflicting authority and denying motion to dismiss for lack of subject
matter jurisdiction).
2
Western argues that CIPC improperly pleaded federal question
jurisdiction under 28 U.S.C. § 1331 by referencing the Miller Act, 40
U.S.C. § 3131 et seq. Western argues that the Miller Act applies only
to performance bonds for projects undertaken for the United States, which
Western’s bond is not.
However, CIP has clearly pleaded diversity
jurisdiction under 28 U.S.C. § 1332, and Western has not challenged this
independent source of jurisdiction. (Doc. 1 ¶ 3.)
9
2.
Motion to Compel
Western moves alternatively to compel arbitration pursuant to
the FAA.
The standard of review on a motion to compel arbitration
is “akin to the burden on summary judgment.” Galloway v. Santander
Consumer USA, Inc., 819 F.3d 79, 85 n.3 (4th Cir. 2016) (quoting
Chorley Enterprises, Inc. v. Dickey's Barbecue Restaurants, Inc.,
807 F.3d 553, 564 (4th Cir. 2015)).
Accordingly, the court may
consider materials outside the pleadings.
Meridian Imaging Sols.,
Inc. v. OMNI Bus. Sols. LLC, 250 F. Supp. 3d 13, 16 n.5 (E.D. Va.
2017) (citations omitted).
A motion to compel arbitration should
be granted where there are no genuine issues of material fact
regarding the existence of an agreement to arbitrate.
Galloway,
819 F.3d at 85; Rose v. New Day Financial, LLC, 816 F. Supp. 2d
245, 251–52 (D. Md. 2011).
When presented with a question as to whether parties are
required to arbitrate a dispute, the trial court is limited to
resolving
the
“arbitrable.”
“gateway
dispute”
of
whether
the
claims
are
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79,
84 (2002); Peabody Holding Co., LLC v. United Mine Workers of Am.,
Int'l Union, 665 F.3d 96, 104 (4th Cir. 2012).
Here, the parties
do not dispute that the court is the proper forum to determine
whether the dispute is arbitrable, nor do the relevant agreements
contain
“clear
and
unmistakable”
arbiter make this determination.
10
language
requiring
that
an
Peabody, 665 F.3d at 102-03.
Thus, the court must determine whether the dispute is arbitrable.
The
FAA
establishes
arbitration” agreements.
“a
liberal
federal
policy
Moses, 460 U.S. at 24. 3
favoring
“When parties
have entered into a valid and enforceable agreement to arbitrate
their disputes and the dispute at issue falls within the scope of
that agreement, the FAA requires federal courts to stay judicial
proceedings, and compel arbitration . . . .”
Murray v. United
Food & Commercial Workers Int’l Union, 289 F.3d 297, 301 (4th Cir.
2002) (citations omitted); 9 U.S.C. §§ 3-4.
However, dismissal of
the action may also be appropriate in cases where all issues before
the court are arbitrable.
See Choice Hotels, 252 F. 3d at 708-
09. 4
3
The subcontract provides that disputes are governed by the North
Carolina Uniform Revised Arbitration Act, N.C. Gen. Stat. § 1-569.1 et
seq.
(Doc. 1-2.)
However, the FAA preempts conflicting state law,
making analysis under the FAA appropriate. See Volt Info. Scis., Inc.
v. Bd. of Tr. of Leland Stanford Jr. Univ., 489 U.S. 468, 477 (1989).
4
While 9 U.S.C. § 3 requires a stay, federal circuit courts are divided
as to whether the district court retains the discretion to dismiss an
action where all claims are subject to arbitration.
Reed v. Darden
Restaurants, Inc., 213 F. Supp. 3d 813, 820 (S.D.W. Va. 2016) (collecting
cases). The Fourth Circuit has recognized that dismissal may be a proper
remedy where all issues before the court are arbitrable. Compare Choice
Hotels Int’l v. BSR Tropicana Resort, Inc., 252 F. 3d 707, 708-09 (4th
Cir. 2001) (“Notwithstanding the terms of § 3, . . . dismissal is a proper
remedy when all of the issues presented in a lawsuit are arbitrable.”),
with Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 937 (4th Cir. 1999)
(“When a valid agreement to arbitrate exists between the parties and
covers the matter in dispute, the FAA commands the federal courts to
stay any ongoing judicial proceedings and to compel arbitration.”). The
Fourth Circuit has recognized the tension between its decision in Choice
Hotels and Hooters as well as the existing circuit split on this issue,
but it has not provided further guidance. See Aggarao v. MOL Ship Mgmt.
Co., Ltd., 675 F.3d 355, 376 n.18 (4th Cir. 2012); Noohi v. Toll Bros.,
708 F.3d 599, 605 n.2 (4th Cir. 2013).
11
The party seeking to compel arbitration must demonstrate:
“(1) the existence of a dispute between the parties, (2) a written
agreement that includes an arbitration provision which purports to
cover the dispute, (3) the relationship of the transaction, which
is evidenced by the agreement, to interstate or foreign commerce,
and (4) the failure, neglect or refusal of the defendant to
arbitrate the dispute.”
Am. Gen Life & Accident Ins. Co. v. Wood,
429 F.3d 83, 87 (4th Cir. 2005) (quoting Adkins v. Labor Ready
Inc., 303 F.3d 496 at 500-01 (4th Cir. 2002)).
In this case, CIPC
challenges only the presence of the second element, arguing that
the parties never entered into a written agreement to arbitrate
any dispute over the surety’s obligations.
Arbitration
is
‘a
matter
of
(Doc. 11 at 5.)
consent,
not
coercion,’ and
federal arbitration policy does not alter that maxim.”
Raymond
James Fin. Servs., Inc. v. Cary, 709 F.3d 382, 385 (4th Cir. 2013)
(quoting Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford
Jr. Univ., 489 U.S. 468, 479 (1989)).
The Fourth Circuit has
recognized that the “‘touchstones of arbitrability analysis’ are
the
‘twin
arbitrate.”
pillars’
of
the
parties’
‘consent
and
intent’
to
Id. at 385–86 (quoting Peabody, 665 F.3d at 103).
While the court must resolve any ambiguity regarding the scope of
the arbitral issues in favor of arbitration, Moses, 460 U.S. at
24–25; Wachovia Bank Nat'l Ass'n v. Schmidt, 445 F.3d 762, 767
(4th Cir. 2006), the question of the parties’ intent does not enjoy
12
any presumption favoring arbitration, First Options of Chicago,
Inc. v. Kaplan, 514 U.S. 938, 944 (1995).
To
determine
whether
the
parties
agreed
to
arbitrate
a
particular dispute, the court must consider relevant state law
principles governing contract formation.
Hill v. Peoplesoft USA,
Inc., 412 F.3d 540, 543 (4th Cir. 2005); see also Perry v. Thomas,
482 U.S. 483, 492 n.9 (1987).
In a case premised upon diversity
jurisdiction, a federal court applies the law of the forum state.
Dassault Falcon Jet Corp. v. Oberflex, Inc., 909 F. Supp. 345, 348
(M.D.N.C. 1995) (citing Klaxon Co. v. Stentor Electric Mfg. Co.,
313 U.S. 487, 496 (1941)).
The parties agree, as the subcontract
provides, that North Carolina law applies.
(Doc. 11 at 6; Doc. 13
at 8; see Doc. 1-2 ¶ 31.)
In determining if an agreement to arbitrate exists, North
Carolina law instructs “the court to examine the language of the
contract itself for indications of the parties’ intent . . . .”
State v. Philip Morris, USA, Inc., 359 N.C. 763, 773, 618 S.E.2d
219, 225 (2005).
The parties’ intent is determined in light of
the “contract as a whole.”
Id.
The court must give the contract’s
language its ordinary meaning and presume that the parties intended
the plain meaning of the words, absent evidence to the contrary.
Anderson v. Anderson, 145 N.C. App. 453, 458, 550 S.E.2d 266, 26970 (2001) (citations omitted).
Further, the court must interpret
all terms of the agreement harmoniously and consistently with each
13
other, unless it would be unreasonable to do so.
Ray D. Lowder,
Inc. v. N.C. State Highway Comm’n, 26 N.C. App. 622, 639, 217
S.E.2d 682, 693 (1975).
And, where two documents are executed
contemporaneously, they are to be construed consistently with one
another.
See Yates v. Brown, 275 N.C. 634, 640-41, 170 S.E.2d
477, 482 (1969) (citation omitted).
Finally, ambiguous language
must be construed contra proferentem, against the drafter.
Cosey
v. Prudential Ins. Co. of Am., 735 F.3d 161, 169-70 (4th Cir. 2013)
(citing Novacare Orthotics & Prosthetics E., Inc. v. Speelman, 137
N.C. App. 471, 476, 528 S.E.2d 918, 921 (2000)).
Here, the complete subcontract was incorporated by reference
into the performance bond, making their tandem interpretation
necessary.
Booker v. Everhart, 294 N.C. 146, 152, 240 S.E.2d 360,
363 (1978) (“To incorporate a separate document by reference is to
declare that the former document shall be taken as part of the
document in which the declaration is made, . . . as if it were set
out at length therein.” (citations omitted)).
Thus, if possible,
the court must read the arbitration and judicial resolution clauses
as harmonious and consistent.
CIPC raises several arguments as to why there is no agreement
between it and Western to arbitrate the dispute.
First, CIPC
argues that the subcontract’s arbitration clause is limited to
“dispute[s] between the parties” (Doc. 1-2 ¶ 34), and Western is
not a party to the subcontract.
(Doc. 11 at 10-11.)
14
Second, it
contends that the presence of a judicial resolution provision in
the performance bond demonstrates there was no intent to arbitrate
disputes arising under it.
(Id. at 9-10, 13-15.)
Third, it argues
that any ambiguity regarding the judicial resolution clause should
be
construed
Fourth,
it
against
contends
the
drafter,
that
even
Western.
(Id.
there
an
if
is
at
15-16.)
agreement
to
arbitrate, the present dispute falls outside of the scope of the
arbitration clause.
(Id. at 16-17.)
Western responds that it does not need to be a party to the
subcontract because the existence of a “significant relationship”
between this dispute and the contract requires arbitration of the
dispute.
While
conceding
that
it
is
not
a
party
to
the
subcontract, Western maintains this is irrelevant because the
subcontract was incorporated by reference into the performance
bond.
(Doc. 7 at 8.)
resolution
clause
Second, Western contends that the judicial
was
not
intended
to
preempt,
but
can
be
harmonized with, the subcontract’s mandatory arbitration clause.
(Doc. 13 at 6.)
Third, it contends, this dispute falls within the
scope of the arbitration clause, which is not clearly limited by
the intent of the parties, and must be construed in favor of
permitting arbitration.
Often,
arbitration
(Doc. 7 at 2, 7.)
provisions
contain
broad
arbitration
clauses that contain the phrase “arising out of or relating to” or
similar language to define disputes subject to arbitration under
15
the agreement.
In those cases, the Fourth Circuit has held that
such clauses embrace “‘every dispute between the parties having a
significant relationship’ to the contract.”
Great Am. Ins. Co. v.
Hinkle Contracting Corp., 497 F. App'x 348, 354 (4th Cir. 2012)
(quoting Am. Recovery Corp. v. Computerized Thermal Imaging, Inc.,
96 F.3d 88, 93 (4th Cir. 1996)).
When applying this standard, the
court must “determine whether the factual allegations underlying
the
claims
are
within
the
scope
of
the
arbitration
clause,
regardless of the legal label assigned to the claim.” Am. Recovery
Corp., 96 F.3d at 93.
In contrast to such broad arbitration clauses, the narrower
arbitration clause in the subcontract in this case reflects an
intent to limit its scope to disputes “with respect to the terms
of the Agreement” that are “between the parties” – defined in the
subcontract as CIPC and UFI.
(Doc. 1-2 ¶ 34.)
The subcontract
also does not contain any reference to a surety that would indicate
an intent to arbitrate the present dispute.
Cf. Great American,
497 F. App’x at 353 (holding that the dispute between a contractor
and surety fell within the scope of the arbitration clause in the
underlying
subcontract,
where
the
arbitration
provision
encompassed disputes “arising out of, or relating to” the agreement
and the subcontract explicitly referenced both the subcontractor
and
the
surety
procedures).
with
regard
to
certain
dispute
resolution
Thus, the significant relationship test does not
16
appear to have the same application here as it ordinarily would in
other cases.
To the extent possible, the court must interpret the mandatory
arbitration clause and judicial resolution clause harmoniously and
consistently with one another.
at 639, 217 S.E.2d at 693.
Ray D. Lowder, Inc., 26 N.C. App.
In this case, the permissive language
of the judicial resolution clause suggests that only the parties
to the subcontract are bound by the arbitration provision.
See
Liberty Mut. Ins. Co. v. Mandaree Public District #36, 503 F.3d
709, 711 (8th Cir. 2007); W. Sur. Co. v. U.S. Eng'g Co., 211 F.
Supp.
3d
302,
310–11
(D.D.C.
2016).
Further,
any
ambiguity
regarding the interpretation of the judicial resolution clause
must be interpreted against the drafter, Western.
Cosey, 735 F.3d
at 169-70.
The district court’s decision in Western Surety Company v.
U.S. Engineering Company is instructive.
In that case, a dispute
arose between a contractor and a subcontractor regarding the
performance of a contract for which Western served as a surety.
U.S. Eng'g Co., 211 F. Supp. 3d at 304-05.
of
the
subcontract,
proceedings.
Id.
the
parties
Pursuant to the terms
entered
into
arbitration
The contractor sought to make a claim under the
surety bond and requested that Western be made a party to the
pending arbitration proceedings.
Id. at 305.
Western filed suit
to enjoin the contractor from compelling arbitration proceedings
17
against it and making a claim on the surety bond.
Id.
In response
to the contractor’s motion to compel arbitration, Western moved
for partial summary judgment as to the sole issue of whether it
must arbitrate the dispute.
Id. at 304-05.
Even though the
subcontract was incorporated by reference into the performance
bond, Western argued that the arbitration clause applied only to
the named parties of the subcontract and that a judicial resolution
clause substantively identical to that present here could not
otherwise be construed harmoniously with a mandatory arbitration
clause.
The
(Doc. 11-1 at 12-18.) 5
court
granted
Western’s
motion
for
partial
summary
judgment, holding that the defendant had not demonstrated that the
parties intended to arbitrate disputes arising between them out of
the performance bond.
Id. at 311.
Applying District of Columbia
law, the court interpreted the arbitration clause as limiting
arbitration to disputes between the contractor and subcontractor.
Id. at 309-10.
resolution
clause
The court found that the permissive judicial
in
the
performance
bond
provided
further
evidence of the parties’ intent not to arbitrate, noting that “if
5
In U.S. Engineering, the subcontract, which was incorporated by
reference into the performance bond, contained an arbitration clause
that stated “[a]ny controversy or claim of Contractor against
Subcontractor or Subcontractor against Contractor shall be resolved by
arbitration . . . .”
U.S. Eng'g Co., 211 F. Supp. at 304.
The
performance bond provided in relevant part that that “[a]ny proceeding,
legal or equitable, under this Bond may be instituted in any court of
competent jurisdiction in which the work or part of the work is located
. . . .” Id. (emphasis added).
18
the court is to give every provision in the surety agreement
meaning, it cannot ignore that there is a provision which calls
for filing suit, not merely accepting arbitration as the sole
avenue of recourse.”
Id. at 310–11.
While U.S. Engineering is
not binding on this court, its reasoning is persuasive.
Moreover, while the distinctions involving narrow or broad
definitions of the parties and “permissive” and “restrictive”
phrasing of contract provisions are not mechanically applied in
the cases, the cases relied on by Western are distinguishable,
principally because they involved broader arbitration clauses and
narrower judicial resolution clauses.
cases).)
(Doc. 13 at 6 (collecting
For example, in Cianbro Corp. v. Empresa Nacional de
Ingenieria y Technologia S.A., the court held that a surety was
bound by a mandatory arbitration clause incorporated by reference
into a performance bond, where the arbitration clause covered all
claims “arising out of or relating to” the contract.
15, 20 (D. Me. 1988).
697 F. Supp.
The court found that the judicial resolution
clause within the performance bond may coexist with the mandatory
arbitration clause because it “simply declare[d] a ‘statute of
limitation’
initiated.”
in
which
Id.
at
any
19
litigation
(noting
under
performance
the
bond
bond
must
be
provided
in
relevant part “[a]ny suit under this bond must be instituted before
the final expiration of two years from date on which final payment
under the subcontract falls due” (emphasis added)).
19
In Developers
Sur. and Indem. Co. v. Resurrection Baptist Church, the court also
found that a broad mandatory arbitration clause similar to that in
Cianbro was incorporated by reference into the performance bond,
relying in part on the fact that the judicial resolution provision
in the performance bond merely set forth a period of limitations
by providing that “[a]ny suit under this bond must be instituted
before the expiration of two (2) years from the date on which final
payment under the Contract falls due.”
(D. Md. 2010).
759 F. Supp. 2d 665, 672
The court distinguished the case from the Eighth
Circuit’s decision in Liberty Mut. Ins. Co. v. Mandaree Public
District #36, where the bond provided, “any proceeding, legal or
equitable, under this Bond may be instituted in any court of
competent jurisdiction [where] the work is located . . . within
two years after the Surety . . . fails to perform its obligations
under this Bond.”
503 F.3d 709 (8th Cir. 2007) (emphasis added).
The court noted, “[u]nlike the Mandaree performance bond, which
contained
permissive
language,
the
employs restrictive language.”
Id.
instant
performance
bond
In the present case, by
contrast, the language of Western’s judicial resolution clause
uses the permissive “may.”
(Doc. 1-1 ¶ 11.)
Western argues that
Mandaree is contrary to the holdings of the First, Fourth, Fifth,
Sixth, and Eleventh Circuits.
(Doc. 13 at 4 n.2.)
However,
Mandaree and the instant case are factually distinguishable from
the other cases, due to their narrower arbitration clauses and
20
permissive
nature
of
the
judicial
resolution
clauses.
See
Developers Sur. & Indem. Co. v. Carothers Constr., Inc., No. 172292-JWL, 2017 WL 3674975, at *5 (D. Kan. Aug. 24, 2017) (noting
“the cases commonly cited for that so-called majority rule are
similarly distinguishable and thus unhelpful, as they involved
situations in which the arbitration provision was not expressly
limited to disputes between particular parties” (citing Schneider
Elec. Buildings Critical Sys., Inc. v. W. Sur. Co., 165 A.3d 485,
493 n.5 (Md. 2017)).
CIPC argues that Western nevertheless should be estopped from
arguing
that
arbitration
is
required
because
Western
has
previously been successful in arguing that arbitration is not
required in cases dealing with the same performance bond language.
(Doc. 11 at 2-3 (citing U.S. Eng’g Co., 211 F. Supp. 3d 302;
Schneider Elec. Building Critical Sys., Inc. v. W. Sur. Co., 149
A.3d 778 (Md. 2016)).)
The Fourth Circuit requires four elements to be met before a
court applies judicial estoppel: (1) “the party sought to be
estopped must be seeking to adopt a position that is inconsistent
with a stance taken in prior litigation;” (2) “the position sought
to be estopped must be one of fact rather than law or legal theory;”
(3) “the prior inconsistent position must have been accepted by
the court;” and (4) “the party sought to be estopped must have
intentionally mislead the court to gain unfair advantage.”
21
Lowery
v. Stovall, 92 F.3d 219, 224 (4th Cir. 1996) (internal citations
and
quotations
omitted).
However,
the
doctrine
of
judicial
estoppel “does not prevent parties from asserting a legal theory
inconsistent with one asserted earlier in litigation.”
Tenneco
Chemicals, Inc. v. William T. Burnett & Co., Inc., 691 F.2d 658,
664
(4th
Cir.
inconsistent
1982).
position
Thus,
even
prior
litigation,
in
if
appears to be based in law, not in fact.
F. Supp. 3d at 310–11.
Western
did
Western’s
take
an
argument
See U.S. Eng'g Co., 211
The present dispute concerns whether the
parties are subject to arbitration under North Carolina law, not
whether specific words factually do or do not appear in the
contract.
This
raises
a
question
of
law,
not
fact,
Bridas
S.A.P.I.C. v. Government of Turkmenistan, 345 F.3d 347, 353 (5th
Cir. 2003) (citations omitted), and judicial estoppel does not
apply.
Thus, for all these reasons, the court finds that Western has
failed to demonstrate that CIPC agreed to arbitrate disputes
arising from the performance bond, and Western’s motion to compel
arbitration will be denied.
B.
Stay Pending the Outcome of Arbitration Between CIPC &
UFI
Western argues that even if the court determines that the
claims before it are not arbitrable, the court should exercise its
discretion to stay the action pending the outcome of the ongoing
22
arbitration between CIPC and UFI.
CIPC opposes the request on
procedural grounds, arguing in a surreply brief that Western’s
request for a discretionary stay is not properly before the court
because it was first raised in Western’s reply brief.
According
to CIPC, Western previously sought only a mandatory stay pursuant
to 9 U.S.C. § 3.
(Doc. 14 at 4.)
Western in turn moves to strike
CIPC’s surreply brief on the ground it was filed in violation of
the court’s local rules.
(Doc. 15.)
This court’s local rules provide for a surreply only where
the non-moving party raises an evidentiary objection in its reply.
Starnes v. Veeder-Root, No. 1:15CV1002, 2017 WL 913633, at *1 n.1
(M.D.N.C. Mar. 7, 2017) (citing L.R. 7.6), aff'd, 694 F. App'x 200
(4th Cir. 2017); see Olvera-Morales v. Int'l Labor Mgmt. Corp.,
246 F.R.D. 250, 254 (M.D.N.C. 2007) (noting “[s]urreplies are
generally disfavored”).
“Otherwise, courts generally ‘allow a
party to file a surreply only when fairness dictates based on new
arguments raised in the previous reply.’”
Starnes, 2017 WL 913633,
at *1 n.1 (quoting DiPaulo v. Potter, 733 F. Supp. 2d 666, 670
(M.D.N.C. 2010)).
Here, Western’s request for a discretionary stay in its reply
constituted
initially.
a
separate
ground
that
should
have
been
set
out
See L.R. 7.3(a) (requiring each motion be “set out in
a separate pleading”). In its motion to dismiss, Western requested
that the court “alternatively, stay judicial proceedings pending
23
arbitration award” and cited only the FAA.
at 6, 8.)
(Doc. 5 at 1; Doc. 7
Western never specified that it was also seeking a
discretionary stay in the event the court determined it had subject
matter jurisdiction.
(Doc. 5 at 1-2, Doc. 7 at 2.)
Similarly,
Western’s reply referenced its motion to stay the case “pending
the resolution of the underlying arbitration,” but failed to
specify whether it was seeking a mandatory or discretionary stay.
(Doc. 13 at 9.)
While Western seems to have provided CIPC with
adequate notice that it was seeking a mandatory stay pursuant to
9 U.S.C. § 3, the court cannot say that CIP had “fair opportunity”
to respond to any argument regarding a discretionary stay, which,
while
closely
related,
involves
different
considerations.
Therefore, to the extent the court considers Western’s request for
a stay based on the court’s discretionary powers, concerns of
fairness dictate that the court consider CIPC’s surreply.
DiPaulo, 733 F. Supp. 2d at 670.
See
Even though the manner in which
Western made its alternative request did not comport with Local
Rule 7.3(a), the court will nevertheless consider the merits of
this motion because Western clarified its requested alternative
relief in its reply brief and CIPC has been afforded an opportunity
to respond.
(M.D.N.C.
See Johnson v. Angels, 125 F. Supp. 3d 562, 564
2015)
(considering
the
merits
of
motions
despite
defendant’s failure to follow Local Rule 7.3(a), where defendants
clarified
their
requested
relief
24
in
a
supporting
brief
and
plaintiff had an opportunity to respond).
Moreover, even in the absence of any motion, consideration of
a stay always falls within the court’s inherent power to act sua
sponte. Crown Cent. Petroleum Corp. v. Dep't of Energy, 102 F.R.D.
95, 98–99 (D. Md. 1984) (citing Landis v. N. Am. Co., 299 U.S.
248,
254-55
(1936)).
“[T]he
power
to
stay
proceedings
is
incidental to the power inherent in every court to control the
disposition of the causes on its docket with economy of time and
effort for itself, for counsel, and for litigants.”
Maryland v.
Universal Elections, Inc., 729 F.3d 370, 379 (4th Cir. 2013)
(quoting Landis, 299 U.S. at 254).
Courts have recognized that a discretionary stay may be
appropriate in cases where common issues of fact relating to the
action may be settled in pending arbitration proceedings.
e.g.,
AgGrow
Oils,
L.L.C.
v.
Nat'l
Union
Fire
Ins.
See,
Co.
of
Pittsburgh, PA, 242 F.3d 777, 783 (8th Cir. 2001) (citations
omitted) (reversing district court’s denial of a discretionary
stay and remanding the case for reconsideration in light of a
pending arbitration); Am. Home Assur. Co. v. Vecco Concrete Const.
Co. of Virginia, 629 F.2d 961, 964 (4th Cir. 1980) (holding that
a discretionary stay was appropriate where “questions of fact
common to all actions pending in the present matter are likely to
be settled” in a pending arbitration proceeding).
In such cases,
“[a] discretionary stay may well be needed to further the strong
25
federal policy favoring agreements to arbitrate.”
AgGrow Oils,
242 F.3d at 782 (citations omitted).
When
considering
a
stay
of
proceedings,
the
court
must
“balance the various factors relevant to the expeditious and
comprehensive disposition of the causes of action on the court's
docket.”
141
F.
Yadkin Riverkeeper, Inc. v. Duke Energy Carolinas, LLC,
Supp.
3d
428,
452
(M.D.N.C.
2015)
Elections, Inc., 729 F.3d at 375).
(quoting
Universal
A court may consider all
relevant factors, including “judicial economy, the hardship and
inequity to the moving party in the absence of a stay, and the
potential prejudice to the non-moving party in the event of a
stay.”
Id. (citation omitted).
Here, the competing interests
weigh in favor of granting a stay.
As Western notes, if this
action is not stayed, the parties will be “forced to expend the
time and expense to prove facts, claims and damages that are
substantially duplicative.”
(Doc. 13 at 9.)
Though Western may
not be bound by the arbitrator’s findings, as it is not a party to
the
proceeding,
considerations
of
judicial
economy
and
the
avoidance of confusion and inconsistent results still warrant a
stay. Am. Home Assur. Co., 629 F.2d at 964; Precision Biosciences,
Inc. v. Cellectis S.A., 2011 WL 6001623, at *1 (E.D.N.C. 2011)
(noting stays may be used to avoid wasteful litigation).
Perhaps
most importantly, Western has represented to the court that its
liability
will
be
dependent
on
26
the
outcome
of
the
pending
arbitration between CIPC and UFI.
(Doc. 7 at 4 (noting that
Western “stands ready to meet its obligations . . . if and when
the liability and the amount of liability are ultimately determined
[in
arbitration]”),
8
(stating
that
Western’s
liability
is
“dependent on the establishment of UFI’s liability”); Doc. 13 at
2 (representing that “the award of the arbitrator is expected to
determine UFI’s liability to CIPC — if any — under the Subcontract,
and
perforce
Western
Surety’s
obligations
to
CIPC
under
the
Performance Bond”), 9 (noting that “Western Surety’s obligations
under the Bond are controlled by the outcome of the arbitration
between CIPC and UFI”).)
It would be wasteful to require the parties to engage in
discovery to determine UFI’s liability when it should be determined
in the ongoing arbitration between CIPC and UFI.
Additionally,
the joint scheduling order filed in connection with Western’s
motion suggests that the dispute between CIPC and UFI will be
resolved no later than July 23, 2018.
(Doc. 5-4 at 4.)
Thus, any
delay is de minimis, unlikely to be prejudicial, and would save
the court and parties from engaging in duplicative proceedings.
It seems plain that all relevant factors greatly favor staying
the action pending the outcome of the ongoing arbitration between
CIPC and UFI, whose imminent disposition will likely resolve the
present action.
Whether considered on Western’s motion or by the
court’s action sua sponte, the court will exercise its discretion
27
to stay the proceedings pending the outcome of CIPC’s arbitration
with its subcontractor.
III. CONCLUSION
For the reasons stated,
IT IS THEREFORE ORDERED that Western’s motion to disregard
CIPC’s surreply (Doc. 15) is DENIED.
IT
IS
FURTHER
ORDERED
that
Western’s
motion
dismiss
or
alternatively stay the proceedings pending arbitration award (Doc.
5) is GRANTED to the following extent: exercising its discretionary
authority, the court STAYS these judicial proceedings pending
resolution of the arbitration between CIPC and UFI.
The parties
shall submit a joint report as to the status of the pending
arbitration proceeding no later than August 13, 2018, which shall
include a recommendation as to whether to continue or dissolve the
stay.
/s/
Thomas D. Schroeder
United States District Judge
July 20, 2018
28
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