Pch Mut. Ins. Co., Inc. v. Casualty & Surety, Inc. ( 2010 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
PCH MUTUAL INSURANCE
COMPANY, INC.,
Plaintiff,
Civil Action No. 08-00282 (CKK)
v.
CASUALTY & SURETY, INC.,
Defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
(November 15, 2010)
This action arises out of an alleged breach of an Administrative Services Agreement (the
“Agreement”) entered into by and between Plaintiff PCH Mutual Insurance Company, Inc.
(“PCH”) and Defendant Casualty & Surety, Inc. (“CSI”). After removing this action from the
Superior Court for the District of Columbia, CSI filed a [8] Motion to Compel Arbitration and
Stay Proceedings. Finding that a genuine issue was presented as to whether the parties’
Agreement provides for mandatory arbitration of disputes arising out of the Agreement, this
Court conducted a one-day bench trial on the threshold question of arbitrability. Based on the
evidence adduced at trial, the Court concludes that CSI has failed to meet its burden of
establishing the existence of a mandatory agreement to arbitrate. Accordingly, the Court shall
DENY CSI’s [8] Motion to Compel Arbitration and Stay Proceedings. The Court’s Findings of
Fact and Conclusions of Law are set forth below.
I. PROCEDURAL BACKGROUND
On January 22, 2008, PCH filed a four-count complaint against CSI in the Superior Court
for the District of Columbia (Case No. 08-00499). See Compl., Docket No. [1-4]. On February
19, 2008, CSI removed the case to this Court, and, on March 7, 2008, filed a Motion to Compel
Arbitration and Stay Proceedings. See Def.’s Not. of Removal, Docket No. [1]; Def.’s Mot. to
Compel Arbitration and Stay Proceedings, Docket No. [8]. PCH opposed the motion, CSI filed a
reply, and PCH filed a sur-reply. See Pl.’s Mem. in Opp’n to Mot. to Compel Arbitration and
Stay Proceedings, Docket No. [15]; Def.’s Reply Br. to Pl.’s Opp’n to Def.’s Mot. to Compel
Arbitration and Stay Proceedings, Docket No. [19]; Pl.’s Sur-Reply in Opp’n to Def.’s Mot. to
Compel Arbitration and Stay Proceedings, Docket No. [22-1].
On August 5, 2008, after conducting a searching review of the parties’ respective
submissions, this Court concluded that a genuine issue existed as to whether the Agreement
provides for mandatory arbitration of disputes. See PCH Mut. Ins. Co., Inc. v. Cas. & Sur., Inc.,
569 F. Supp. 2d 67, 69 (D.D.C. 2008). Because the making of an agreement for arbitration was
“in issue,” the Court, consistent with the requirements of the Federal Arbitration Act, determined
that further limited proceedings were necessary to determine the arbitrability of the parties’
dispute. Id. at 77; see also 9 U.S.C. § 4 (“If the making of the arbitration agreement . . . be in
issue, the court shall proceed summarily to the trial thereof.”). Accordingly, this Court
conducted a one-day bench trial on the threshold question of arbitrability. See Min. Order (Feb.
3, 2009); Tr. of Bench Trial (Feb. 2, 2009) (“Tr.”), Docket No. [61].
During the course of the trial, the Court heard live testimony from three witnesses and
received documentary evidence presented by the parties. Thereafter, CSI and PCH each
submitted proposed Findings of Fact and Conclusions of Law for the Court’s consideration. See
Pl.’s Proposed Findings of Fact and Conclusions of Law, Docket No. [53]; Def.’s Proposed
Findings of Fact and Conclusions of Law in Respect of Limited Trial on Arbitrability, Docket
2
No. [54]. CSI also filed a rebuttal to PCH’s proposed Findings of Fact and Conclusions of Law.
See Def.’s Resp. to Pl.’s Proposed Findings of Fact and Conclusions of Law, Docket No. [58].
The matter is now fully briefed and ripe for adjudication.
II. FINDINGS OF FACT1
After listening to the testimony presented at trial, personally observing the demeanor and
credibility of the witnesses,2 reviewing the evidentiary record, and making all reasonable
inferences to be drawn therefrom in accordance with the Federal Rules of Evidence, the Court
finds that the following facts have been established by a preponderance of the evidence:
A. The Parties
1. Plaintiff PCH is a “risk retention group” domiciled in the District of Columbia
providing insurance coverage to assisted living facilities in Pennsylvania and neighboring states.
Pl.’s Ex. 4 (Agreement) at 1; Def.’s Ex. I (Dec. 10, 2003 Ltr. from T. Winch to D. Condon) at
CSI49.
2. Broadly speaking, a “risk retention group” is a corporation or limited liability
company designed to assume and spread the liability exposure of its group members – i.e.,
businesses that are engaged in similar or related fields (here, assisted living services). See 15
U.S.C. § 3901(a)(4). Risk retention groups provide a vehicle for businesses that cannot readily
1
To the extent practicable, the Court has attempted to segregate its findings of fact and
conclusions of law. Nevertheless, to the extent matters designated as findings of fact may be
considered conclusions of law, they shall be deemed conclusions of law. Similarly, to the extent
matters expressed as conclusions of law may be considered findings of fact, they shall be deemed
findings of fact.
2
Except as specifically noted herein, the Court found the testimony of each of the three
witnesses presented at trial – David Condon and James Godfrey, on behalf of CSI, and Jon
Harkavy, on behalf of PCH – to be, as a general matter, credible.
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obtain insurance on favorable terms to essentially “self-insure their own risk” and obtain access
to reinsurance markets. Tr. at 18:15-18:25 (Condon Test.).
3. Defendant CSI is an insurance wholesale broker and insurance program manager
based in Alabama and operating in approximately thirty-nine states across the country. Tr. at
89:8-89:15 (Godfrey Test.); Pl.’s Ex. 4 (Agreement) at 1.
B. Early Discussions Surrounding The Formation Of PCH
4. The events surrounding the formation of PCH were the subject of a fair amount of
attention at trial, in part because PCH was not actually formed until on or about April 29, 2004,
when its Articles of Incorporation were filed with the D.C. Department of Insurance and
Securities Regulation, meaning that PCH was not formed until shortly after the agreement
containing the “arbitration clause” now at issue was negotiated and executed. Tr. at 39:14-39:25
(Condon Test.); Pl.’s Ex. 4 (Agreement) at 1; Pl.’s Ex. 5 (Articles of Incorporation) at CSI45.
5. Several parties, corporate and individual, had a hand in the formation of PCH, but
its origins are found in preliminary discussions between James Godfrey (“Godfrey”), CSI’s
President and founder, and Brian Barrick (“Barrick”), a retail insurance agent operating his
Personal Care & Assisted Living Insurance Center (“PCALIC”) out of Pennsylvania. Tr. at
17:11-17:13, 69:4-69:9 (Condon Test.); Tr. at 88:12-89:5 (Godfrey Test.); Pl.’s Ex. 7 (Feb. 20,
2004 E-mail from B. Barrick to D. Condon) at PCH000005.
6. Specifically, sometime in 2002 or 2003, Godfrey and Barrick discussed the
difficulties that an assisted living facility association familiar to Barrick was having in obtaining
satisfactory insurance coverage. Tr. at 90:17-90:24 (Godfrey Test.).
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C. Condon Enters The Scene And Animates The Formation Process
7. As a outgrowth of their discussion, Godfrey arranged for Barrick to speak with
David Condon (“Condon”), an insurance wholesale broker working for CSI who, among other
things, assists in the creation of insurance programs. Tr. at 15:18-16:2, 17:23-18:6 (Condon
Test.); Tr. at 89:18-89:22, 90:21-91:3 (Godfrey Test.).
8. At some point in 2003, Condon and Barrick discussed the possibility of creating
an insurance program to better meet the needs of assisted living facilities. Tr. at 17:23-18:6
(Condon Test.). Condon, who had some prior experience with risk retention groups, was first to
propose forming a risk retention group as a possible insurance coverage alternative for assisted
living facilities. Tr. at 17:19-17:22, 18:7-18:12 (Condon Test.).
9. At some unidentified point early on in this process, Barrick approached Matt
Harvey (“Harvey”), the President of an association of assisted living facilities in Pennsylvania, to
determine whether the association’s membership would support the formation of a risk retention
group. Tr. at 72:7-73:1 (Condon Test.).
10. As discussions progressed, Condon assumed an important – but by no means
exclusive – role in coordinating the formation of PCH as a risk retention group for assisted living
facilities. Indeed, Condon was the self-described “motivating force” in the formation of PCH.
Tr. at 66:3-66:14 (Condon Test.).
D. Condon Brings Risk Services Into The Formation Process
11. Condon assumed responsibility for establishing relationships with various service
providers for the future PCH – e.g., vendors, reinsurers, and third-party administrators. Tr. at
66:3-66:11 (Condon Test.). Most notably, in or about late 2003, Condon reached out to non-
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party Risk Services, LLC (“Risk Services”), inviting Risk Services to become involved in the
formation of PCH. Tr. at 30:13-30:25 (Condon Test.).
12. Condon had previously worked with Risk Services – a company that, among other
things, provides services to risk retention groups across the United States and in offshore
domiciles – in setting up an unrelated risk retention group for intermodal trucking companies in
California. Tr. at 20:9-20:11, 30:13-30:25 (Condon Test.).
13. On or about November 4, 2003, Condon wrote Mike Rogers, President of Risk
Services, enclosing what he described as “a rather complete proposal” for the formation of PCH.
Pl.’s Ex. 2 (Nov. 4, 2003 Ltr. from D. Condon to M. Rogers) at CSI47; see also Tr. at 35:23-37:4
(Condon Test.).
14. On or about December 10, 2003, Risk Services responded to Condon’s letter with
one of its own, describing, among other things, Risk Services’ anticipated role in connection with
the formation of PCH. Def.’s Ex. I (Dec. 10, 2003 Ltr. from T. Winch to D. Condon); see also
Tr. at 37:12-38:1 (Condon Test.).
15. That role, at least as envisioned by Risk Services, would include serving as PCH’s
Captive Insurance Company Manager, consulting with PCH to develop an appropriate
organizational structure, facilitating regulatory approval of the risk retention group, acting as a
“liaison” between PCH and its service providers in preparing the documents required for
regulatory approval, working with PCH to ensure that it had the requisite capitalization, and,
subsequent to formation, overseeing internal financial management and regulatory compliance.
Def.’s Ex. I (Dec. 10, 2003 Ltr. from T. Winch to D. Condon) at CSI55; Tr. at 29:2-29:14
(Condon Test.); Tr. at 99:19-99:24 (Harkavy Test.).
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16. In exchange for these services, Risk Services anticipated receiving some amount
of compensation, most likely a percentage of the gross earned premium payments received by or
on behalf of PCH for liability insurance coverage. Def.’s Ex. I (Dec. 10, 2003 Ltr. from T.
Winch to D. Condon) at CSI53. The precise form the compensation Risk Services expected is
immaterial; all that matters is that Risk Services, like all the parties involved, had a financial
interest in facilitating the formation of PCH.
E. The Agreement Between PCH And CSI
17. From the outset, CSI was expected to serve as the Program Administrator for the
future PCH. In accordance with this expectation, on March 31, 2004, CSI and PCH entered into
an Administrative Services Agreement (that is, the Agreement), pursuant to which CSI was to
provide program administrative services for the future PCH’s liability insurance programs. Pl.’s
Ex. 4 (Agreement) at 1.
18. The Agreement was executed by Godfrey, on behalf of CSI, and Harvey, on
behalf of PCH. Tr. at 60:2-60:5, 76:7-76:16 (Condon Test.); Pl.’s Ex. 4 (Agreement) at 7.
Although PCH was technically about a month shy of incorporation at the time the Agreement
was executed, Harvey subsequently became the first president of PCH and a member of its Board
of Directors. Tr. at 73:7-73:16 (Condon Test.); Pl.’s Ex. 5 (Articles of Incorporation) at CSI46.
In any event, neither party has suggested that the Agreement is not binding on PCH on this basis.
19. As the Program Administrator, CSI was responsible for, among other things, the
development, preparation, and issuance of insurance policies and adherence to insurance
underwriting guidelines. Pl.’s Ex. 4 (Agreement) ¶ 2.
20. At least within the contours of the Agreement itself, in its role as Program
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Administrator, CSI would operate as an independent contractor. Pl.’s Ex. 4 (Agreement) ¶ 2(c).
21. In exchange for its services as Program Administrator, CSI was entitled to some
amount of compensation, a fee tagged to the percentage of the gross earned premium payments
received by or on behalf of PCH for liability insurance coverage. Pl.’s Ex. 4 (Agreement) ¶ 8.
Again, the precise form the compensation CSI expected is immaterial; all that matters is that CSI,
like all the parties involved, had a financial interest in facilitating the formation of PCH.
22. The parties’ contractual relationship was, absent further action, designed to be ten
years in duration; the Agreement would expire by its terms on March 31, 2014. Pl.’s Ex. 4
(Agreement) ¶ 1.
23. Three specific provisions of the Agreement merit further attention here. First,
Paragraph 17 of the Agreement (the “Arbitration Clause”) – the locus of the parties’
disagreement at this stage of the proceedings – provides as follows:
17. Arbitration. Any disputes concerning any aspect of
this Agreement may be submitted to binding
arbitration. The prevailing party shall be entitled to
recover all costs incurred, including reasonable
attorney’s fees.
Pl.’s Ex. 4 (Agreement) ¶ 7.
24. Second, Paragraph 14 of the Agreement (the “Injunction Clause”) provides as
follows:
14. Injunction. In the event that [CSI], its employees,
agents, brokers and/or representatives, attempt to
breach the terms of this Agreement, [PCH] shall, in
addition to its rights and remedies available to it at
law or in equity, have the right to seek an injunction
against [CSI] to enforce the provisions of this
Agreement. [CSI] agrees to be responsible for and to
reimburse [PCH] for any attorney’s fees and costs
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associated with any legal action taken by [PCH] to
enforce the terms of this Agreement.
Pl.’s Ex. 4 (Agreement) ¶ 14.
25. Finally Paragraph 233 of the Agreement (the “Savings Clause”) provides as
follows:
[23]. Partial Validity. If any term or provision of this
Agreement or the application thereof to any person or
circumstance shall to any exten[t] be invalid or
unenforceable, the remainder of the Agreement . . .
shall not be affected thereby, and each term and
provision of the Agreement shall be enforced as
written to the fullest extent permitted by law.
Pl.’s Ex. 4 (Agreement) ¶ 23.
F. Drafting The Agreement: The Limited Involvement Of The Signatories
26. Moving backwards in time, the evidence presented at trial concerning the drafting
of the Agreement between CSI and PCH was far from illuminating. This is particularly true with
respect to the Arbitration Clause, which was indisputably not the subject of much, if any,
attention by the participants in the drafting process.
27. As an initial matter, the record is nearly devoid of evidence concerning the
thought processes and intentions of the only two signatories to the Agreement – namely, Godfrey
and Harvey.
28. Godfrey had little personal involvement in the preparation of the Agreement
3
The final six paragraphs of the Agreement are misnumbered, with the paragraph
following Paragraph 19 erroneously labeled as Paragraph 16. As labeled, the Agreement has two
each of paragraphs numbered 16, 17, 18, and 19. For ease of reference, the Court shall refer to
the first set of paragraphs so-numbered as Paragraphs 16 through 19, and shall refer to the
misnumbered paragraphs as if they had been sequentially numbered – i.e., as Paragraphs 20
through 25.
9
between CSI and PCH; his participation was essentially limited to the early discussions
surrounding the formation of PCH, his execution of the Agreement on CSI’s behalf, and his
extension of a $130,000 loan to PCH to ensure that it would have sufficient capital for its
formation. Tr. at 90:12-91:24 (Godfrey Test.).
29. Godfrey testified that, prior to signing, he reviewed the Agreement, including the
Arbitration Clause, and that CSI generally “look[s] for an arbitration agreement to be” included
in insurance agreements. Tr. at 93:6-93:10, 93:17-93:18 (Godfrey Test.). He also testified that
he reviewed the Injunction Clause, and that, although unclear as to its meaning, he assumed that
it did not pertain to CSI and did not affect the Arbitration Clause. Tr. at 95:13-95:17 (Godfrey
Test.).
30. Godfrey’s relatively cursory testimony, admittedly predicated upon his “brief[]”
perusal of the Agreement, Tr. at 93:9-93:10 (Godfrey Test.), did not address the specific
language of the Arbitration Clause or the Injunction Clause nor tie his proffered interpretation to
any discussions with PCH or any of its representatives (or even with CSI’s representative in the
drafting process, Condon). As a result, the Court finds Godfrey’s generalized testimony only
minimally probative of the parties’ understanding of the Agreement. Nevertheless, the Court
shall consider Godfrey’s testimony to the extent it may reflect CSI’s one-sided interpretation of
the Arbitration Clause.
31. Meanwhile, the record has nothing specifically to say of Harvey’s understanding
of the Arbitration Clause (or, for that matter, any part of the Agreement), as neither CSI nor PCH
sought to introduce any testimony or evidence from Harvey, the signatory on PCH’s behalf.
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G. Drafting The Agreement: The Limited Involvement Of PCH
32. Not only did the parties fail to cultivate the record with respect to Harvey’s
understanding of the Agreement between CSI and PCH, but they neglected to introduce any
relevant testimony or evidence concerning the participation of anyone acting on behalf of the
future PCH in the process of drafting the Agreement.
33. Notably, Condon admitted, consistently with the other evidence presented at trial,
that he did not view Risk Services as negotiating on behalf of PCH in the context of drafting the
Agreement. Tr. at 85:11-85:20 (Condon Test.).
34. Moreover, to the extent Condon’s testimony may be construed as suggesting that
Barrick should be viewed as representing the future PCH in the course of drafting the Agreement
between CSI and PCH, Tr. at 72:3-72:9, 72:23-73:1 (Condon Test.), the Court does not credit the
suggestion for two reasons. First, the suggestion is in some, albeit not irreconcilable, tension
with Condon’s testimony that Barrick served as the agent for the assisted living association of
which Harvey was President. Tr. at 74:21-74:25, 78:25-79:4 (Condon Test.). Second, and more
importantly, the suggestion is unsupported and in fact rebutted by countervailing documentary
evidence indicating that Barrick’s (or, more precisely, PCALIC’s) role vis-à-vis the future PCH
was to serve as its Marketing Director, Pl.’s Ex. 7 (Draft Marketing Agreement) at PCH000006-
000013, and in that capacity would function as PCH’s “representative” no more than CSI, as the
future PCH’s Program Administrator, or Risk Services, as the future PCH’s Captive Insurance
Company Manager.4 At bottom, the record does not support the inference, by a preponderance of
4
In a draft of a proposed independent marketing agreement between PCALIC and PCH,
PCALIC was, like CSI, characterized as an “independent contractor,” Pl.’s Ex. 7 (Draft
Marketing Agreement) ¶ 2(e), and it was anticipated that PCALIC would receive some form of
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the evidence, that Barrick was negotiating on behalf of PCH in the context of drafting the
Agreement.
35. More broadly, the precise nature of the relationship of the three principal entities
involved in the formation process – CSI, Risk Services, and PCALIC – to the future PCH is
ultimately immaterial; rather, what is significant is that all three (and perhaps other service
providers) were jointly working towards the formation of PCH. As Condon himself testified,
after recognizing an unmet need in the market, CSI and “these other service providers [set] about
creating a client.” Tr. at 77:11-77:15 (Condon Test.).
36. In any event, it is undisputed that, while Barrick made changes to an independent
marketing agreement between his agency and PCH, he offered no commentary or changes to the
Agreement between CSI and PCH. Tr. at 41:19-41:25, 80:10-80:12, 80:21-80:24 (Condon
Test.); Pl.’s Ex. 7 (Feb. 20, 2004 E-mail from D. Condon to T. Winch) at PCH000005.
Accordingly, even if there were some credence to Condon’s suggestion that Barrick was
somehow representing PCH in the course of negotiations, there still would be no evidence on the
record establishing the understanding or intentions of PCH in executing the Agreement
H. Drafting The Agreement: The Involvement Of CSI And Risk Services
37. The absence of evidence relating to the participation of Harvey and PCH is
unsurprising, given that the Agreement between CSI and PCH was just one of several documents
prepared in the course of forming PCH, and received little attention from anyone. However, to
the extent there is any evidence on the record concerning the drafting of the Agreement, it relates
compensation in exchange for its services as Marketing Director to the future PCH, most likely a
percentage of the gross earned premium payments received by or on behalf of PCH for liability
insurance coverage. Id. at ¶ 3.
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principally to Condon, acting on behalf of CSI, and various employees of Risk Services.
38. Beginning in or about February 2004, Condon and employees of Risk Services
exchanged a series of e-mails concerning the Agreement. The two principal figures from Risk
Services involved in the preparation of the Agreement between PCH and CSI were Troy Winch
(“Winch”), Risk Services’ Director of Captive Services, who held the primary responsibility
within Risk Services for coordinating the formation of PCH, and Jon Harkavy (“Harkavy”), Risk
Services’ Executive Vice President and General Counsel. Tr. at 22:18-22:21, 43:24-44:2
(Condon Test.); Tr. at 98:3-98:9, 106:22-107:2, 112:24-113:5 (Harkavy Test.).
39. Although Condon testified that he did not have the authority to exercise “final
approval” of the Agreement on behalf of CSI, he nevertheless had the authority and responsibility
to, and in fact did, make changes to the Agreement on CSI’s behalf. Tr. at 66:22-67:8, 67:21-
67:23 (Condon Test.).
40. Condon’s proposed changes to the Agreement, directed exclusively towards
modifying the provisions governing CSI’s compensation and identifying the proper corporate
name for CSI, were ultimately incorporated into the final version of the Agreement. Tr. at 28:15-
29:1, 53:8-53:25 (Condon Test.); Tr. at 102:9-102:14, 126:15-127:1 (Harkavy Test.); compare
Pl.’s Ex. 17 (Draft Agreement) ¶ 8, with Pl.’s Ex. 4 (Agreement) ¶ 8.
41. Apart from some superficial edits that Harkavy may or may not have made to the
Agreement between CSI and PCH, Tr. at 102:4-102:6 (Harkavy Test.), Condon was the only
individual to suggest changes to the Agreement.
42. Condon’s edits were relatively minor, and did not touch upon any of the
provisions relevant to the motion now before the Court. In fact, even Harkavy described Condon
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as “passive” in hammering out the terms of the Agreement between CSI and PCH, Tr. at 107:8-
108:2 (Harkavy Test.), a description entirely consistent with all the evidence on the record
indicating that no one dedicated much attention to the Agreement, let alone the Arbitration
Clause.
I. Drafting The Agreement: The Arbitration Clause And The Injunction Clause
43. Condon credibly testified that he read the entire Agreement. Tr. at 60:6-60:8
(Condon Test.). However, Condon did not alter the Agreement’s Arbitration Clause or the
Injunction Clause. Compare Pl.’s Ex. 17 (Draft Agreement) ¶¶ 14, 17, with Pl.’s Ex. 4
(Agreement) ¶¶ 14, 17.
44. Condon testified that he did not “pa[y] a great deal of attention” to the Injunction
Clause, but stated that he did not see any inconsistency between it and the Arbitration Clause.
Tr. at 60:12-61:10 (Condon Test.). Condon’s understanding of the relationship between the two
provisions was that, in order to compel CSI to perform under the Agreement, PCH could resort to
injunctive relief; all other disputes would be resolved by arbitration. Tr. at 63:8-63:18 (Condon
Test.).
45. Critically, however, Condon did not recall any conversation or discussion among
the parties (or even between the parties and non-party Risk Services) with respect to the
Arbitration Clause or the Injunction Clause. Tr. at 56:12-56:14 (Condon Test.). Condon
conceded that those provisions were included in the final version of the Agreement because they
were part of an entirely separate agreement discussed in greater detail below. Tr. at 56:15-56:17
(Condon Test.).
46. Consistent with Condon’s testimony, none of the correspondence concerning the
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drafting of the Agreement makes specific reference to arbitration or the Arbitration Clause. Pl.’s
Ex. 2 (Nov. 4, 2003 Ltr. from D. Condon to M. Rogers), Ex. 6 (Feb. 18, 2004 E-mail from D.
Condon to T. Winch), Ex. 7 (Feb. 20, 2004 E-mail from D. Condon to T. Winch), Ex. 8 (Feb. 23,
2004 E-mail from D. Condon to T. Winch), Ex. 9 (Mar. 16, 2004 E-mail from T. Winch to D.
Condon), Ex. 11 (Feb. 24, 2004 E-mail from D. Condon to T. Winch), Ex. 12 (Mar. 8, 2004 E-
mail from D. Condon to T. Winch), Ex. 13 (Mar. 8, 2004 E-mail from D. Condon to T. Winch),
Ex. 14 (Mar. 16, 2004 E-mail from D. Condon to T. Winch), Ex. 15 (Mar. 16, 2004 E-mail from
D. Condon to T. Winch), and Ex. 16 (Mar. 17, 2004 E-mail from D. Condon to T. Winch).
47. Meanwhile, Harkavy could not even testify definitively whether he was aware at
the time that the Agreement was executed that it contained an arbitration provision, explaining
that “it was not a subject of great attention” for him. Tr. at 102:19-102:22 (Harkavy Test.).
48. In any event, Harkavy described his role as limited to ensuring that the Agreement
between CSI and PCH would past regulatory muster; in his own words, he played no
“substantive role” in crafting the terms of the Agreement. Tr. at 105:20-106:7 (Harkavy Test.).
The Court therefore accords little weight to his testimony that he understood that the Arbitration
Clause was permissive rather than mandatory, and that the provision merely allocated the costs in
the event the parties proceeded to arbitration. Tr. at 108:25-109:15 (Harkavy Test.). The
testimony is, moreover, of little import in light of the undisputed fact that Risk Services is not a
party to the Agreement and Condon’s admission that he did not view Risk Services as
negotiating on behalf of the future PCH. Tr. at 85:11-85:20 (Condon Test.).
J. Drafting The Agreement: Cannibalizing The Intermodal Agreement
49. The record is clear: nobody dedicated much attention to the Agreement between
15
CSI and PCH; there were no contemporaneous discussions concerning the Arbitration Clause or
the Injunction Clause; and the only material evidence having any bearing upon either provision
relates only to CSI’s professed understanding, which was never conveyed, in sum or in
substance, to PCH or any of its representatives prior to execution of the Agreement. As such,
based upon the record created by the parties, the Court’s ability to draw any inferences as to what
the parties intended by the language they selected in the Arbitration Clause is severely
circumscribed. At best, the record permits the Court to conclude that CSI understood the
Arbitration Clause to require mandatory arbitration of all disputes arising out of the Agreement,
though even the evidence to that effect (i.e., Godfrey and Condon’s testimony) is not particularly
compelling. Apart from the contractual language itself, the Court has no basis for drawing
conclusions as to PCH’s understanding of the Arbitration Clause or to what extent there was a
shared understanding between CSI and PCH.
50. Recognizing this, and apparently with an eye towards invoking the doctrine of
contra proferentem, the parties dedicated the majority of their attention at trial to identifying the
origins of the language that ultimately came to form the Agreement between CSI and PCH.
51. Prior to the formation of PCH and the drafting and execution of the Agreement,
CSI (more specifically, Condon) was involved in setting up an unrelated risk retention group for
intermodal trucking companies in California. Tr. at 19:1-19:17 (Condon Test.). Together with
Risk Services, who was brought into the process by a retail insurance agent operating in
California, CSI participated in a similar process of forming a risk retention group for these
intermodal trucking companies. Tr. at 19:14-19:17 (Condon Test.). It is undisputed that PCH
had no involvement whatsoever in this process.
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52. As part of that transaction, an Administrative Services Agreement was created to
govern the relationship between the risk retention group and CSI, as the insurance program
administrator (the “Intermodal Agreement”). Tr. at 20:12-20:15 (Condon Test.); Def.’s Ex. 10
(Intermodal Agreement) at PCH000042-000048. As described below, the Intermodal Agreement
became the starting point (and, with minor exceptions, the ending point) for the preparation of
the Agreement between CSI and PCH. Most importantly, the arbitration and injunction clauses
in the Intermodal Agreement reappeared verbatim in the Agreement between PCH and CSI. Tr.
at 26:2-26:6, 28:10-28:14 (Condon Test.); compare Def.’s Ex. 10 (Intermodal Agreement) ¶¶ 14,
17, with Pl.’s Ex. 4 (Agreement) ¶¶ 14, 17.
53. The parties’ disagreement here extends to two questions: first, who was
responsible for drafting the Intermodal Agreement in the context of that transaction; and, second,
how the Intermodal Agreement later came to be used as the base for the Agreement between CSI
and PCH. On the first question, the Court finds that the origins of the language used in the
Intermodal Agreement are indeterminate. On the second, the Court finds that Risk Services was
the first to suggest using the Intermodal Agreement as a template of sorts for the Agreement
between CSI and PCH, and that CSI, through Condon, sanctioned its use. Critically, PCH had no
role either in drafting the original Intermodal Agreement or in importing its terms into the
Agreement between it and CSI.
54. Beginning with the first question, no evidence introduced at trial established the
provenance of the Intermodal Agreement, let alone the arbitration clause in that agreement. True,
Condon characterized Risk Services as “the source” of the Intermodal Agreement. Tr. at 23:7-
23:14 (Condon Test.). However, Condon testified that “a combination of people” created the
17
Intermodal Agreement, with responsibility for the “technical details” falling to Risk Services. Tr.
at 20:23-21:3 (Condon Test.). He further conceded that he had no understanding as to the origins
of the Intermodal Agreement. Tr. at 85:2-85:4 (Condon Test.). Indeed, he testified that he was
never told who drafted the Intermodal Agreement, and only speculated that Risk Services “could
have gotten it out of a form book.” Tr. at 29:16-29:18, 31:20-31:22, 34:9-34:12, 35:1-35:18
(Condon Test.).
55. At the same time, Condon’s testimony that his own involvement in preparing the
Intermodal Agreement was limited, and did not extend to the crafting of the arbitration clause, is
unrebutted. Tr. at 25:20-26:1 (Condon Test.). Condon represented that his role in drafting the
Intermodal Agreement was limited to supplying the corporate name of CSI and modifying a
provision pertaining to CSI’s maintenance of certain financial records, Tr. at 20:16-20:20, 29:16-
29:21, 65:20-65:23 (Condon Test.), testimony that is consistent with contemporaneous
correspondence, Pl.’s Ex. 21 (Nov. 5, 2003 E-mail from D. Condon to J. Harkavy) at
PCH000133.
56. Harkavy’s testimony was entirely consistent with Condon’s account. Harkavy
was forthright in conceding that he was aware of no facts suggesting that the language for the
Intermodal Agreement originated with Condon or CSI. Tr. at 114:16-114:20 (Harkavy Test.).
Meanwhile, although Harkavy testified that he maintains a stock of various agreements and
documents helpful in forming a risk retention group, and that he sometimes makes those
agreements and documents available to clients and law firms, Tr. at 100:3-100:11 (Harkavy
Test.), the Court credits his testimony that he did not know who drafted the Intermodal
Agreement, and that it may have been a “template from another form,” Tr. at 100:21-101:6,
18
125:1-125:4, 125:23-126:14 (Harkavy Test.); see also Pl.’s Ex. 8 (Feb. 23, 2004 E-mail from T.
Winch to D. Condon) at PCH000018.
57. From this evidence, the Court’s conclusions are necessarily limited: first, Condon,
though a participant, was not the sole draftsman of the Intermodal Agreement or its arbitration
clause; and second, Risk Services may or may not have supplied the initial draft of the
Intermodal Agreement or based its contents on a form it obtained from other sources. But most
significant for the resolution of the issues now before the Court, it is undisputed that PCH had no
role in drafting the Intermodal Agreement or its arbitration clause.
58. Turning to the second question, the record is more illuminating in ascertaining
how the Intermodal Agreement later came to be used as the base for the Agreement between CSI
and PCH. In short, Risk Services first suggested, and CSI subsequently sanctioned, the use of the
Intermodal Agreement as a starting point for the Agreement between CSI and PCH. Again, PCH
had no role in the matter.
59. On February 20, 2004, Condon wrote Winch, Risk Services’ Director of Captive
Resources, requesting a “draft copy” of the program administrator agreement – i.e., the
agreement between PCH and CSI. Pl.’s Ex. 8 (Feb. 20, 2004 E-mail from D. Condon to T.
Winch) at PCH000019. Winch responded by suggesting that, if CSI was going to provide similar
services to PCH as it did for the intermodal trucking risk retention group, “it make[s] sense to
use that as a base for the CSI agreement, given that both [CSI] and [regulatory authorities] have
used/seen that agreement.” Pl.’s Ex. 8 (Feb. 20, 2004 E-mail from T. Winch to D. Condon) at
PCH000019; see also Tr. at 79:21-80:2 (Condon Test.).
60. Condon agreed, Tr. at 44:11-44:12 (Condon Test.), and Winch subsequently
19
forwarded the Intermodal Agreement to him, Pl.’s Ex. 9 (Mar. 16, 2004 E-mail from T. Winch to
D. Condon) at PCH000038; Tr. at 45:6-45:7 (Condon Test.). There is no suggestion, nor does
the record support the inference, that Risk Services made any changes or edits to the Intermodal
Agreement prior to forwarding it to Condon. Tr. at 67:13-67:15 (Condon Test.).
61. Condon was satisfied with the form of the Intermodal Agreement and at first made
no attempt to tailor its terms to the transaction between CSI and PCH. Pl.’s Ex. 11 (Feb. 24,
2004 E-mail from D. Condon to T. Winch) at PCH000021; Pl.’s Ex. 12 (Mar. 8, 2004 E-mail
from D. Condon to T. Winch) at PCH000023; Pl.’s Ex. 13 (Mar. 8, 2004 E-mail from D. Condon
to T. Winch) at PCH000029; Tr. at 47:12-47:18, 48:17-48:20 (Condon Test.); Tr. at 101:14-
101:16 (Harkavy Test.).
62. However, Risk services subsequently flagged certain ministerial errors in the draft
Agreement. Tr. at 86:12-87:2 (Condon Test.). Specifically, on March 16, 2004, Winch wrote
Condon, noting that the version of the Agreement then being considered still reflected terms
applicable only to the Intermodal transaction. Pl.’s Ex. 14 (Mar. 16, 2004 E-mail from T. Winch
to D. Condon) at PCH000034; Tr. at 51:16-52:3 (Condon Test.). Condon responded, “I guess I
didn’t pay as much attention to it as I thought I did.” Pl.’s Ex. 15 (Mar. 16, 2004 E-mail from D.
Condon to T. Winch) at PCH000037; Tr. at 52:13-52:24 (Condon Test.).
63. Thereafter, on March 17, 2004, Condon wrote Winch attaching a draft of the
Agreement, incorporating his changes from the Intermodal Agreement, and recommending that
the draft be used for the administrative services agreement between CSI and PCH. Pl.’s Ex. 16
(Mar. 17, 2004 E-mail from D. Condon to T. Winch) at PCH000051; Tr. at 54:1-54:4 (Condon
Test.). Again, those changes did not relate to the Arbitration Clause or the Injunction Clause.
20
64. Based on the testimony and documentary evidence presented at trial, the Court
finds that it was Risk Services that first proposed using the Intermodal Agreement as a template
for the Agreement between CSI and PCH, but that Condon, on behalf of CSI, sanctioned and
endorsed its use.
K. Custom And Practice Evidence
65. Finally, the parties also sought to introduce evidence at trial concerning the
broader use of arbitration provisions in the insurance industry, as well as in the more specific
context of agreements governing the formation of risk retention groups.5 In this regard, CSI
offered the testimony of Condon and Godfrey, while PCH relied upon Harkavy’s testimony.
66. Over the course of his career, Condon has obtained approximately six insurance
designations, including Certified Property and Casualty Underwriter and Registered Professional
Liability Underwriter. Tr. at 16:8-16:11 (Condon Test.). Condon considers himself to be an
“expert” in the insurance industry. Tr. at 37:9-37:11 (Condon Test.). He is also a licensed
attorney and a member in good standing of the California bar. Tr. at 16:18-16:24 (Condon
Test.).
67. Substantively, Condon testified that agreements with standard insurance carriers
“invariably” include arbitration clauses. Tr. at 83:11-83:19 (Condon Test.). However, Condon’s
generalized testimony did not address the nature of those arbitration clauses or, for that matter,
5
Although the term “expert” was occasionally deployed by the parties, both sides
effectively relied on the testimony of lay witnesses. The Court has considered such testimony to
the extent it was rationally based upon the witnesses’ observations and personal knowledge. See
Fed. R. Evid. 701; cf. Medina v. District of Columbia, __ F. Supp. 2d __, 2010 WL 2473700, at
*19 (D.D.C. June 18, 2010). The Court need not belabor the point; regardless of how the
testimony is characterized, the Court finds that there is insufficient record support to establish a
discernible custom and practice as to the use of arbitration clauses in this context.
21
the nature of agreements involving standard insurance carriers and their relationship to
agreements involving risk retention groups. Nor did Condon articulate how the language of such
clauses compare or contrast to the language at issue in this case. Moreover, Condon admitted
that he has only been involved in the creation of two risk retention groups – the one involving
intermodal trucking companies in California and the one at issue here. Tr. at 82:25-83:5
(Condon Test.); see also Tr. at 90:8-90:11 (Godfrey Test.). In each case, the arbitration clause
was subject to the same ambiguity. For these reasons, whether considered together or
independently, the Court finds Condon’s testimony is entitled to little weight in ascertaining
whether there is a custom or practice as to the use of mandatory arbitration clauses in this
context.
68. Godfrey, the President and founder of CSI, has worked in the insurance business
for over thirty-five years. Tr. at 88:12-89:5 (Godfrey Test.). During that period, he has formed
various insurance-related entities, including his own agency in 1997, a carrier in 1989, and CSI in
1999. Tr. at 88:22-89:5 (Godfrey Test.).
69. Godfrey testified that arbitration clauses are “very standard” in agreements with
insurance carriers, and characterized arbitration as “a standard in the industry,” particularly where
parties enter into long-term relationships. Tr. at 93:11-94:2 (Godfrey Test.). He further testified
that “every [agreement] that [he has] ever seen had [an arbitration agreement] in there.” Tr. at
93:18-93:19 (Godfrey Test.). As was the case with Condon, Godfrey’s testimony related to the
insurance industry as a whole, and did not specifically address agreements involving risk
retention groups, with which he admittedly has minimal experience. Tr. at 90:8-90:11 (Godfrey
Test.). Godfrey did not specify whether the alleged industry standard was permissive or
22
mandatory arbitration, nor did he articulate how the language of these clauses compare or
contrast to the language at issue in this case. For these reasons, whether considered together or
independently, the Court finds Godfrey’s testimony to be minimally probative of whether there is
a custom or practice as to the use of mandatory arbitration clauses in this context.
70. Harkavy is the Executive Vice President and General Counsel of Risk Services,
positions he has held for approximately twenty years. Tr. at 98:3-98:9 (Harkavy Test.). Harkavy
testified that he has seen at least fifty risk retention group agreements over the course of his
career, and that there is no standard as to the inclusion or content of arbitration clauses in such
agreements. Tr. at 104:17-105:4, 117:10-117:18 (Harkavy Test.). When pressed, Harkavy was
unable to provide an estimate as to what percentage of such agreements contain arbitration
clauses. Tr. at 105:11-105:14 (Harkavy Test.). Harkavy also testified that most arbitration
provisions in insurance contracts are more detailed and expansive than the one at issue in this
action, and frequently delineate procedures for commencing and conducting arbitration
proceedings. Tr. at 103:20-104:16 (Harkavy Test.).
71. The Court finds that Harkavy’s somewhat more specific testimony is entitled to
some, but not substantial, weight. However, even absent Harkavy’s testimony, the Court would
find – as it does now – that the record simply does not establish, by a preponderance of the
evidence, that there is a custom or practice of using mandatory arbitration clauses either in the
risk retention group context or the broader insurance industry.
23
III. CONCLUSIONS OF LAW
Based upon the foregoing Findings of Fact, the Court makes the following Conclusions of
Law:
1. The Federal Arbitration Act (“FAA”) provides that “[a] written provision in any
. . . contract evidencing a transaction involving commerce to settle by arbitration a controversy
thereafter arising out of such contract . . . or the refusal to perform the whole or any part thereof
. . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in
equity for the revocation of any contract.” 9 U.S.C. § 2. Where a district court is satisfied that
an issue is referable to arbitration under a written agreement, it must “stay the trial of the action
until such arbitration has been had in accordance with the terms of the agreement.” 9 U.S.C. § 3.
In this regard, the FAA “leaves no place for the exercise of discretion by a district court, but
instead mandates that district courts shall direct the parties to proceed to arbitration on issues as
to which an arbitration agreement has been signed.” Dean Witter Reynolds, Inc. v. Byrd, 470
U.S. 213, 218 (1985) (emphasis in original).
2. Determining whether a contract indicates an agreement to arbitrate is typically a
task for the courts, rather than arbitrators. See Howsam v. Dean Witter Reynolds, Inc., 537 U.S.
79, 84 (2002) (“a gateway dispute about whether the parties are bound by a given arbitration
clause raises a ‘question of arbitrability’ for a court to decide.”).
3. As the Supreme Court has emphasized, the FAA “strongly favors the enforcement
of agreements to arbitrate as a means of securing ‘prompt, economical and adequate solution of
controversies,’” Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 479-80
(1989) (quoting and overruling Wilko v. Swan, 346 U.S. 427, 438 (1953)), and requires that
24
courts “rigorously enforce agreements to arbitrate,” Byrd, 470 U.S. at 217. In accordance with
this salutary statutory purpose, where an agreement contains a valid arbitration clause, “any
doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration,”
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983), and “an order
to arbitrate [a] particular grievance should not be denied unless it may be said with positive
assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted
dispute,” AT & T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 650 (1986) (internal
quotation marks and notations omitted).
4. At the same time, it is fundamental that arbitration is a matter of consent. Stolt-
Nielsen S.A. v. AnimalFeeds Int’l Corp., __ U.S. __, 130 S. Ct. 1758, 1775 (2010). Indeed,
“arbitration is a matter of contract and a party cannot be required to submit to arbitration any
dispute which he has not agreed so to submit.” AT & T Techs., 460 U.S. at 648 (internal
quotation marks omitted). The district court may “not override the clear intent of the parties, or
reach a result inconsistent with the plain text of the contract, simply because the policy favoring
arbitration is implicated.” Equal Emp’t Opportunity Comm’n v. Waffle House, Inc., 534 U.S.
279, 294 (2002). “After all, the basic objective . . . is not to resolve disputes in the quickest
manner possible . . . but to ensure that commercial arbitration agreements, like other contracts,
are enforced according to their terms.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,
947 (1995) (internal citation and quotation marks omitted).
A. CSI Bears The Burden Of Establishing That The Parties Intended To Agree To
The Mandatory Arbitration Of Disputes
5. Because arbitration is a matter of consent, the general presumption in favor of
arbitrability simply “does not apply to the [threshold] determination of whether there is a valid
25
agreement to arbitrate between the parties,” a question that is resolved by reference to ordinary
state-law principles governing the formation of contracts.6 Institut Pasteur v. Chiron Corp., 2005
WL 366968, at *10 (D.D.C. Feb. 16, 2005) (quoting Fleetwood Enters. Inc. v. Gaskamp, 280
F.3d 1069, 1073 (5th Cir. 2002)); see also First Options, 514 U.S. at 943-44; Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941). It is only after the district court concludes
that a binding agreement to arbitrate exists that the presumption in favor of arbitrability comes
into effect. First Options, 514 U.S. at 944-45. Accordingly, the Court turns to the question of
whether CSI, the party who seeks to compel arbitration, has met its burden of establishing the
existence of a mandatory agreement to arbitrate disputes between the parties, without the benefit
of any presumption for or against arbitrability.
B. The Arbitration Clause Is Ambiguous7
6. Under District of Columbia law, “the party asserting the existence of a contract
has the burden of proving its existence.” Bailey v. Fed. Nat’l Mortg. Ass’n, 209 F.3d 740, 746
(D.C. Cir. 2000) (citing Ekedahl v. COREStaff, Inc., 183 F.3d 855, 858 (D.C. Cir. 1999) (per
curiam)). In this context, that burden extends to proving that there was an agreement to all
material terms and that the parties intended to submit to mandatory arbitration. Bailey, 209 F.3d
at 745. CSI, as the party seeking to compel arbitration, concedes that it bears the burden of proof
6
This Court previously held that the Agreement is governed by District of Columbia law,
PCH Mut. Ins. Co., 569 F. Supp. 2d at 72-73, a conclusion only further bolstered by the evidence
presented at trial, see Tr. at 55:17-55:21 (Condon Test.).
7
Although the Court previously held that the Arbitration Clause at issue here is
ambiguous, PCH Mut. Ins., 569 F. Supp. 2d at 74-77, and CSI concedes the point, see Tr. at
12:1-12:2, the Court shall revisit relevant parts of its prior analysis here, as the textual ambiguity
necessarily informs other aspects of its decision today.
26
of establishing the existence of an enforceable agreement. Tr. at 5:25-6:3. For the reasons set
forth below, CSI has simply failed to meet that burden.
7. When charged with construing the terms of a contract, a court should begin with
the text of the agreement itself, giving the language chosen by the parties – which is presumed to
be the most reliable indicator of the parties’ intent – its plain meaning. Dyer v. Bilaal, 983 A.2d
349, 355 (D.C. 2009). The inquiry is an objective one: the court must determine what meaning a
“reasonable person in the position of the parties” would attach to the disputed language. DLY-
Adams Place, LLC v. Waste Mgmt. of Md., Inc., 2 A.3d 163, 166 (D.C. 2010) (internal quotation
marks omitted). In pursuing this inquiry, the court should consider the disputed language within
the context of the entire contract, seeking to give effect to each provision. Hunt Constr. Grp.,
Inc. v. Nat’l Wrecking Corp., 587 F.3d 1119, 1121 (D.C. Cir. 2009).
8. A contract is not ambiguous merely because the parties disagree over its meaning
or could have drafted clearer terms. Tran ex rel. Estate of Le v. Carr, 708 F. Supp. 2d 1, 6
(D.D.C. 2010) (citing Dist. No. 1-Pac. Coast Dist. v. Travelers Cas. & Sur. Co., 782 A.2d 269,
274 (D.C. 2001)); see also In re Bailey, 883 A.2d 106, 118 (D.C. 2005) (“none of the provisions
at issue here are ambiguous, although the agreement is poorly drafted.”). “The relevant question
is not whether the contract uses the most precise language a court can imagine ex post.” Hunt
Constr., 587 F.3d at 1122. Instead, “[a] contract is ambiguous when, and only when . . . the
provisions in controversy are[] reasonably or fairly susceptible to different constructions [or]
interpretations, or two or more different meanings.” DLY-Adams Place, 2 A.3d at 166-67(internal quotation marks omitted and notations altered); accord Mamo v. Skvirsky, 960 A.2d
595, 599-600 (D.C. 2008). The Court concludes that the Arbitration Clause is reasonably or
27
fairly susceptible to at least two different constructions.
9. The Arbitration Clause provides as follows:
17. Arbitration. Any disputes concerning any aspect of this
Agreement may be submitted to binding arbitration. The
prevailing party shall be entitled to recover all costs incurred,
including reasonable attorney’s fees.
Pl.’s Ex. 4 (Agreement) ¶ 7.
10. CSI contends that reading the word “may” in the Arbitration Clause as permissive
would amount to no more than a barren recital that the parties might in the future agree to
arbitrate a dispute. True, District of Columbia law does not require parties to employ any “magic
words,” such as “mandatory” or “binding,” to establish an enforceable, mandatory agreement to
arbitrate. Bryson v. Gere, 268 F. Supp. 2d 46, 52 (D.D.C. 2003). CSI is also correct that, under
District of Columbia law, “[i]t is a settled rule of contract interpretation that contract language
should not be interpreted to render the contract promise illusory or meaningless.” Caglioti v.
Dist. Hosp. Partners, LP, 933 A.2d 800, 811 (D.C. 2007) (quoting Retail Clerks Int’l Ass’n
Local No. 455, AFL-CIO v. Nat’l Labor Relations Bd., 510 F.2d 802, 806 n.15 (D.C. Cir. 1975)).
Based upon this principle, the Courts of Appeals for the Fourth and Eighth Circuits have
concluded that the use of the word “may” did not render certain arbitration clauses permissive
because such an interpretation would leave the clause devoid of meaning. See United States v.
Bankers Ins. Co., 245 F.3d 315, 320-21 (4th Cir. 2001); Am. Italian Pasta Co. v. Austin Co., 914
F.2d 1103 (8th Cir. 1990);8 see also Detroit Edison Co. v. Burlington N. & Santa Fe Ry. Co., 442
8
As explained in the Court’s prior opinion, the Arbitration Clause at issue in this case
departs from the clauses considered by these courts because, in addition to providing that parties
“may” submit disputes to binding arbitration, it goes on to provide that the party that prevails in
arbitration “shall be entitled to recover all costs incurred, including reasonable attorney’s fees.”
28
F. Supp. 2d 387, 391 n.2 (E.D. Mich. 2006) (suggesting that if parties intended to agree only to
permissive arbitration, they could have provided that “either party may seek resolution of the
question or controversy pursuant to binding arbitration or through litigation.”) (emphasis in
original).
11. More persuasively, CSI underscores that the Agreement also includes an
Injunction Clause reserving to PCH the right to seek an injunction to enforce the Agreement.
Pl.’s Ex. 4 (Agreement) ¶ 14. There is some force to the argument that, unless the Arbitration
Clause is read to require mandatory arbitration, there would be little reason to expressly carve out
a right to injunctive relief. Though perhaps a close call, given the relatively perfunctory language
chosen by the parties, the presence of the Injunction Clause, and the apparent (but not
unresolvable) anomaly that might result if the first sentence was read as merely permissive, it is
plausible to interpret the Arbitration Clause as an expression of a mandatory arbitration
agreement.
12. Nevertheless, as a general matter of contract law, the word “may” is viewed as a
permissive, rather than mandatory, term, particularly when used in contraposition to the word
“shall.” See Jama v. Immigration & Customs Enforcement, 543 U.S. 335, 346 (2005); Ace
Constructors, Inc. v. United States, 70 Fed. Cl. 253, 288 (Fed. Cl. 2006), aff’d, 499 F.3d 1357(Fed. Cir. 2007). Indeed, at least one court within this District has persuasively held that the use
of the word “may” in an arbitration clause between private parties “evinces the parties’ intent not
Pl.’s Ex. 4 (Agreement) ¶ 17. As such, another plausible interpretation of the arbitration clause is
that arbitration is permissive, not mandatory, but that if the parties agree to arbitrate, the loser
pays the winner’s attorneys’ fees.
29
to be bound to invoke the arbitration machinery to settle their disputes.” Group Hospitalization
& Med. Servs., Inc. v. Stubbs, 1990 WL 183576, at *2 (D.D.C. Nov. 16, 1990).
13. Significantly, the first sentence of the Arbitration Clause at issue here provides
that any dispute concerning the Agreement “may be submitted to binding arbitration,” while the
second sentence provides that the party that prevails in arbitration “shall be entitled to recover all
costs incurred, including reasonable attorney’s fees.” Pl.’s Ex. 4 (Agreement) ¶ 17 (emphasis
added). The Court concludes that the provision may reasonably be read merely to contemplate
the possibility of arbitration, without mandating its use. Under this interpretation, only where the
parties voluntarily elect to proceed to arbitration does the provision’s mandatory effect come into
play: in such circumstances, the provision would require the losing party to pay the prevailing
party’s costs and attorneys’ fees. In other words, construing its plain language from an objective
point of view, the Arbitration Clause may be seen as little more than a fee-shifting provision.
14. In Flynn v. Ohio Bldg. Restoration, Inc., 260 F. Supp. 2d 156 (D.D.C. 2003), the
court addressed a provision with a similar structure in concluding that the parties had not agreed
to the use of mandatory grievance procedures. There, the relevant contractual language provided:
A charge of violation of this Article . . . may be filed by the Union
and/or the trustees of any of the joint trust funds provided for in this
Agreement, and shall be considered a dispute under this Agreement
and shall be processed in accordance with the procedures for handling
of grievances and the final binding resolution of disputes.
Id. at 163 (emphasis added). The court construed the interplay between the words “may” and
“shall” as merely requiring, in the event the Union or the trustees “exercise[d] their discretion to
initiate the arbitration procedures, [that] any such charge must then be processed according to the
grievance procedures set forth in the CBA.” Id. at 166. Likewise, the Arbitration Clause at issue
30
here may fairly be read to have a mandatory effect (in requiring the shifting of fees) only after the
parties have voluntarily decided to litigate their disputes before an arbitral body.
15. The reasonableness of this construction is supported by the fact that, elsewhere in
the Agreement, the parties proved themselves capable of drafting terms with clear binding effect,
most often through the use of the word “shall.” See, e.g., Pl.’s Ex. 4 (Agreement) ¶¶ 3, 5-8, 10,
12; cf. Raytheon Eng’rs & Constructors, Inc. v. SMS Shloemann-Siemag Akiengesellschaft, 2000
WL 420866, at *3 (N.D. Ill. Mar. 16, 2000) (if the parties intended to grant one another the
unilateral right to impose arbitration, separate provisions providing for unilateral rights
evidenced that they knew how). It is also consonant with the parties’ proven ability to combine
discretionary rights and mandatory obligations through the interplay of the words “may” and
“shall.” See, e.g., Pl.’s Ex. 4 (Agreement) ¶¶ 4, 9.
16. Other aspects of the Arbitration Clause demonstrate further ambiguity as to
whether the parties intended to provide for mandatory arbitration of disputes. The clause does
not identify the arbitrator, a method for choosing the arbitrator, or a place of arbitration. While
this shortcoming does not necessarily prove that the parties did not reach a “meeting of the
minds,” it is probative of whether the parties actually considered or agreed upon all material
terms of an agreement to arbitrate. Cf. PainWebber Inc. v. Chase Manhattan Private Bank
(Switzerland), 260 F.3d 453, 463 (5th Cir. 2001) (concluding that failure to identify geographic
location for arbitration or the arbitral forum “simply leaves too many critical elements
unaddressed to support [the] contention that the . . . Agreement, standing alone, amounts to a
binding arbitration agreement between the parties.”).
17. The Court therefore concludes that the Arbitration Clause may reasonably be read
31
simply as a permissive arbitration clause, coupled with a fee-shifting provision. In fact, given the
provision’s use of the word “may,” considered alongside the parties’ proven ability to draft
language unequivocally establishing binding rights and obligations, the Court is inclined to
conclude that this is the most reasonable reading of the Arbitration Clause. However, based
upon the language of the Arbitration Clause alone, the Court cannot determine which of these
interpretations is correct as a matter of law.
C. The Preponderance Of The Extrinsic Evidence Does Not Establish That The
Parties Intended To Submit To Mandatory Arbitration
18. Without a “meeting of the minds” as to all material terms, there can be no
enforceable contract. Bailey, 209 F.3d at 746 (citing Jack Baker, Inc. v. Office Space Dev. Corp.,
664 A.2d 1236, 1238 (D.C. 1995)); see also Restatement (Second) of Contracts § 201(3) (1981)
(where parties to an agreement attached different meanings to a term thereof, and neither party
had reason to know of the meaning attached by the other, “neither party is bound by the meaning
attached by the other, even though the result may be a failure of mutual assent.”).
19. Once a court determines that a contract is ambiguous, the court may look to any
extrinsic evidence demonstrating the intent of the parties at the time of contracting. Dyer, 983
A.2d at 355; see also Ekedahl, 183 F.3d at 858 (“Proof of a meeting of the minds may be found
either in the written agreement or, if the agreement is ambiguous, in the parties’ actions at the
time of contract formation.”). Indeed, “[w]here an ambiguity is present, the intent and
understanding of the parties is of critical importance.” Howard Univ. v. Lacy, 828 A.2d 733, 737
(D.C. 2003). Under District of Columbia law, extrinsic evidence may include (a) the
circumstances surrounding the making of the contract, including preliminary negotations and
discussions, (b) customary practices of which either party knows or has reason to know, and (c)
32
the course of conduct of the parties under the contract. In re Bailey, 883 A.2d at 118. Even here,
however, the focus remains on what a reasonable person in the position of the parties would have
thought the disputed language meant. Dyer, 983 A.2d at 355.
20. As set forth above, the record is clear: nobody dedicated much attention to the
Agreement; there were no contemporaneous discussions regarding the Arbitration Clause; and
the only evidence having any bearing upon the parties’ interpretation of the Arbitration Clause
relates only to CSI’s professed understanding, which was never conveyed to PCH or any of its
representatives prior to execution of the Agreement. CSI concedes, as it must, that there is no
evidence on the record establishing one way or the other whether PCH intended or understood
the Arbitration Clause to require mandatory arbitration.9 Tr. at 146:3-146:19. For obvious
reasons, the minimally persuasive testimony from Godfrey and Condon that they unilaterally
understood the Arbitration Clause to require mandatory arbitration cannot establish a shared
intention or a meeting of the minds between CSI and PCH. Recognizing this, CSI resorts to
various arguments, some more half-baked than others, in support of its contention that the parties
intended to agree to mandatory arbitration, none of which are of any avail. The Court addresses
9
It is not entirely clear whether CSI’s “promoter” theory, discussed in greater detail
below, is meant to encompass an argument that Barrick or Risk Services’ intent may be imputed
to the future PCH. To the extent CSI intends to suggest that Barrick should be viewed as
representing the future PCH in the course of drafting the Agreement, the Court has rejected that
suggestion. Regardless, the record is clear that Barrick made no changes and offered no
commentary to the Agreement. Similarly, to the extent CSI intends to suggest that Risk Services
should be viewed as representing the future PCH in the course of drafting the Agreement, the
Court has rejected that contention as well. Not only did Condon admit that he did not view Risk
Services as negotiating on behalf of PCH, but the record does not permit the inference that any
one of the three principal entities involved in the process of forming PCH – CSI, Risk Services,
and PCALIC – was more of a “representative” to PCH than the others. In any event, there is no
evidence that Risk Services understood the Arbitration Clause to require mandatory arbitration
either.
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each in turn.
21. CSI first argues that arbitration clauses are the norm in the insurance industry.
Generally, an industry custom or practice must be “definite, uniform, and well known, and it
must be established by ‘clear and satisfactory evidence.’” Howard Univ. v. Best, 547 A.2d 144,
151 (D.C. 1988); Weaver v. Du Pont, 119 A.2d 716, 716 (D.C. 1956); accord Law Debenture
Trust Co. of New York v. Maverick Tube Corp., 595 F.3d 458, 466 (2d Cir. 2010) (applying New
York law). Simply put, CSI has failed to prove, by a preponderance of the evidence, that there is
any custom or practice concerning the use of arbitration clauses in this context, let alone one
sufficiently “definite, uniform, and well known” to justify its use as extrinsic evidence of the
parties’ intent. See Diskin v. J.P. Stevens & Co., Inc., 836 F.2d 47, 51-52 (1st Cir. 1987)
(applying New York law, concluding that party could not establish arbitration was customary
method of resolving disputes through vague and unspecific evidence).
22. CSI next argues that the absence of extrinsic evidence is of no moment merely by
virtue of the fact that representatives of CSI and PCH signed the Agreement. The argument is
perplexing. True, a meeting of the minds may be evidenced by the terms of a signed written
agreement, Davis v. Winfield, 664 A.2d 836, 838 (D.C. 1995), but that truism is of no use here
given the patent ambiguity in the Arbitration Clause. Cf. Bryson, 268 F. Supp. 2d at 52 (although
arbitration clauses need not expressly state that they are “mandatory,” there must nevertheless be
“other indications” of an intent to consent to binding arbitration). The same holds true for CSI’s
curious argument that principles of equitable estoppel preclude any effort by PCH to suggest that
the Agreement is unenforceable on the grounds that PCH had yet to be formed as of the date of
the Agreement. In effect, both arguments beg the question. PCH has never claimed that it is not
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bound by the Agreement or, more specifically, the Arbitration Clause; rather, it has simply
maintained that the Arbitration Clause does not require binding arbitration, and CSI has not
adduced any evidence suggesting that the parties’ shared understanding was otherwise.
23. Even considering all of the extrinsic evidence on the record, the Court cannot
conclude that a reasonable person in the position of the parties would have construed the
Arbitration Clause as requiring arbitration of the parties’ disputes. CSI has simply fallen
woefully short of establishing, by a preponderance of the evidence, that there was a “meeting of
the minds” between CSI and PCH as to the nature of the Arbitration Clause. There being no
“mutual consent on the issue, there [can] be no binding contractual commitment.” Local Union
1395, Int’l Bhd. of Elec. Workers, AFL-CIO v. Nat’l Labor Relations Bd., 797 F.2d 1027, 1036
(D.C. Cir. 1986); see also ISC Holding AG v. Nobel Biocare Invs. N.V., 351 Fed. Appx. 480, 481
(2d Cir. 2009) (summary order) (“Without a meeting of the minds such that an enforceable
agreement to arbitrate was formed, we will not compel arbitration.”). Accordingly, by operation
of the Savings Clause and substantive federal arbitration law, the Arbitration Clause in effect
drops out from the Agreement. See Rent-a-Center, W., Inc. v. Jackson, __ U.S. __, 130 S. Ct.
2772, 2778 (2010) (as a matter of substantive federal arbitration law, an arbitration provision is
severable from the remainder of the contract).
D. CSI Cannot Salvage Its Motion By Resort To The Doctrine Of Contra
Proferentem
24. Under the doctrine of contra proferentem, “any ambiguity as to [a] contract’s
meaning will be construed strongly against the drafter.” Dyer, 983 A.2d at 355; see also
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62 (1995) (addressing the doctrine
within the context of federal arbitration law). “This canon of construction . . . is a ‘secondary’
35
standard of interpretation, and inferior to extrinsic proof of the parties’ agreement, or to other
authority revealing that understanding.” Am. Bldg. Maint. Co. v. L’Enfant Plaza Props., Inc.,
655 A.2d 858, 863 (D.C. 1995) (internal citation and quotation marks omitted); accord In re
Bailey, 883 A.2d at 118.
25. The rationale undergirding the doctrine has been aptly described as follows:
Where one party chooses the terms of a contract, he is likely to
provide more carefully for the protection of his own interests than for
those of the other party. He is also more likely than the other party to
have reason to know of uncertainties of meaning. Indeed, he may
leave meaning deliberately obscure, intending to decide at a later date
what meaning to assert. In cases of doubt, therefore, so long as other
factors are not decisive, there is substantial reason for preferring the
meaning of the other party.
Restatement (Second) of Contracts § 206 cmt. a; see also Mastrobuono, 514 U.S. at 63 (“The
reason for this rule is to protect the party who did not choose the language from an unintended or
unfair result.”).
26. Clearly, the doctrine cannot be invoked against PCH on the basis that it directly
drafted the Agreement (or, more specifically, the Arbitration Clause). The record supports only
one conclusion: PCH had no direct role in selecting the language for the Agreement between it
and CSI or, for that matter, in deciding to use the Intermodal Agreement as a base for drafting the
Agreement. Therefore, PCH cannot be said to be the draftsman of the Agreement; indeed, it was
hardly a participant.
27. Nor does CSI appear to suggest otherwise. Instead, CSI’s principal argument (so
far as the Court can tell) is as follows: non-party Risk Services drafted Agreement; Risk Services
was a “promoter” of the future PCH; therefore, Risk Services’ role as the “draftsman” of the
Agreement should be imputed to PCH and the doctrine of contra proferentem requires the
36
Arbitration Clause to be interpreted in CSI’s favor. For several reasons, the argument is without
merit.
28. As an initial matter, to the Court’s knowledge, no Court has ever extended the
“promoter” theory to invoke the doctrine of contra proferentem under circumstances such as
those presented here. Under certain circumstances, preliminary contracts executed on a
corporation’s behalf by its agent before the corporation formally comes into existence may be
imputed to the corporation’s “promoter” or vice versa. See generally Richard A. Lord, Williston
on Contracts § 35:71 (4th ed. 2010). Here, CSI again misconstrues the nature of PCH’s
objections to arbitration. PCH has never claimed it is not bound by the Agreement in toto; it
simply has proffered an alternative, and entirely reasonable, interpretation of the Arbitration
Clause. More to the point, the “promoter” theory has no application here because the Agreement
was executed by Harvey, who subsequently became the first president of PCH and a member of
its Board of Directors, and not anyone from Risk Services.
29. In any event, CSI’s argument fails at the outset for the simple reason that the
record does not support the conclusion that Risk Services drafted the Agreement between CSI
and PCH. Apart from some superficial edits that Harkavy may or may not have made to the
Agreement, Condon, on behalf of CSI, was the only individual to make changes to the
Agreement. Further, to the extent the Intermodal Agreement is even relevant, the origins of the
language used in that agreement are indeterminate. See Champagne v. Victory Homes, Inc., 897
A.2d 803, 806 n.5 (Me. 2006) (doctrine of contra proferentem could not be invoked where
record was silent as to who drafted arbitration provision); Nadherny v. Roseland Prop. Co., Inc.,
390 F.3d 44, 51 (1st Cir. 2004) (doctrine of “no utility” where “unclear who drafted the
37
contract”). There are, of course, instances in which it cannot be determined that one party rather
than the other chose the specific words of the contract, and this is one of them. Based on the
record created by the parties, there simply is no evidentiary basis for the Court to conclude that
Risk Services was the draftsman of the Agreement, or its Arbitration Clause.
30. Moreover, Condon had the capacity to (and in fact did) make changes to the
Agreement on CSI’s behalf. In fact, he was the only individual to make substantive changes to
the Agreement. In addition, while Risk Services was the first to suggest using the Intermodal
Agreement as a template for the Agreement between CSI and PCH, the record evidences that
CSI, through Condon, sanctioned and in fact endorsed its use. Under these circumstances, there
is no credible concern that CSI was somehow unprotected from an unintended or unfair
interpretation of the chosen language such that would justify invoking the doctrine of contra
proferentem. See Transformational Strategies Consulting, Inc. v. ACS State Healthcare, LLC,
526 F. Supp. 2d 66, 71 n.5 (D.D.C. 2007) (applying New York law, concluding that ambiguities
could not be construed against the drafter of the parties’ initial agreement where both parties
participated in the drafting of the amendment).
31. Finally, even assuming, arguendo, that Risk Services could be deemed the
exclusive draftsman, CSI has not shown that Risk Services was operating as the “promoter” of
the future PCH in the context of drafting the Agreement between CSI and PCH. Generally
speaking, “promoters” are defined as individuals who take an active part in organizing a
corporation prior to its coming into being. Shoreham Hotel Ltd. P’ship v. Wilder, 866 F. Supp. 1,
4 (D.D.C. 1994); see also Jones v. Health Res. Corp. of Am., 509 A.2d 1140, 1146 n.15 (D.C.
1986) (promoters procure for the future corporation the rights, instrumentalities, and capital to
38
enable it to do business). As previously indicated, Condon readily conceded that he did not view
Risk Services as negotiating on behalf of PCH in the context of drafting the Agreement, and the
record does not permit the inference that any one of the three principal entities involved in the
process of forming PCH – CSI, Risk Services, and PCALIC – was more of a “representative” of
PCH than the others. If anything, the Court would be inclined to conclude that CSI – whose
principal extended a $130,000 loan to PCH to ensure that it would have sufficient capital for its
formation – is the most viable candidate for so-called “promoter” status.
32. For all these reasons, the Court concludes that the doctrine of contra proferentem
has no applicability to the present Motion.
IV. CONCLUSION
The Court has considered the remaining arguments tendered by the parties and has
concluded that they are without merit. Accordingly, based upon the foregoing Findings of Fact
and Conclusions of Law, the Court shall DENY CSI’s [8] Motion to Compel Arbitration and
Stay Proceedings. An appropriate Order accompanies these Findings of Fact and Conclusions of
Law.
Date: November 15, 2010
/s/
COLLEEN KOLLAR-KOTELLY
United States District Judge
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