John F. Harkins Company, Inc. v. The Waldinger Corporation , 796 F.2d 657 ( 1986 )

OPINION OF THE COURT

ALDISERT, Chief Judge.

This appeal involves a dispute between a contractor and subcontractor. The district court held that a seemingly broad arbitration provision set forth in one clause of the subcontract was limited by another subcontract clause which incorporated a narrow arbitration clause contained in the primary or principal contract between the contractor and the project manager. The crucial issue is whether we characterize the function performed by the district court as contract interpretation or contract construction. We hold that the district court was interpreting language contained in the contracts, rather than deciding the legal relations between the parties, and therefore review its determination under the clearly erroneous standard. Ram Construction Co. v. American States Insurance Co., 749 F.2d 1049, 1052-53 (3d Cir.1984). We further conclude that the court’s interpretation was not clearly erroneous and will therefore affirm.

I.

John F. Harkins Co. was one of several primary contractors on the construction project for the Atlantic City Hilton Casino/Hotel. Harkins contracted with Hilton and the construction manager, Tishman Construction Co., to install the heating, ventilation, and air conditioning systems. Harkins subcontracted sheetmetal duct-work to Waldinger Corporation.

On November 9, 1984, Waldinger commenced an arbitration proceeding against Harkins before the American Arbitration Association, pursuant to what it considered a mandatory arbitration clause in the subcontract. Waldinger alleged that Harkins had “changed the conditions, sequence and schedule under which [Waldinger’s] work was to be performed ...” resulting in excess costs to Waldinger, and requested an award of $6 million. App. at 34. Harkins disagreed that this was subject to arbitration. It then initiated this action in New Jersey state court seeking to enjoin the arbitration. Harkins relied on a restrictive arbitration clause in the primary contract, which Harkins maintains was incorporated into its subcontract with Waldinger, a clause that limits arbitration to disputes over signed change orders. Waldinger then removed the state court action to federal district court.

The district court agreed with Harkins and held that this dispute was not covered by the arbitration clause. It concluded that “the proper interpretation of the disputed contractual provisions limits arbitrability to disputes over signed change orders____” App. at 60. The court determined that this was the primary contract arbitration limitation and that this limitation was incorporated into the subcontract. Because Waldinger’s dispute did not involve a signed change order, the court ruled that it was not arbitrable. The court therefore denied Waldinger’s motion for a stay of the district court action pending arbitration, and granted Harkins’ motion to stay the arbitration. Id. Waldinger appeals. We have jurisdiction under 28 U.S.C. § 1292(a)(1). J & R Sportswear & Co. v. Bobbie Brooks, Inc., 611 F.2d 29, 29 (3d Cir.1979); Becker Autoradio U.S.A., Inc. v. Becker Autoradiowerk GmbH, 585 F.2d 39, 42 n. 7 (3d Cir.1978).

II.

Before us Waldinger contends that the district court erred in construing the contract’s arbitration language. Although terms of an injunction are normally reviewed for abuse of discretion, any determination that is a prerequisite to the issuance of an injunction, i.e., the term of a contractual arbitration provision, is reviewed according to the standard applicable to that particular determination. See Weiss v. York Hospital, 745 F.2d 786, 829-30 (3d Cir.1984). Therefore, the crucial task before us is to decide the appropriate standard of review of the district court’s examination of the contractual arbitration provisions.¹ Both Waldinger and Harkins cite Ram Construction Co. v. American States Insurance Co., 749 F.2d 1049 (3d Cir.1984), for different standards of review on this issue. We agree that Ram Construction controls.

In Ram Construction, we distinguished between the standards of review for contract interpretation and contract construction. Id. at 1052-53. Contract interpretation is a question of fact, and review is according to the clearly erroneous standard. Id. at 1053. In contrast, contract construction is a question of law mandating plenary review. Id. Harkins argues that this case turns on interpreting the contract’s terms in order to ascertain the intent of the parties. Waldinger contends that the case pivots on construing the contract according to law.

The distinction between interpretation and construction is not always easy. Professor Corbin described the distinction:

By “interpretation of language” we determine what ideas that language induces in other persons. By “construction of the contract,” as that term will be used here, we determine its legal operation— its effect upon the action of courts and administrative officials. If we make this distinction, then the construction of a contract starts with the interpretation of its language but does not end with it; while the process of interpretation stops wholly short of a determination of the legal relations of the parties. When a court gives a construction to the contract as that is affected by events subsequent to its making and not foreseen by the parties, it is departing very far from mere interpretation of their symbols of expression, although even then it may claim somewhat erroneously to be giving effect to the “intention” of the parties.

3 Corbin, Corbin on Contracts § 534 at 9 (1960) (footnotes omitted). Our opinion in Ram Construction further illuminates the distinction between contract interpretation and contract construction. In that case we were faced with the question of whether the provisions of a contract for removal of one rock slide from a roadway covered a subsequent rock slide, or whether the actions of the parties had created a second contract. Speaking through Judge Weis, we said:

[T]he decision that two separate agreements for slide removal existed was one of contract construction, not interpretation. As the surety states and the record confirms, there are no differences between the parties on the material terms of the Slide II agreement. The amount and type of work, compensation, time and method of carrying out the work, and other details are not contested. No question of interpretation is presented, only the construction of the agreement; that is whether Slide II is to be considered legally part of the December 8, 1982 contract or as a separate agreement.

749 F.2d at 1053. We also quoted Professor Patterson: “ ‘Construction, which may be usefully distinguished from interpretation, is a process by which legal consequences are made to follow from the terms of the contract and its more or less immediate context, and from a legal policy or policies that are applicable to the situation.’ ” Id. (quoting Patterson, The Interpretation and Construction of Contracts, 64 COLUM.L.REV. 833, 835 (1964)).

III.

In the case at bar, the clash between the contracting parties centered on whether the parties intended that the liberal language of the subcontract’s arbitration clause should apply, or whether they intended that the subcontract incorporate the primary contract’s arbitration provision. Thus, when we use the Ram Construction -Professor Corbin-Professor Patterson nomenclature of “interpreting the contract,” in this case this means ascertaining the intent of the parties as to what arbitration clause controlled. We have previously held that this is a question of fact, governed by the clearly erroneous standard. Matter of Barclay Industries, Inc., 736 F.2d 75, 79 (3d Cir.1984) (“[Interpretation of an ambiguous contract ... is a question of the parties’ intent, and thus a question of fact.”); Landtect Corp. v. State Mutual Life Assurance Co., 605 F.2d 75, 79 (3d Cir.1979) (“ ‘Discerning contractual intent’ is a question of fact unless the provisions of a contract are ‘wholly unambiguous.’ ” (quoting Heyman v. Commerce & Industry Insurance Co., 524 F.2d 1317, 1320 (2d Cir.1975)). We therefore conclude that the judicial task performed by the district court here was contract interpretation, i.e., determining the intent of the parties regarding arbitration. The court was required to find as a fact what the contracting parties intended. It had to divine this intent from the language of the contract documents and any extrinsic evidence that went to the issue of intent. Once we review the district court’s language interpretation, the legal operation of that interpretation on review follows easily. The proper standard of review has to be whether the district court’s findings — interpretation of the contract, that is, the intent of the parties as to the meaning of the contract’s language — are clearly erroneous. We hold that its interpretation is not clearly erroneous.

IV.

A.

Harkins and Waldinger disagree over the interpretation of two provisions in the primary contract between Tishman, the construction manager, and Harkins, the heating, ventilation and air conditioning contractor, and two provisions in the subcontract between Harkins and Waldinger, the sheetmetal subcontractors. These provisions describe arbitration of disputes between parties to the two contracts. Section 17 of the Harkins/Waldinger subcontract provides:

17. All disputes, claims or questions arising hereunder shall be subject to arbitration and shall be submitted to arbitration in accordance with the provisions, then obtaining, of the Standard Form of Arbitration Procedure of the A.I.A. A determination thereunder shall be final and binding upon the parties thereto. Pending determination, there shall be no work stoppage.

App. at 22. Waldinger contends that this section alone made all disputes arising under the subcontract subject to mandatory arbitration.

In response, Harkins contends that other provisions — one in the subcontract and two in Tishman/Harkins’ primary or principal contract — limited the scope of arbitration. Harkins relies on Section 2 of the Harkins/Waldinger subcontract which provides:

2. Work performed by subcontractor shall be in strict accordance with CONTRACT DOCUMENTS applicable to the work to be performed and materials, articles and/or equipment to be furnished hereunder. SUBCONTRACTOR shall be bound by all provisions of these documents and also by applicable provisions of the PRINCIPAL CONTRACT to which the CONTRACTOR is bound, and to the same extent____

Id. (emphasis supplied). Harkins argues that the phrase “and to the same extent” in this section limited any mandatory arbitration provision in the subcontract to the scope of those arbitration provisions contained in the primary contract.

Arbitration provisions contained in the primary contract have a much narrower scope than that of the subcontract. Section 37 of the Tishman/Harkins primary contract refers to arbitration in general and limits arbitration to only those disputes that Clause 38 of the primary contract specifies as arbitrable:

37. In any case in which it is provided by the terms of this contract that any specific dispute or specific payment to be made shall be determined by arbitration, such arbitration shall be conducted in the City in which the Site is located in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrators may be entered in any Court having jurisdiction thereof.

Id. at 17. The only clause of the primary contract that permits arbitration is Section 38, which specifies arbitration for disputes over written change orders:

38. The owner, without invalidating this contract, may order extra work or make changes by altering, adding to or deducting from the work, the Contract Price to be adjusted accordingly. The Contractor shall not make any alterations or omit anything, or perform additional or extra work, except upon written order signed by the Owner____

In case of disagreement as to the amount to be paid or allowed, the Contractor shall promptly comply with the order and the amount shall be determined by arbitration as herein provided.

Id. at 17-18.

B.

After considering these provisions and other evidence relating to the parties’ intent, the district court determined that:

The only real issue for the court to resolve is whether Waldinger can submit issues for arbitration under the subcontract when Harkins could not seek arbitration of the same issues under the primary contract, given the fact that section 2 of the subcontract binds Waldinger, the subcontractor, to the same extent to which Harkins is bound under the primary contract. We believe that the correct interpretation bars Waldinger from arbitrating disputes under the subcontract if Harkins could not do the same under the primary contract.

Id. at 58. In addition, to its examination of the contracts, the district court relied on an affidavit of John F. Harkins, President of Harkins Co., as evidence of the parties’ intent:

The provision of paragraph 2 of Harkins’ form subcontract that “Subcontractor shall be bound by all provisions of these documents and also by applicable provisions of the Principal Contract to which Contractor is bound, and to the same extent” is intended, inter alia, to assure that subcontractors have no greater rights and remedies against Harkins under the subcontract form than Harkins has against owners or general contractors under principal contracts.

Id. at 44. This, of course, is strong evidence of the contracting parties’ intent. Significantly, there was no rebuttal to this evidence.

In addition, the. district court also deemed relevant an amendment to the subcontract prepared by Waldinger:

3. Paragraph 2, Terms and Conditions of Subcontract is amended as follows:

Add the following sentence at the end of the paragraph: “Subcontractor shall have the benefit of all rights, remedies and redress against the Contractor which Contractor has against Tishman, the Owner under the Contract Documents.”

Id. at 31. The district court believed that this “indicates that Waldinger was well aware that the subcontract’s standard form allotted more rights to Harkins, the contractor, than to itself or to any subcontractor. The fact that Waldinger requested and obtained the amendment suggests that it contemplated the types of problems that might arise because all provisions of the primary contract were to be incorporated by reference into the subcontract.” Id. at 59.

V.

In Anderson v. City of Bessemer, 470 U.S. 564, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985), the Supreme Court recently explained the highly circumscribed nature of appellate review of findings of fact:

If the district court’s account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently. Where there are two permissible views of the evidence, the factfinder’s choice between them cannot be clearly erroneous.

Id. at —, 105 S.Ct. at 1512. Accordingly, we do not have the authority to reverse the district court’s finding simply because we may have reached another finding as to intent. We are required to examine the entire record — the contractual provisions as well as other evidence that was before the district court. Furthermore, our review is no less circumscribed, “even when the district court’s findings do not rest on credibility determinations, but are based instead on ... documentary evidence or inferences from other facts.” Id.

Section 2 of the Harkins/Waldinger subcontract can be read to limit the scope of the subcontract’s arbitration provision to the narrower provisions of the Tishman/Harkins primary contract. The Harkins’ affidavit and the amendment proposed by Waldinger further support the district court’s finding of what the parties intended. We therefore hold that the district court’s interpretation of the contractual language was not clearly erroneous.

VI.

Waldinger challenges the district court’s judgment on several other grounds, all of which we find unpersuasive. First, it relies on several cases where courts have held that an incorporation clause in a subcontract does not limit the dispute resolution method specified in the subcontract. Facts in these cases, however, differ from the matter at bar. In John W. Johnson, Inc. v. Basic Construction Co., 429 F.2d 764, 773 (D.C.Cir.1970), a clause in the primary contract stated that the contractor would bind subcontractors to the terms and provisions of the primary contract which were “applicable to the work.” Here the incorporation clause was not limited to work. This factual distinction also applies to McKinney Drilling Co. v. Collins Co., 517 F.Supp. 320, 328 n. 7 (N.D.Ala.1981), affirmed,. 701 F.2d 132 (11th Cir.1983), another case upon which appellant relies heavily. Moreover, in McKinney Drilling Co., the court relied upon expert testimony stating that it was industry custom that the terms of the contract at issue did not apply to the subcontract. Id. at 327. Here, the district court relied upon Harkins’ affidavit where he stated that the opposite was true. Also, we note that in Johnson and McKinney the courts of appeals were not limited to the clearly erroneous standard of review, as we are required by Ram Construction, but apparently exercised plenary review.

Waldinger also argues that because of the strong federal interest in promoting arbitration, a court should favor a finding of arbitrability.² We are uncertain that arbitration is afforded such a stated preference beyond the environment of labor arbitration. See United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 578, 80 S.Ct. 1347, 1350, 4 L.Ed.2d 1409 (1960) (“In the commercial case, arbitration is the substitute for litigation. Here arbitration is the substitute for industrial strife. Since arbitration of labor disputes has quite different functions from arbitration under an ordinary commercial agreement, the hostility evinced by courts toward arbitration of commercial agreements has no place here.”); Goodwin v. Elkins & Co., 730 F.2d 99, 108 (3d Cir.1984) (“Arbitrability ... is purely a matter of contract.”). But see Moses H. Cone v. Mercury Construction Co., 460 U.S. 1, 25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983) (“[D]oubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver____"). We do not believe that the rule stated in Cone applies here where in interpreting the language of the contracts the district court was performing a fact finding function.

VII.

We will not say that the district court’s interpretation of the contract is clearly erroneous. The district court’s decision to enjoin the arbitration proceedings was, therefore, not an abuse of its discretion.

The judgment of the district court will be affirmed.

1 . "[F]ederal law applies in construing and enforcing an arbitration clause, even in those cases in which jurisdiction is based on diversity.” Goodwin v. Elkins & Co., 730 F.2d 99, 108 (3d Cir.1984).

2 . Additionally, Waldinger contends that because Harkins drafted the subcontract, any ambiguity in the contract should be construed against it. See, e.g., Zulla Steel, Inc. v. O. & M. Gregos, Inc., 174 N.J.Super. 124, 415 A.2d 1183 (App.Div.1980). In that case the court ruled that an ambiguous payment clause in a contract between a contractor and subcontractor should be construed against the contractor because "the contract was on [the contractor’s] form and the payment provision was a portion of its printed contract.” Id., 415 A.2d at 1187. However, this is a rule of contract construction, rather than contract interpretation, and as such should not affect the district court’s decision on the underlying factual issue of interpretation.