Petrolex II LLC v. Lyman Lofts Developers LLC The Bailey Group LLC ( 2023 )

March 31, 2023
Supreme Court
Petrolex II LLC, as assignee of :
Jesmac, Inc.
v. : No. 2022-10-Appeal.
(PM 19-10036)
The Bailey Group LLC et al. :
Petrolex II LLC, as assignee of :
Commercial Painting, Inc.
v. : No. 2022-11-Appeal.
(PM 19-7974)
The Bailey Group LLC et al. :
Petrolex II LLC :
v. : No. 2022-12-Appeal.
(PC 20-5729)
The Bailey Group LLC et al. :
Petrolex II LLC, as assignee of Gem :
Mechanical Services, LLC
v. : No. 2022-24-Appeal.
(PM 19-9211)
The Bailey Group LLC et al. :
NOTICE: This opinion is subject to formal revision
before publication in the Rhode Island Reporter. Readers
are requested to notify the Opinion Analyst, Supreme
Court of Rhode Island, 250 Benefit Street, Providence,
Rhode Island 02903, at Telephone (401) 222-3258 or
Email: opinionanalyst@courts.ri.gov, of any
typographical or other formal errors in order that
corrections may be made before the opinion is published.
Supreme Court
Petrolex II LLC, as assignee of :
Jesmac, Inc.
v. : No. 2022-10-Appeal.
(PM 19-10036)
The Bailey Group LLC et al. :
Petrolex II LLC, as assignee of :
Commercial Painting, Inc.
v. : No. 2022-11-Appeal.
(PM 19-7974)
The Bailey Group LLC et al. :
Petrolex II LLC :
v. : No. 2022-12-Appeal.
(PC 20-5729)
The Bailey Group LLC et al. :
Petrolex II LLC, as assignee of Gem :
Mechanical Services, LLC
v. : No. 2022-24-Appeal.
(PM 19-9211)
The Bailey Group LLC et al. :
Present: Suttell, C.J., Goldberg, Robinson, Lynch Prata, and Long, JJ.
OPINION
Justice Goldberg, for the Court. These consolidated cases came before the
Supreme Court on November 30, 2022, pursuant to an order directing the parties to
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appear and show cause why the issues raised in these appeals should not be
summarily decided. The plaintiff, Petrolex II LLC (Petrolex), appeals from a
decision granting motions to stay the Superior Court proceedings in four cases and
refer them to arbitration in this construction dispute. After considering the parties’
written and oral submissions and reviewing the record, we conclude that cause has
not been shown and that these cases may be decided without further briefing or
argument. For the reasons set forth herein, we affirm the orders of the Superior
Court.
Facts and Travel
The party identified as the lead defendant, Lyman Lofts Developers LLC
(Lyman), was the owner of the Lyman Mill property (property) located at 184
Woonasquatucket Avenue, North Providence, Rhode Island.1 In April 2015, Lyman
entered into an agreement with The Bailey Group LLC (Bailey) to serve as general
contractor for renovations converting an old mill complex into residential apartment
units (the project). In April 2016, as a requirement by an additional investor brought
in to obtain tax credits, Lyman and Bailey entered into an American Institute of
Architects (AIA) standard agreement form between owner and contractor with
respect to the project. Zurich American Insurance Company (Zurich), at the request
1
The plaintiff and Lyman share a principal office location, with the manager of each
entity possessing an identical surname (Santoro); however, Lyman is no longer a
party to this case.
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of Bailey, furnished a payment bond in the amount of $11,952,275 for the project in
accordance with the project requirements. Bailey subsequently entered into separate
agreements (subcontracts) with each of the subcontractors retained for the project.2
The record discloses that Lyman made timely payments on the first
twenty-one requisitions submitted by Bailey, including all change orders, amounting
to $17,261,600. Bailey claimed it was still owed $1,313,277 on the project for its
final submitted requisition and retainage. Lyman denied owing any money to Bailey
because mechanics’ liens filed by the subcontractors against the property totaling
$1,485,016.70, plus costs and attorneys’ fees, were outstanding. Lyman claimed
Bailey owed at least twelve of its subcontractors a total of $1,617,704.70 for labor,
material, and equipment furnished in connection with the project. Lyman further
asserted that it was owed a credit from Bailey under the construction contract, for
failing to perform as required, in the amount of $854,352, and that Lyman’s architect
on the project agreed a credit of $736,000 was owed to Lyman.
In 2019 three subcontractors filed complaints against Bailey and Lyman to
enforce their mechanics’ liens for work done, but not paid for, on the project. The
plaintiff settled these outstanding balances by directly paying the subcontractors in
2
Bailey is the principal defendant in the cases on appeal.
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return for assignment of the liens against defendants.3 As a condition of these
payments, plaintiff required the subcontractors to dismiss any claims they had
against Lyman, terminating Lyman’s involvement in these cases. The plaintiff then
filed amended complaints, substituting itself as the plaintiff and assignee of the three
subcontractors in the mechanics’ liens actions. On August 13, 2020, plaintiff filed
an additional complaint against Bailey as the assignee of nine further subcontractors.
In addition to the causes of action currently before us, Lyman filed a complaint
against defendants claiming it was owed $854,352 in credits for the project.
The defendants filed motions to stay the Superior Court proceedings in all five
Superior Court cases and refer them to arbitration. On August 3, 2021, the trial
justice issued a bench decision, finding that plaintiff directly paid the subcontractors
their outstanding balances, in return requiring the subcontractors to dismiss their
claims against Lyman. The trial justice noted that the parties agreed that plaintiff
“stands squarely in the position and the shoes of each subcontractor * * *.”
The trial justice found that the language of the subcontracts was clear and
unambiguous, requiring mandatory arbitration for disputes concerning both the
construction and application of the subcontracts. The trial justice further determined
that, even if the provision in the subcontracts or agreements providing that Bailey is
3
The plaintiff paid less than the outstanding amounts due under the subcontracts for
assignment and transfer of all right, title, and interest in and to the subcontractors’
claims against defendants.
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obliged to pay only if it is paid by Lyman is deemed void, as plaintiff asserted, the
dispute between the parties was nonetheless subject to arbitration. The trial justice
granted defendants’ motions to stay the Superior Court proceedings in all of the
cases before the court and compelled the parties to participate in mandatory
mediation and arbitration. On August 16, 2021, plaintiff timely appealed, filing
separate notices of appeal in four of the Superior Court actions.4
On appeal, plaintiff contends that the trial justice erred in granting the motions
to stay and refer the matters to arbitration because there was no dispute between
defendants and the subcontractors regarding the construction and application of the
language as set forth in the subcontracts. The plaintiff further argues that a dispute
over the pay-if-paid provision contained in the respective contracts is not referrable
to arbitration as this clause, plaintiff contends, is void and unenforceable as being
against public policy.
Standard of Review
“The issue of whether a dispute is arbitrable is a question of law that this Court
reviews de novo.” Rhode Island Council on Postsecondary Education v. Hellenic
Society Paideia – Rhode Island Chapter, 202 A.3d 931, 934 (R.I. 2019) (quoting
Town of Johnston v. Rhode Island Council 94, AFSCME, Local 1491, 159 A.3d 83,
4
A notice of appeal was not filed in the fifth case, Lyman Lofts Developers LLC v.
The Bailey Group, No. PC 20-5839.
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85 (R.I. 2017)). “Arbitration is a creature of the agreement between the parties, and
a ‘duty to arbitrate a dispute arises only when a party agrees to arbitration in clear
and unequivocal language, and even then, the party is only obligated to arbitrate
issues that it explicitly agreed to arbitrate.’” Id. (quoting State Department of
Corrections v. Rhode Island Brotherhood of Correctional Officers, 866 A.2d 1241,
1247 (R.I. 2005)). “Because arbitration is a matter of contract, ‘[g]eneral rules of
contract construction apply[,]’ and ‘whether the parties agreed to submit a particular
dispute to arbitration turns upon the parties’ intent when they entered into the
contract from which the dispute ultimately arose.’” Id. (quoting Radiation Oncology
Associates, Inc. v. Roger Williams Hospital, 899 A.2d 511, 514 (R.I. 2006)). “In
ascertaining what the intent is we must look at the instrument as a whole and not at
some detached portion thereof.” Id. (quoting Hill v. M. S. Alper & Son, Inc., 106 R.I.
38, 47, 256 A.2d 10, 15 (1969)). “Significantly, however, ‘[w]hen uncertainty exists
about whether a dispute is arbitrable, this Court, like the United States Supreme
Court, has enunciated a policy in favor of resolving any doubt in favor of
arbitration.’” Id. (quoting School Committee of Town of North Kingstown v. Crouch,
808 A.2d 1074, 1078 (R.I. 2002)).
Analysis
The plaintiff first argues that Section 5.2 of the subcontracts is very specific
and limited and applies only to disputes concerning the interpretation and application
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of the terms in the subcontracts. The plaintiff contends that the meaning of the term
“construction” must be strictly construed and should be interpreted as pertaining to
the arrangement of terms in the subcontracts. According to plaintiff, because this is
a legal dispute, and not a dispute concerning the construction or application of the
language in the subcontracts, the cases need not proceed to arbitration. We disagree.
The relevant language is as follows:
“5. CLAIMS AND DISPUTE RESOLUTION
“* * *
“5.2 Any dispute, controversy, or claim concerning the
construction or application of this Agreement that is not
settled by the parties shall be decided in accordance with
the dispute resolution procedures contained in the
Owner-Contractor Agreement. If the Owner-Contractor
Agreement does not provide a dispute resolution
procedure, the dispute shall be arbitrated in accordance
with the Construction Industry Arbitration Rules of the
American Arbitration Association. The decision of the
arbitrator shall be binding and judgment upon the award
rendered by the Arbitrator may be entered into any court
having jurisdiction thereof.” (Emphasis added.)
The applicable section of the Owner-Contractor Agreement states:
“ARTICLE 6 DISPUTE RESOLUTION
“* * *
Ҥ 6.2 BINDING DISPUTE RESOLUTION
“For any Claim subject to, but not resolved by, mediation
pursuant to Section 15.3 of AIA Document A201-2007,
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the method of binding dispute resolution shall be as
follows:
“(Check the appropriate box. If the Owner and
Contractor do not select a method of binding dispute
resolution below, or do not subsequently agree in writing
to a binding dispute resolution method other than
litigation, Claims will be resolved by litigation in a court
of competent jurisdiction.)
“[‹‹X››]5 Arbitration pursuant to Section 15.46 of AIA
Document A201-2007
“[‹‹ ››] Litigation in a court of competent jurisdiction
5
The arbitration box was the only box checked with an “X.”
6
The pertinent sections of § 15.4 are as follows:
Ҥ 15.4.1 If the parties have selected arbitration as the
method for binding dispute resolution in the Agreement,
any Claim subject to, but not resolved by, mediation shall
be subject to arbitration which, unless the parties mutually
agree otherwise, shall be administered by the American
Arbitration Association in accordance with its
Construction Industry Arbitration Rules in effect on the
date of the Agreement. * * *
“* * *
Ҥ 15.4.2 The award rendered by the arbitrator or
arbitrators shall be final, and judgment may be entered
upon it in accordance with applicable law in any court
having jurisdiction thereof.
Ҥ 15.4.3 The foregoing agreement to arbitrate and other
agreements to arbitrate with an additional person or entity
duly consented to by parties to the Agreement shall be
specifically enforceable under applicable law in any court
having jurisdiction thereof.”
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“[‹‹ ››] Other (Specify)” (Footnotes added.)
“When determining whether a contract is ambiguous, the agreement is viewed
in its entirety and the words used in the contract are given their ordinary meaning.”
Sturbridge Home Builders, Inc. v. Downing Seaport, Inc., 890 A.2d 58, 62-63 (R.I.
2005). “When ascertaining the usual and ordinary meaning of contractual language,
every word of the contract should be given meaning and effect; an interpretation that
reduces certain words to the status of surplusage should be rejected.” Andrukiewicz
v. Andrukiewicz, 860 A.2d 235, 239 (R.I. 2004).
Section 5.2 of the subcontracts states “[a]ny dispute, controversy, or claim
concerning the construction or application of this Agreement that is not settled by
the parties shall be decided in accordance with the dispute resolution procedures
contained in the Owner-Contractor Agreement.” (Emphasis added.) The term
“application” means “[t]he act of applying,” while “applying” is defined as
“put[ting] into action.” The American Heritage Dictionary of the English Language
86 (5th ed. 2011). Construing Section 5.2 as to pertain only to the interpretation of
language set forth in the subcontracts would reduce the phrase “application” to mere
surplusage and thus, irrelevance. We reject this contention. The language of Section
5.2 explicitly requires that any disputes regarding the construction or application of
the subcontracts be referred to arbitration. We therefore conclude that any dispute
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concerning the application of the subcontracts, including legal disputes arising from
the project, must be referred for arbitration.
The plaintiff next argues that the pay-if-paid provision in the subcontracts is
void and unenforceable as being against public policy, and thus not referrable for
arbitration. The United States Supreme Court has opined that “a challenge to the
validity of the contract as a whole, and not specifically to the arbitration clause, must
go to the arbitrator.” Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 449
(2006). Simply put, a “challenge [to] the enforceability of the underlying contract
does not negate the enforceability of their agreement to arbitrate.” Montgomery Ford
Lincoln Mercury, Inc. v. Hall, 999 So. 2d 964, 968 (Ala. Civ. App. 2008). “As a
matter of federal law, the arbitration clause is unaffected even if the substance of the
contract is otherwise void or voidable.” Sleeper Farms v. Agway, Inc., 506 F.3d 98,
103 (1st Cir. 2007) (citing Prima Paint Corporation v. Flood & Conklin Mfg. Co.,
388 U.S. 395, 403-04 (1967)).
The plaintiff cites a recent Superior Court decision, Moura Interior Finishes
of Massachusetts, Inc. v. Tocci Building Corporation, PC 20-2585, when arguing
that the pay-if-paid provision of the subcontracts is void and unenforceable as
against public policy. In Moura, the trial justice stated that a “pay when” clause
“should be void against public policy and unenforceable” when granting a motion
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for summary judgment. That ruling has no bearing on our decision in the cases at
bar.
Having concluded that “[a]ny dispute, controversy, or claim concerning the
construction or application of [the] Agreement” must be resolved through
arbitration, even if the pay-if-paid provision were to be declared void, the arbitration
provision of the subcontracts would not be nullified because “a challenge to the
validity of the contract as a whole, and not specifically to the arbitration clause, must
go to the arbitrator.” Buckeye, 546 U.S. at 449. Accordingly, any disagreement over
the enforceability of the pay-if-paid provision should be decided by an arbitrator
pursuant to Section 5.2 of the subcontracts.
Conclusion
For the reasons set forth in this opinion, we affirm the orders of the Superior
Court. The papers in these cases may be returned to the Superior Court.
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STATE OF RHODE ISLAND
SUPREME COURT – CLERK’S OFFICE
Licht Judicial Complex
250 Benefit Street
Providence, RI 02903
OPINION COVER SHEET
Petrolex II LLC, as assignee of Jesmac, Inc. v. The
Bailey Group LLC et al.
Petrolex II LLC, as assignee of Commercial Painting,
Inc. v. The Bailey Group LLC et al.
Title of Case
Petrolex II LLC v. The Bailey Group LLC et al.
Petrolex II LLC, as assignee of Gem Mechanical
Services, LLC v. The Bailey Group LLC et al.
No. 2022-10-Appeal (PM 19-10036)
No. 2022-11-Appeal (PM 19-7974)
Case Number
No. 2022-12-Appeal (PC 20-5729)
No. 2022-24-Appeal (PM 19-9211)
Date Opinion Filed March 31, 2023
Suttell, C.J., Goldberg, Robinson, Lynch Prata, and
Justices Long, JJ.
Written By Associate Justice Maureen McKenna Goldberg
Source of Appeal Providence County Superior Court
Judicial Officer from Lower Court Associate Justice Richard D. Raspallo
For Plaintiff:
Guido R. Salvadore, Esq.
Attorney(s) on Appeal
For Defendant:
Michael J. Lepizzera, Jr., Esq.
SU-CMS-02A (revised November 2022)