Employers Insurance of Wausau v. Bright Metal Specialties, Inc.

EMPLOYERS INSURANCE OF WAUSAU, a Mutual Company, Plaintiff-Counter-Defendant-
Appellant,
v.
BRIGHT METAL SPECIALTIES, INC., Defendant-Counter-Claimant, Cross Claimant-Cross-
Defendant-Appellee,
Rogers Construction Company, Defendant-Cross-Defendant-Cross-Claimant-Third-Party Plaintiff-
Appellee.
Bright Metal Specialties, Inc., Plaintiff-Cross-Defendant-Appellee,
v.
Employers Insurance of Wausau, a Mutual Company, Defendant-Cross-Defendant-Appellant,
Rogers Construction Company, Defendant-Cross-Claimant.
Employers Insurance of Wausau, a Mutual Company, Plaintiff-Counter-Defendant-Appellee,
v.
Bright Metal Specialties, Inc., Defendant-Counter-Claimant-Cross-Claimant-Cross-Defendant-Appellee,
Rogers Construction Company, Defendant-Cross-Defendant-Cross-Claimant-Third-Party Plaintiff-
Appellant.
Bright Metal Specialties, Inc., Plaintiff-Cross-Defendant-Appellee,
v.
Employers Insurance of Wausau, a Mutual Company, Defendant-Cross-Defendant-Appellee,
Rogers Construction Company, Defendant-Cross-Claimant-Appellant.
Nos. 98-5404, 98-5405.
United States Court of Appeals,
Eleventh Circuit.
May 22, 2001.
Appeals from the United States District Court for the Southern District of Florida. (No. 97-00410-CV-UUB),
Ursula Ungaro-Benages, Judge.
Before EDMONDSON, FAY and GARWOOD*, Circuit Judges.
FAY, Circuit Judge:
Appellants Employers Insurance of Wausau ("Wausau") and Rogers Construction Company
("Rogers") appeal the district court's order compelling arbitration of a claim asserted by Appellee Bright
*
Honorable Will L. Garwood, U.S. Circuit Judge for the Fifth Circuit, sitting by designation.
Metal Specialties, Inc. ("Bright") arising from a dispute on a Government construction project in Everglades
National Park. The district court held that Wausau, a Miller Act surety, became a party to Bright's subcontract
and the arbitration provision therein by virtue of Wausau's Takeover Agreement with the Government,
Wausau's Completion Contract with its completion general contractor, Rogers Construction Co. ("Rogers"),
and the Ratification Agreement with Bright. Wausau argues that it did not contractually agree to arbitrate
with Bright, that it is not bound by the arbitration provision in Bright's subcontract, and that the Miller Act
precludes arbitration of a claim against a Miller Act surety such as Wausau. Rogers concedes that it is bound
by Bright's subcontract, but contends that Bright's claim is excluded from arbitration pursuant to an arbitration
exception in the subcontract. Moreover, Bright contests our jurisdiction to hear this appeal. We conclude
that the district court's order was an appealable "final decision" and affirm the arbitration order with respect
to both Wausau and Rogers.
I. Background
The parties agree to the following facts, most of which are established by contract. On or about July
16, 1993, the National Park Service ("Government") contracted with A-1 Construction/BellincCo. ("A-1")
for the repair of roofs to certain buildings located in the Everglades National Park (the "Project"). Wausau,
as contract surety, provided performance and payment bonds for the Project on behalf of A-1, its principal,
in favor of the Government, as required by the Miller Act, 40 U.S.C. § 270, et seq. In September 1993, A-1
subcontracted a portion of the Project work to Bright pursuant to a written agreement (the "Subcontract" or
"Bright/A-1 Subcontract") that included an arbitration clause.
The Government subsequently terminated A-1 for its default on the Project, and called upon Wausau
to complete the work pursuant to the performance bond. On or about May 20, 1994, the Government and
Wausau entered into a Takeover Agreement by which Wausau agreed to complete the prime contract for A-1.
On or about May 26, 1994, Wausau entered into a Contract for Completion and Construction (the
"Completion Contract") with Rogers whereby Rogers became the completing contractor for all remaining
work under the prime contract. Pursuant to the Completion Contract, Wausau agreed to assign to Rogers all
of Wausau's right, title and interest in and to A-1's executory subcontracts for the performance of Project
work.
On or about June 14, 1994, Bright and Wausau entered into a Ratification Agreement which resolved
Bright's payment bond claim and ratified the Bright/A-1Subcontract. First, Wausau and Bright resolved
claims relating to monies due Bright for work performed prior to A-1's termination. Second, Bright agreed
to complete the Subcontract and agreed to start work on the Project within seven (7) days after request by
Wausau, its agent, "or assigns, including any completion contractor engaged by [Wausau]." Third, the
Ratification Agreement provided that Wausau could "assign its rights under the [A-1] subcontract and this
agreement" to a completion contractor. Finally, the parties agreed that Wausau would pay Bright the
remaining retainage, as fulfillment of its obligations to Bright, if work did not begin within a specified period.
Thereafter, Wausau required Bright to complete the Subcontract with Rogers as the completion contractor.
Bright resumed work on the Project in June 1994.
In December 1994, Bright and Wausau settled a payment bond claim previously submitted by Bright
for work, labor and/or materials performed and/or furnished under its Subcontract with A-1.1
Near completion of the Project, Bright sought additional compensation for delays and damages
caused by the Government. Ultimately, Bright submitted to Rogers a request for "equitable adjustment"
("REA") under the Subcontract. As required by the contract documents, Rogers submitted the request to
Wausau for presentation by Wausau to the Government. Bright, Rogers, Wausau and the Government met
in Denver, Colorado in February 1996 to address Project claims, including Bright's REA. At the meeting, the
Government offered to settle Bright's REA for approximately $10,000, less than two percent (2%) of the
amount sought by Bright. Bright declined the settlement offer and left the meeting. After Bright left the
meeting, Wausau accepted the Government's settlement offer without Bright's approval or consent. Bright
did not submit any further claims against the Government, directly or through Rogers or Wausau, regarding
the amounts sought in the REA.
In January 1997, Bright filed a Demand for Arbitration with the American Arbitration Association
("AAA") for alleged breach of contract by Rogers and Wausau. Bright claimed losses in the amount of
$944,000 plus interest, attorney's fees and costs.
In February 1997, Wausau filed a complaint in the District Court for the Southern District of Florida
against Rogers and Bright seeking declaratory and injunctive relief against the arbitration (Case No. 97-410-
Civ-Marcus). In a separate action against Wausau and Rogers, Bright filed a Motion to Compel Arbitration,
pursuant to the Federal Arbitration Act, 9 U.S.C. § 4, and based on an arbitration clause in the Subcontract
between Bright and A-1 (Case No. 97-433-Civ-Marcus). Wausau and Rogers filed claims for declaratory and
1
Pursuant to this settlement agreement, Wausau paid Bright the agreed amount in exchange for a
release signed by Bright of all claims of any nature which Bright might have against the Government or
against Wausau under its surety bond.
injunctive relief seeking to stay the arbitration.2
The two actions were consolidated and referred to Magistrate Judge Ted E. Bandstra. On December
22, 1997, Magistrate Judge Bandstra issued an Amended Report and Recommendation that Wausau and
Rogers be compelled to arbitrate Bright's claim. The district court, Judge Ungaro-Benages presiding,3
conducted a de novo review and by order entered September 22, 1998, affirmed the Magistrate's Amended
Report and Recommendation granting Bright's Motion to Compel Arbitration, denying Wausau's and Roger's
Motions for Injunctive Relief, and denying all remaining motions as moot. In addition, the district court
dismissed each of the underlying consolidated actions in deference to arbitration, and denied Roger's request
for reconsideration.
Wausau and Rogers appeal from the district court's decision. Bright challenges our jurisdiction to
hear this appeal asserting that the district court's order was not a final decision with respect to arbitration
under 9 U.S.C. § 16(a)(3) of the Federal Arbitration Act ("FAA").
II. Standard of Review
The jurisdictional issue is a question of law, which we review de novo. See Randolph v. Green Tree
Fin. Corp.-Alabama, 178 F.3d 1149, 1152 (11th Cir.1999). We review de novo the district court's order
compelling arbitration. See Randolph, 178 F.3d at 1152.
III. Analysis
A. "Final Decision" under the Federal Arbitration Act
As a threshold matter, we decide whether we have jurisdiction over this appeal. Special rules govern
appeals from a district court's arbitration order as set forth in section 16 of the FAA. See 9 U.S.C. § 16; see
also American Express Fin. Advisors, Inc. v. Makarewicz, 122 F.3d 936 (11th Cir.1997). The question here
is whether the district court's order compelling arbitration of Bright's claim and dismissing the underlying
actions is a "final decision with respect to an arbitration" within the meaning of the statute. 9 U.S.C. §
16(a)(3).
In arguing that we lack jurisdiction, Bright distinguishes between "embedded" and "independent"
2
Bright filed a counterclaim against Wausau and a cross-claim against Rogers conditioned on the
Court denying arbitration. In response to Bright's conditional pleadings, Rogers filed a counterclaim
against Bright Metal and its surety, Preferred National Insurance Company.
3
On January 21, 1998, the district court entered an order transferring the consolidated cases to Judge
Ungaro-Benages.
proceedings, a distinction this Court has recognized, albeit without using those labels.4 See Thomson
McKinnon Sec., Inc. v. Salter, 873 F.2d 1397, 1399 (11th Cir.1989) (cited in Randolph, 178 F.3d at 1155 n.
4). Bright correctly notes that, generally speaking, a decision of the district court is final when it disposes
of all the issues framed by the litigation and leaves nothing for the district court to do but execute the
judgment. See Randolph, 178 F.3d at 1154 (quoting Catlin v. United States, 324 U.S. 229, 233, 65 S.Ct. 631,
633, 89 L.Ed. 911 (1945)). However, Bright contends that the phrase "final decision" does not include an
order compelling arbitration and dismissing the other claims in the action, when that order occurs in an
"embedded" proceeding such as this one.5
We find that Bright's argument is foreclosed by the Supreme Court's recent opinion in Green Tree
Fin. Corp.-Alabama, 531 U.S. 79, 121 S.Ct. 513, 520, 148 L.Ed.2d 373 (2000). That decision held that a
district court order compelling arbitration and dismissing all other claims is "final" within the meaning of §
16(a)(3), and therefore appealable, even when that order occurs in an "embedded" proceeding involving both
a request for arbitration and other claims for relief. Green Tree Fin. Corp., 121 S.Ct. at 520-521, 121 S.Ct.
513. Here, as in Green Tree Fin. Corp., the district court directed the parties to resolve the dispute by
arbitration and dismissed both cases,6 leaving the court nothing to do but execute the judgment. Accordingly,
we have jurisdiction over the consolidated actions because the arbitration order disposes of all the issues
framed by the litigation and leaves nothing for the district court to resolve.
B. The Applicability of the Subcontract's Arbitration Clause
Having determined that we have jurisdiction over this appeal, we now turn to the question whether
the parties agreed to arbitrate the present dispute. Wausau contends that it may not be compelled to arbitrate
because it is not a party to any agreement containing an arbitration clause. Bright argues that Wausau ratified
4
An "embedded" proceeding is one that involves both a request for arbitration and other claims for
relief. In an "independent" proceeding, the issue of arbitration is the only issue before the court. See
Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 121 S.Ct. 513, 520, 148 L.Ed.2d 373 (2000).
5
Here, the consolidated actions allege, inter alia, breach of contract, release, and performance and
payment bond claims related to the underlying merits of the case, in addition to the issue of arbitration.
Thus, Bright claims that the arbitration order is not a final decision because it does not decide the merits
of the underlying claims.
6
Although the district court did not specify whether the dismissal was with or without prejudice, the
arbitration order clearly disposed of the entire case on the merits and left no part of it pending before the
court. Moreover, the district court could have, but did not, stay the case pending arbitration. See Green
Tree Fin.Corp., 121 S.Ct. at 520 n. 2 (explaining that arbitration order staying rather than dismissing all
other claims for relief would not be appealable).
the Subcontract and therefore, assumed the duty to arbitrate pursuant to an arbitration provision therein.
C. Choice of Law
Federal law establishes the enforceability of arbitration agreements, while state law governs the
interpretation and formation of such agreements. See Perry v. Thomas, 482 U.S. 483, 107 S.Ct. 2520, 96
L.Ed.2d 426 (1987). Federal law counsels that questions of arbitrability, when in doubt, should be resolved
in favor of arbitration. See Moses H. Cone Mem'l Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24, 103
S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). Thus, as with any other contract, the parties' intentions control, but
those intentions are generously construed as to issues of arbitrability.7
1. Wausau's duty to arbitrate.
As an initial matter, Wausau is correct that, under the FAA, no party can be compelled to arbitrate
unless that party has entered into an agreement to do so. See AT & T Tech., Inc. v. Communications Workers,
475 U.S. 643, 649, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986). Courts, however, have recognized a
number of theories under which non-signatories may be bound to the arbitration agreements of others. See,
generally, Thomson-CSF, S.A. v. Am. Arbitration Ass'n, 64 F.3d 773 (2d. Cir.1995). These theories arise out
of common law principles of contract and agency law: 1) incorporation by reference; 2) assumption; 3)
agency; 4) veil-piercing/alter ego; and 5) estoppel. See id. at 776; see also MS Dealer Serv. Corp. v.
Franklin, 177 F.3d 942, 947 (11th Cir.1999).
In this case, the district court concluded that Wausau agreed to arbitrate disputes with Bright when
it "stepped into" the shoes of A-1 and signed the Ratification Agreement with Bright. The court reasoned that
the Ratification Agreement, signed by Wausau and Bright, incorporated by reference the Subcontract, thus,
expressing Wausau's intent to arbitrate disputes arising out of the Subcontract in accordance with the
arbitration provision therein.8 See e.g., United States Fidelity and Guaranty Co. v. West Point Constr. Co.,
837 F.2d 1507 (11th Cir.1988) (compelling surety to arbitrate where performance bond incorporated by
reference subcontract that contained arbitration provision).
7
Although the question of which state's law should govern is an important one, neither the parties nor
the courts have focused on this issue. See Scott v. Prudential Securities, Inc., 141 F.3d 1007, 1012 n. 6
(11th Cir.1998). As a federal court sitting in diversity, we apply the conflict of law rules of Florida,
including Florida contract law, unless the relevant documents provide otherwise. See Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021-22, 85 L.Ed. 1477 (1941).
8
The district court applied Georgia law to interpret the Subcontract based on the choice of law
provision therein. See Subcontract, ¶ 15.2. To the extent that Florida law applied, as the place of
performance, the district judge cited Florida law in accord.
We agree with the district court that Wausau is bound by the arbitration provision in the Bright/A-1
Subcontract. By signing the Takeover Agreement, Wausau assumed all duties and responsibilities of A-1 to
complete the prime contract in exchange for the balance of the contract price. See e.g., Travelers Indem., et
al. v. United States, 16 Cl.Ct. 142 (1988) (holding that surety became a party to the prime contract upon
executing a Takeover Agreement with the United States). While the Takeover Agreement did not specifically
obligate Wausau to any contractual provisions previously negotiated between Bright and A-1, this agreement
clearly reveals Wausau's intent to "step into the shoes" of A-1. The Ratification Agreement, executed with
Bright, guaranteed performance of the Subcontract work "according to the terms and conditions of the
Subcontract." This agreement evinces Wausau's intent to affirm the Subcontract, including the arbitration
provision therein. See Green v. Ford Motor Credit Co., 146 Ga.App. 531, 246 S.E.2d 721, 722-23 (1978);
Port Largo Club, Inc. v. Warren, 476 So.2d 1330, 1333 (Fla. 3d DCA 1985). Finally, the Completion
Contract granted Wausau the option to assign its rights in the Subcontract to Rogers. Read together, these
agreements lead us to conclude that Wausau gained the benefits and obligations of the Subcontract between
A-1 and Bright. Thus, Wausau became bound by the arbitration provision in the Subcontract.
Wausau does not contest that it acquired A-1's "rights" under the Subcontract. Pursuant to the
Ratification Agreement, Wausau obtained Bright's agreement to complete the Subcontract at no additional
cost. Wausau also acquired the right to assign its rights under the Subcontract to a completion contractor.
Wausau concedes that it exercised its right to assign the Subcontract to Rogers.9 However, Wausau contests
its obligation to arbitrate under the agreement. This is tantamount to Wausau asking the Court to recognize
its rights under the Subcontract without the correlative duties therein.
Wausau argues that it could not have assumed the obligation to arbitrate under the Bright/A-1
Subcontract because that Subcontract automatically terminated, by its own terms, upon the Government's
default of A-1 on April 29, 1994. A fair reading of paragraph 10.4 of the Subcontract, however, leads us to
conclude that the Subcontract became terminable, but did not automatically terminate when the Government
defaulted A-1.10 Wausau does not assert, and we find no evidence in the record, that Wausau or Bright
9
Significantly, Rogers concedes that it succeeded to the obligations of A-1 under the Subcontract.
This could only be by assignment from Wausau. See Completion Contract (obligating Wausau to assign
to Rogers all "[Wausau's] right, title and interest in and to [A-1's] executory Subcontracts").
10
The Subcontract provides:
10.4 TERMINATION BY OWNER. Should the Owner terminate its contract with the
terminated the Subcontract pursuant to its termination provisions. We also find it disingenuous for Wausau
to have taken full advantage of the Subcontract and now argue that it was not in effect.
Finally, Wausau contends that it cannot be compelled to arbitrate with Bright because the Miller Act
places exclusive jurisdiction of claims against Miller Act sureties in federal court. The district court found
that the Miller Act does not preclude arbitration, and alternatively, that Wausau waived any such protection
afforded it. We agree.
Under the Miller Act, a claim against a surety arising under a Miller Act bond shall be brought in
federal court. See 40 U.S.C. § 270a-e. The Miller Act does not apply here because Bright alleges that
Wausau breached the Subcontract; Bright does not pursue a claim against Wausau's payment bond. Even
if it applies, the Miller Act does not preclude arbitration under the FAA where the parties have previously
agreed to arbitrate disputes. See United States ex. rel. Portland Constr. Co. v. Weiss Pollution Control Corp.,
532 F.2d 1009, 1012 (5th Cir.1976)11 (staying Miller Act suit pending outcome of arbitration where
subcontract contained arbitration provision); United States ex. rel. Capolino Sons, Inc. v. Electronic &
Missile Facilities, Inc. 364 F.2d 705 (2d. Cir.1966) (requiring subcontractor to arbitrate Miller Act payment
bond claim pursuant to arbitration provision in subcontract, which provision was not prohibited by the Miller
Act). Accordingly, we conclude that Wausau assumed A-1's obligations to arbitrate with Bright when
Wausau took over the Project and ratified the Subcontract.12
2. Roger's Duty to Arbitrate
Rogers concedes that it is bound by the arbitration provision in the Subcontract. However, Rogers
objects to arbitration on the basis of an exception to arbitration contained in the Subcontract. Specifically,
Rogers claims that § 14.2(b) of the Bright/A-1 Subcontract expressly excludes from arbitration "pass through"
Contractor or any part of which includes the Subcontractor's Work, the Contractor shall
so notify the Subcontractor in writing and upon written notification, this Agreement shall
be terminated....
Bright/A-1 Subcontract, ¶ 10.4.
11
Fifth Circuit cases decided before October, 1981 are binding precedent in this Circuit. Bonner v.
City of Prichard, 661 F.2d 1206, 1210 (11th Cir.1981).
12
Having found that the dispute is arbitrable, we do not address Wausau's claim that Bright released
Wausau from its obligations under the Subcontract. See 9 U.S.C. § 4; see also Aluminum, Brick & Glass
Workers Int'l Union v. AAA Plumbing Pottery Corp., 991 F.2d 1545, 1550 (11th Cir.1993) (explaining
that courts are not permitted to address defenses to disputes within the scope of an arbitration clause).
claims, or claims asserted by Bright up the ladder to the Government.13 Pursuant to this exception, the
agreement to arbitrate between Rogers and Bright would not apply to any "claim" brought by Bright against
Rogers if Rogers asserted that the claim, in whole or in part, was against the Government ("Owner") since
the contract between Rogers and the Government does not provide for binding arbitration. Based on the
Magistrate Judge's findings, the district court concluded that the exception does not apply for two reasons:
1) Bright's REA was not a "claim" under the Subcontract; and 2) Bright's REA was never asserted against
Rogers as required by the exception provision.
Our review of the record evidence accords with the findings of the Magistrate Judge. The arbitration
exception set forth in paragraph 14.2 of the Subcontract does not apply because Bright's REA is not a "claim"
under the Subcontract. The Subcontract provides that claims relating to the Government had to be submitted
by Rogers "in the manner and within the time elements provided in Contract Documents for like claims by
the Contractor upon the [Government]." Subcontract, ¶ 6.2. The prime contract between A-1 and the
Government required the Contractor (A-1 and later Rogers) to submit all claims in accordance with the
Contract Disputes Act.14 See Prime Contract, Article 37. Moreover, the prime contract provided that a
demand for payment of money exceeding $50,000 was not a claim under the Contract Disputes Act until it
was certified by the Contractor.15
13
Paragraph 14.2 of the Subcontract provides in relevant part:
14.2 EXCEPTIONS. The agreement to arbitrate shall not apply to any claim:
***
(b) asserted by the Subcontractor against the Contractor if the Contractor asserts said
claim, either in whole or part against the Owner, or asserted by the Owner against the
Contractor, when the contract between the Contractor and Owner does not provide for
binding arbitration....
Subcontract, ¶ 14.2.
14
Contract Disputes Act of 1978, 41 U.S.C. § 601 et. seq
15
Article 37 of the Prime Contract provides in pertinent part:
(c) "Claim", as used in this clause, means a written demand or written assertion by one of
the contracting parties seeking as a matter of right, the payment of money in a sum
certain, the adjustment or interpretation of contract terms, or other relief arising under or
relating to this contract.
...
In the district court, Rogers conceded that Bright submitted a claim against the Government in an
amount exceeding $1,000,000 for delays and damages caused by the Government. See Roger's Response to
Bright's Motion to Compel. Ultimately, Rogers and/or Wausau advised Bright to submit its claim as an REA,
rather than as a certified claim under the Contract Disputes Act. The parties agree that Bright's REA was
never certified, as the prime contract required for any and all claims exceeding $50,000. See Prime Contract,
¶ 37. Thus, the REA is not a "claim" as defined in Article 37 of the prime contract, and Rogers may not rely
on the arbitration exception in the Subcontract because that same Subcontract required Rogers to certify
claims relating to the Government. See e.g., Woodrow Wilson Constr. Co., Inc. v. MMR-Radon Constructors,
Inc., 635 So.2d 758 (La.Ct.App.1994) (affirming arbitration order, under terms of subcontract providing for
arbitration unless contractor submitted claim against owner, where general contractor did not submit claim
against owner in accordance with procedures specified).
Given our decision that Bright's REA was not a "claim" subject to the arbitration exception under the
Subcontract, we do not reach the district court's alternate basis for compelling Rogers to submit to
arbitration.16 We also do not address Roger's argument that Bright's claim did not require certification to be
submitted as an REA, and alternatively that only Wausau could certify Bright's claim. Regardless of who was
responsible for certification or whether Bright's claim should have been certified, the exception to arbitration
does not apply because there is no "claim" as defined by Article 37 of the prime contract. See Aluminum,
Brick & Glass Workers Int'l Union v. AAA Plumbing Pottery Corp., 991 F.2d 1545, 1550 (11th Cir.1993)
(explaining that courts are not permitted to address defenses to disputes within the scope of an arbitration
clause).
Bright's claim against Wausau and Rogers is simple. Wausau and Rogers had no right to settle
Bright's million dollar claim against the government for any sum and certainly not for $10,000. This dispute
clearly arises out of the contractual relationship between these parties and is covered by the arbitration clause.
IV. Conclusion
However, a written demand or written assertion by the Contractor seeking the payment of
money exceeding $50,000 is not a claim under the Act until certified as required by
subparagraph (d)(2) below.
Government/A-1 Prime Contract dated July 16, 1993, ¶ 37 (emphasis added).
16
Namely, the district court found that Bright never asserted its demand for additional compensation
against Rogers, as required by the exception provision. See Subcontract, ¶ 14.2, supra at n. 11.
For these reasons, we AFFIRM the district court's order compelling arbitration as to both Rogers and
Wausau and dismissing the underlying cases.
GARWOOD, Circuit Judge, dissenting in part:
I concur in all of Judge Fay's cogent opinion except only so much thereof as holds that Wausau is
bound by the arbitration provisions in the Bright/A-1 Subcontract. I respectfully dissent from the latter
holding.
The majority correctly recognizes that the September 1993 Bright/A-1 Subcontract does not of itself
bind Wausau to its arbitration provisions, notwithstanding Wausau's status as Miller Act performance and
payment bond surety for the project general contractor A-1, because Wausau was not a party to the Bright/A-
1 Subcontract.1 The majority instead holds that Wausau became bound to Bright under the Bright/A-1
Subcontract, including its arbitration clause, by the combined effect of three documents Wausau executed
subsequent to the Government's termination of A-1 for A-1's default on the project, namely: the May 20,
1994 Takeover Agreement between Wausau and the Government; the May 26, 1994 Completion Contract
between Wausau and Rogers, the new completing prime contractor for the project hired by Wausau; and the
June 14, 1994 Ratification Agreement between Wausau and Bright, as a result of which Bright later that
month began and ultimately completed (or mostly completed), as a Rogers subcontractor, the remaining work
called for in the Bright/A-1 Subcontract. I interpret these documents, and their collective effect, differently
than does the majority.
The combined effect of the three documents relied on by the majority is simply that Wausau, as
authorized by the Government, undertook completion of the overall project by contracting with Rogers for
Rogers to complete all the remaining work called for in A-1's contract with the Government, Wausau agreeing
to assign to Rogers its rights in the uncompleted subcontracts so that Rogers would, in effect, be substituted
for A-1 in those subcontracts with respect to the unfinished work thereunder, and Bright and Wausau agreeing
that Wausau would pay Bright for all unpaid work done prior to A-1's termination and that Wausau had a 120
day option to require Bright to so agree to complete for Rogers, which option was timely exercised. The net
result was in essence that Wausau paid Bright for unpaid work performed to date and Rogers was substituted
1
Cf. U.S. v. Pool and Canfield, Inc., 778 F.Supp. 1088, at 1090 (W.D.Mo.1991) (by issuing Miller
Act payment bond as to general contract, surety did not agree to arbitrate claims by subcontractor merely
because the subcontract between the subcontractor and the general contractor contained an arbitration
clause).
for A-1 in the Subcontract as to the uncompleted work thereunder, and the subcontract's arbitration clause
binds Rogers and Bright, but not Wausau, just as it had bound Bright and A-1, but not Wausau. There is
nothing unusual or unfair about this. Bright was protected by the payment bond for the work it had done and
did not have to agree to Wausau having the option to cause Rogers to step into A-1's shoes under the
Subcontract; but, the Subcontract was subject to termination by virtue of A-1's termination and Bright had
no right to complete the work; and thus agreeing with Wausau as it did gave Bright, which had performed
only about a third of the Subcontract, the opportunity, which shortly thereafter materialized, of being awarded
the contract to complete the balance of the work on the same terms for a solvent prime contractor, Rogers.
Nothing in the documents relied on by the majority contains any agreement on Wausau's part be
bound by A-1's obligations under the Subcontract unless Wausau itself undertook to complete the work, as
opposed to having it done by a new completion prime contractor, and except that Wausau recognized and
discharged its payment bond obligation to pay Bright for unpaid for work performed prior to A-1's
termination.
Wausau's Takeover Agreement with the Government allows Wausau, in order to fulfill its
performance bond obligations to the Government, to hire a completion prime contractor to complete the job,
contains no arbitration clause (and incorporates no agreement which contains such a clause), and expressly
provides it would not "be deemed to create any rights in favor of, or inure to the benefit of any third party or
parties" (and would not enlarge Wausau's obligations under its bonds).
Wausau's Completion Contract with Rogers obligates Wausau to assign its rights in the uncompleted
subcontracts to Rogers, but does not purport to recognize any obligations on the part of Wausau under those
subcontracts, which Wausau was not a party to. And, of course, Bright (like the other subcontractors) was
not a party to either the Completion Contract or the Takeover Agreement.
The only agreement executed by both Wausau and Bright is the Ratification Agreement. The
Ratification Agreement commences by recitals that A-1 has been terminated by the Government, which has
called on Wausau (referred to throughout as "Surety") under its performance bond, that Bright (referred to
throughout as "Subcontractor") has made a claim under the payment bond, and that the total Subcontract
amount is $493,653, the value of the work completed is $154,609, of which $39,038.25 has been paid,
leaving a balance of $107,040.30 now owing plus $7,730.45 as five percent retainage (specified in clause (8)
of the recitals). Paragraph (1) states that Wausau has paid Bright $107,040.30 and that Bright releases
Wausau from "all claims for monies due this day, excluding retainage withheld." Paragraph (2) provides that
"Subcontractor ratifies and agrees to complete its subcontract ... and further agrees to start work within seven
(7) days after request by Surety ..." (emphasis added). Paragraph (3) provides:
"Since the work under the contract with the Owner of the project may be completed by a new
completion prime contractor, Subcontractor agrees that Surety may assign its rights under the
subcontract and this agreement to the completing prime contractor if done within one hundred twenty
(120) days of the date of this agreement. Subcontractor will then look to the assignee for all further
payments including all retainages whether withheld now as set forth above or in the future."
Paragraph (4), the last paragraph, makes provision respecting payment by Wausau to Bright of the $7,730.45
retainage for previously performed work, and states that "such payment will constitute complete fulfillment
of the obligations of Surety to Subcontractor."2
Nowhere does the Ratification Agreement state that Wausau ratifies or is bound by the Subcontract.
Rather, it expressly provides that if within 120 days Wausau assigns "its rights" thereunder and under the
Ratification Agreement to a "new completion prime contractor," Bright "will then look to the assignee for
all further payments." This is just what happened. Wausau did assign its rights under the Ratification
Agreement to Rogers, Bright in June 1994 did start to complete the unfinished Subcontract work as a
subcontractor of Rogers, and Bright did look to Rogers for further payments. Bright has been paid in full,
including retainage, for work done prior to A-1's termination. It is illogical to say that in these circumstances
Wausau is somehow implicitly bound by the Subcontract, when Bright has expressly agreed to look only to
the new prime completion contractor-Rogers-for "all further payments" and has agreed that Wausau's
payment of the $7,730.45 retainage for work done for A-1 "will constitute complete fulfillment of the
obligations of Surety to Subcontractor."
2
On December 14, 1994, Wausau paid Bright the $7,730.45 retainage and Bright executed a release in
favor of Wausau. Arguably, the payment was not required by paragraph (4), which provides in full:
"If within one hundred twenty (120) days of the date of this agreement Surety, its agent
or assigns has not called upon Subcontractor to complete, Surety will pay the retainages
withheld as set forth in Item (8) provided the work in place has been accepted by the
Owner. Tender of such payment will constitute complete fulfillment of the obligations of
Surety to Subcontractor."
Wausau explains that it construed paragraph (4) to apply whenever Wausau did not (within 120
days) call on Bright to complete for Wausau itself, as opposed to completing for the new
completing prime contractor (Rogers). However, that construction is arguably inconsistent with
the portion of the last sentence of paragraph (3) relating to retainages withheld "now as set forth
above." That possible inconsistency is, however, irrelevant to any issue on this appeal, as is also
whether the $7,730.45 payment was required by the payment bond. Bright has been paid the
retainage for work done before A-1's termination, and that was accomplished long prior to the
events giving rise to the present controversy.