AgGrow Oils, L.L.C. v. National Union Fire

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 99-4319
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AgGrow Oils, L.L.C., *
*
Plaintiff - Appellee, *
*
v. * Appeal from the United States
* District Court for the
National Union Fire Insurance * District of North Dakota.
Company of Pittsburgh, PA, *
*
Defendant - Appellant, *
*
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Submitted: November 15, 2000
Filed: March 7, 2001
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Before LOKEN, LAY, and MORRIS SHEPPARD ARNOLD, Circuit Judges.
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LOKEN, Circuit Judge.
National Union Fire Insurance Company (“National”) issued a performance bond
guaranteeing the obligations of T.E. Ibberson Company (“TEI”) under a contract
between TEI and AgGrow Oils, L.L.C. (“AgGrow”). AgGrow filed this action against
National to recover on the bond, claiming that TEI was in default of its contractual
obligations. National moved to stay the litigation pending mandatory arbitration under
the TEI/AgGrow contract, which was incorporated by reference in National’s bond.
The district court denied a stay, and National appeals. We agree with the district court
there is no arbitration agreement between AgGrow and National mandating a stay
under section 3 of the Federal Arbitration Act, 9 U.S.C. § 3. However, we conclude
the district court should reconsider whether to stay this action, at least in part, because
arbitration of the underlying contract dispute between AgGrow and TEI is now
pending. Accordingly, we affirm in part and remand.
I. Background.
AgGrow was established in 1996 to construct and operate a plant to process
oilseeds grown by farmer-investors into edible and industrial oils. In May 1997,
AgGrow and TEI entered into a Construction Contract in which TEI agreed to design
and build the processing facility near Carrington, North Dakota, and AgGrow agreed
to pay TEI a “not to exceed” price of $7,758,281. TEI purchased the processing
equipment from Anderson International Corporation (“Anderson”). A TEI subsidiary,
Ibberson Engineering, provided engineering services on the project. Consistent with
prior direct dealings between AgGrow and Anderson, TEI guaranteed that the
completed plant would process 200 tons of five specified oilseeds per day, and that the
“expeller cake” would have a residual oil content of five to eight percent. National
issued a performance bond binding National “to the Owner [AgGrow] for the
performance of [TEI’s obligations under] the Construction Contract, which is
incorporated herein by reference.”
After completion, the plant did not meet TEI’s performance guarantees, and
AgGrow notified TEI and National of its intent to claim a default and seek relief under
the bond. AgGrow commenced this action in February 1999, suing National to recover
on the bond and for bad faith, Ibberson Engineering for negligence, and Anderson for
negligence and breach of warranty. AgGrow did not sue TEI. Ibberson Engineering
cross claimed against Anderson, and Anderson cross claimed against Ibberson
Engineering and National. Some months later, TEI filed an arbitration claim against
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AgGrow under the arbitration provision in the Construction Contract;1 AgGrow
counterclaimed for damages, including damages for TEI’s alleged breach of the
performance guarantees. TEI also sued Anderson in the District of Minnesota seeking
indemnity for any liability to AgGrow. That action was transferred to the District of
North Dakota and has been consolidated with this action.
National moved to stay AgGrow’s lawsuit, arguing that AgGrow is obligated to
arbitrate its claim under the performance bond because the bond expressly incorporated
by reference the Construction Contract, including its arbitration provision. AgGrow
opposed that motion, arguing the bond itself contains no agreement to arbitrate and
instead provides that “[a]ny proceeding, legal or equitable, under this Bond may be
instituted in any court of competent jurisdiction in the location in which the work or
part of the work is located . . . within two years after the Surety refuses or fails to
perform its obligations under this Bond.” The district court initially denied National’s
motion for a mandatory stay, concluding that AgGrow’s claim on the bond is not
arbitrable because “the bond literally incorporates only AgGrow’s promise to arbitrate
with TEI; it does not . . . encompass mandatory arbitration with National.” Four
months later, after the parties advised that Anderson refused to arbitrate, and that no
arbitration proceedings had been commenced,2 the district court denied a discretionary
stay. National appeals. We have jurisdiction to review this interlocutory order. See
9 U.S.C. § 16(a)(1)(A); In re Piper Funds, Inc., 71 F.3d 298, 300 (8th Cir. 1995).
1
Section 4.5 of the Construction Contract provides that “[a]ny controversy or
Claim arising out of or related to the Contract, or the breach thereof, shall be settled by
arbitration in accordance with the Construction Industry Arbitration Rules of the
American Arbitration Association.”
2
In fact, TEI filed its claim in arbitration one month before the district court
ruled. As we shall explain, this was a critical fact that the parties should have
immediately brought to the district court’s attention.
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II. Is National Entitled to a Mandatory Stay?
Section 3 of the Federal Arbitration Act provides that the district court shall stay
the trial of an action brought “upon any issue referable to arbitration under an
agreement in writing for such arbitration.” 9 U.S.C. § 3. However, “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., Inc. v. Communications
Workers, 475 U.S. 643, 648 (1986) (quotation omitted). “We apply ordinary state law
contract principles to decide whether parties have agreed to arbitrate a particular
matter,” giving “healthy regard for the federal policy favoring arbitration.” Keymer v.
Management Recruiters Int’l, Inc., 169 F.3d 501, 504 (8th Cir. 1999) (quotation
omitted). The question of arbitrability is for the court, not the arbitrator. See
McLaughlin Gormley King Co. v. Terminix Int’l Co., 105 F.3d 1192, 1193-94 (8th Cir.
1997).
The issue is whether AgGrow and National agreed to arbitrate AgGrow’s claim
on the performance bond. That issue turns on the meaning of the provision in the bond
incorporating by reference the Construction Contract between AgGrow and TEI.
Applying North Dakota law, the first question is whether the incorporation provision
is ambiguous, a question of law we must decide from the four corners of the written
agreement. See Burk v. Nance Petroleum Corp., 10 F.3d 539, 542 (8th Cir. 1993). As
a general matter of contract law, an incorporation clause is effective only when the
“provision to which reference is made has a reasonably clear and ascertainable
meaning.” J.S. & H. Constr. Co. v. Richmond County Hosp. Auth., 473 F.2d 212, 215
(5th Cir. 1973). Without question, incorporation of the Construction Contract clarified
the performance obligations of TEI that National as surety undertook to guarantee. See
Hollerman Mfg. Co. v. Standard Accident Ins. Co., 239 N.W. 741, 744-45 (N.D. 1931)
(unpaid supplier may sue on bond issued in favor of owner and incorporating builder’s
contractual obligation to pay suppliers); accord Home Indem. Co. v. F.H. Donovan
Painting Co., 325 F.2d 870, 874 (8th Cir. 1963). However, it is less clear that the
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incorporation clause reflected an intent by AgGrow and National to arbitrate their
disputes under the bond -- that intent is not clearly expressed, and it seems to be
negated by the bond provision referring to the judicial resolution of disputes and by the
provision in the Construction Contract that it “not be construed to create a contractual
relationship of any kind . . . between any persons or entities other than [AgGrow and
TEI].” We conclude the incorporation clause is ambiguous on the issue of arbitrability,
that is, “rational arguments can be made in support of contrary positions as to the
meaning of the language in question.” Johnson v. Mineral Estate, Inc., 343 N.W.2d
778, 780 (N.D. 1984).
When a contract is ambiguous, extrinsic evidence may be considered to
determine the parties’ intent. See Case Int’l Co. v. T.L. James & Co., 907 F.2d 65, 67
(8th Cir. 1990) (testimony of drafter considered in finding that prime contract’s
arbitration clause was not incorporated by reference into a subcontract). In this case,
we have no extrinsic evidence regarding the parties’ intent on the arbitrability question.
An ambiguous contract may also be explained “by reference to the circumstances under
which it was made and the matter to which it relates.” N.D. CENT. CODE § 9-07-12.
In general, a performance bond provides recourse to an obligee (AgGrow) against a
secondary obligor (National, the surety) in the event the principal obligor (TEI) fails to
perform the underlying obligation. See RESTATEMENT (THIRD) OF SURETYSHIP AND
GUARANTY § 1 (1996). In defending a claim on the bond, the surety may raise nearly
all defenses available to the principal obligor, plus defenses unique to the surety, such
as actions by the obligee that impair the surety’s position or release the principal
obligor. Id. §§ 34, 37-47. When the surety has performed the underlying obligation
or has discharged the principal obligor by settling with the obligee, the surety usually
has a right to be reimbursed by the principal obligor. Id. §§ 22-24.
National argues that, as surety, it “steps into the shoes” of TEI and may compel
AgGrow to arbitrate its claim on the bond under the arbitration provision in the
Construction Contract. In support of its position, National marshals an impressive
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array of cases from other jurisdictions in which a bond provision incorporating the
underlying contract was held to include the contract’s arbitration provision and to
justify a stay of litigation on the bond. Some of these cases are not quite on point,
either because the surety was not seeking the stay, or because the stay was granted
pending arbitration between the parties to the underlying contract, not between the
bonding company and the obligee.3 Whether a lawsuit on the bond should be stayed
while the obligee and the principal obligor arbitrate the underlying performance dispute
is a different question than whether the obligee and the surety have separately agreed
to arbitrate any disputes under the bond. See United States v. Bregman Constr. Corp.,
256 F.2d 851, 854 (7th Cir. 1958).
Some of the cases cited by National have expressly held that an incorporation
clause in the bond gave either the surety, or the obligee making a claim on the bond,
the right to arbitrate the bond claim, as well as to stay the pending court action.4 To the
same effect, another case held that an incorporation clause gave the surety a right to
participate in pending arbitration between the principal obligor and the obligee. See
Firemen’s Ins. Co. v. Edgewater Beach Owner’s Ass’n, 1996 WL 509720, at *3 (N.D.
Fla. June 25, 1996). But these cases do not discuss the significance of construing the
incorporation clause as an express agreement to arbitrate between the obligee and the
bonding company. The impact of such an agreement can be far-reaching. For example,
it would permit the surety to compel arbitration of a claim on the bond when the
3
See Maxum Founds., Inc. v. Salus Corp., 779 F.2d 974, 976-77 (4th Cir. 1985);
J & S Constr. Co. v. Travelers Indem. Co., 520 F.2d 809, 809-10 (1st Cir. 1975);
accord J.S. & H. Constr. Co., 473 F.2d at 213-14.
4
See Commercial Union Ins. Co. v. Gilbane Bldg. Co., 992 F.2d 386, 386-89
(1st Cir. 1993); United States Fid. & Guar. Co. v. West Point Constr. Co., 837 F.2d
1507, 1507-08 (11th Cir. 1988); Exchange Mutual Ins. Co. v. Haskell Co., 742 F.2d
274, 275-76 (6th Cir. 1984); accord Cianbro Corp. v. Empresa Nacional de Ingenieria
Y Technologia, S.A., 697 F. Supp. 15, 19 (D. Me. 1988).
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principal obligor is bankrupt or out of business, even though no party to the underlying
contract wished to arbitrate performance issues. It would also permit the obligee to
compel an unwilling surety to arbitrate its unique defenses, such as whether the obligee
had impaired the surety’s position or released the principal obligor. Mindful of the
fundamental principle that “[a]rbitration under the [Federal Arbitration] Act is a matter
of consent, not coercion,” Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52,
57 (1995), we are unwilling to construe an incorporation clause whose obvious purpose
was to clarify the extent of the surety’s secondary obligation as also reflecting a mutual
intent to compel arbitration of all disputes between the surety and the obligee under the
bond. Like the district court, we conclude there was no such agreement to arbitrate.
Therefore, National is not entitled to a mandatory stay under section 3 of the Act.
Accord Hartford Accident & Indem. Co. v. Scarlett Harbor Assocs. Ltd. P’ship, 695
A.2d 153, 156-57 (Md. 1997); In re Fidelity & Deposit Co. of Md. v. Parsons &
Whittemore Contractors Corp., 397 N.E.2d 380, 381-83 (N.Y. 1979).
III. Is National Entitled to a Discretionary Stay?
Though National is not entitled to compel arbitration of AgGrow’s claim on the
bond, the district court has discretion to stay “third party litigation [that] involves
common questions of fact that are within the scope of the arbitration agreement” in the
Construction Contract. Contracting Northwest, Inc. v. City of Fredericksburg, 713
F.2d 382, 387 (8th Cir. 1983); accord American Home Assurance Co. v. Vecco
Concrete Constr. Co., 629 F.2d 961, 964 (4th Cir. 1980).5 As these cases recognized,
5
Both Contracting Northwest and Vecco concluded that 9 U.S.C. § 3 authorizes
a stay in favor of a non-party to the arbitration agreement. In IDS Life Ins. Co. v.
Sunamerica, Inc., 103 F.3d 524, 530 (7th Cir. 1996), the Seventh Circuit concluded that
only a party to the arbitration agreement may be granted a stay under § 3, but other
parties may be entitled to a stay “under the doctrine of abstention applicable to parallel
proceedings in judicial and arbitral fora.” All three decisions recognized there is
discretion to stay a lawsuit when a parallel arbitration proceeding should have priority.
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a discretionary stay may well be needed to further the strong federal policy favoring
agreements to arbitrate. Here, for example, AgGrow agreed to arbitrate any
performance disputes with TEI but sued National as surety on the bond. TEI is the real
party in interest in the lawsuit because it has agreed to indemnify National, and
National may assert TEI’s defenses under the Construction Contract. Absent a
discretionary stay, AgGrow will succeed in avoiding its duty to arbitrate performance
issues under the Construction Contract if its suit on the bond is given priority over the
parallel arbitration proceeding commenced by TEI.
The district court denied a discretionary stay, in part based upon its erroneous
understanding that no arbitration proceeding was pending. The court was also
concerned that arbitration is unlikely to resolve the entire dispute because Anderson did
not agree to arbitrate and refuses to participate in or be bound by the arbitration.
However, TEI and AgGrow may not avoid their agreement to arbitrate because they
failed to obtain prior commitments to arbitrate from suppliers, subcontractors, or
bonding companies whose conduct or contractual obligations may now be relevant in
resolving the entire dispute. As the Supreme Court said in Dean Witter Reynolds, Inc.
v. Byrd, 470 U.S. 213, 221 (1985), “we rigorously enforce agreements to arbitrate,
even if the result is ‘piecemeal’ litigation.”
In these circumstances, we must remand so that the district court may reconsider
the question of a discretionary stay. There is now arbitration pending, and it should be
given priority to the extent it is likely to resolve issues material to this lawsuit. On the
other hand, the lawsuit involves more parties and claims than the arbitration. In a
complex, multi-party dispute of this type, issues such as the risk of inconsistent rulings,
the extent to which parties will be bound by the arbitrators’ decision, and the prejudice
that may result from delays must be weighed in determining whether to grant a
discretionary stay, and in fashioning the precise contours of any stay. Compare
See also Webb v. R. Rowland & Co., 800 F.2d 803, 808 (8th Cir. 1986).
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Contracting Northwest, 713 F.2d at 387, and Gilbane, 992 F.2d at 391 & n.8 (granting
stays), with Sierra Rutile Ltd. v. Katz, 937 F.2d 743, 750-51 (2d Cir. 1991), and
American Shipping Line, Inc. v. Massan Shipping Indus., Inc., 885 F. Supp. 499, 502
(S.D.N.Y. 1995) (denying stays). Such issues are properly committed in the first
instance to the district court’s discretion.
The order of the district court denying National’s motion for a mandatory stay
is affirmed. The denial of a discretionary stay is vacated, and the case is remanded for
further proceedings not inconsistent with this opinion. Each party shall bear its own
costs on appeal.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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