Western Surety Company v. U.S. Engineering Company

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
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WESTERN SURETY COMPANY, )
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Plaintiff, )
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v. ) Civil Action No. 15-cv-327 (TSC)
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U.S. ENGINEERING COMPANY )
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Defendant. )
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MEMORANDUM OPINION
Plaintiff Western Surety Company brought this suit for declaratory and injunctive relief
seeking to enjoin Defendant U.S. Engineering Company from compelling arbitration proceedings
against Plaintiff and making a claim on a surety bond issued by Plaintiff. Defendant has filed a
motion to dismiss under Rule 12(b)(6), arguing that the parties are contractually bound to
arbitrate their dispute over the bond. Plaintiff responded by filing a motion for partial summary
judgment solely on the issue of whether it must arbitrate its dispute with the Defendant. For the
reasons stated herein, Defendant’s motion will be DENIED, and Plaintiff’s motion will be
GRANTED.
I. BACKGROUND
On January 25, 2012, Turner Construction and Defendant entered into a contract for
Defendant to perform construction and renovation work at the South African Embassy in
Washington, D.C. (ECF No. 16, Pl. Statement of Facts (“SOF”) ¶ 1). Defendant then awarded a
subcontract for sheet metal work on the project to United Sheet Metal, Inc. (Id. ¶ 2). The
subcontract contains the following provisions that are pertinent for the pending motions:
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 The introductory paragraph identifies U.S. Engineering as the “Contractor” for purposes
of the contract, who enters into a “subcontract” with United Sheet Metal.
 Paragraph 26, which is entitled “Arbitration,” states:
Any controversy or claim of Contractor against Subcontractor or
Subcontractor against Contractor shall be resolved by arbitration pursuant to
the Construction Industry Arbitration Rules of the American Arbitration
Association in effect on the date on which the demand for arbitration is made
....
 Paragraph 31, the Merger Clause, integrates the prior communications and
representations “between Contractor and Subcontractor,” and notes that the subcontract is
the “final and complete agreement between Contractor and Subcontractor.”
(Pl. Ex. 1).
After entering into the subcontract with Defendant, United Sheet Metal negotiated with
Plaintiff to issue a surety bond for $585,000. (Pl. Ex. 2). Under the terms of the surety bond:
 United Sheet Metal is named as the “Contractor,” Plaintiff is the “Surety,” and Defendant
is the “Owner.” (Pl. Ex. 2 at p. 1).
 “The Contractor and Surety [Plaintiff], jointly and severally, bind themselves, their heirs,
executors, administrators, successors and assigns to the Owner [Defendant] for the
performance of the Construction Contract, which is incorporated herein by reference.”
(Id. § 1).
 “Any 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 . .
.”
(Pl. Ex. 2, §§ 15, 1, 11.)
In early 2013, a dispute over the performance of the subcontract arose between Defendant
and United Sheet Metal, which led to Defendant terminating the subcontract. (Pl. SOF ¶¶ 11–
12). Defendant hired a replacement subcontractor to finish the sheet metal work, and United
Sheet Metal sought to compel arbitration, seeking $331,242 in damages. (Id. ¶¶ 13–14).
Defendant filed a counterclaim for $417,379 in damages. (Id. ¶ 14). The arbitration proceedings
between Defendant and United Sheet Metal have not concluded. (Id. ¶ 15).
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On June 9, 2014, Plaintiff received a letter from Defendant stating that it had terminated
United Sheet Metal’s performance of the subcontract, and that Defendant intended to make a
claim under the surety bond. (Id. ¶ 16). On March 4, 2015, Defendant filed a request to join
Plaintiff as a party in Defendant’s arbitration proceedings with United Sheet Metal. (Id. ¶ 18).
Plaintiff refused to consent to the joinder, and instead filed its Complaint in this court on March
6, 2015. (See id. ¶ 19).
Defendant argues that because the bond agreement incorporates the subcontract by
reference, Plaintiff is bound by the arbitration clause in the subcontract to arbitrate its claim on
the surety bond, as well as any issues of arbitrability. Plaintiff asserts that it never consented to
arbitration, and that it is impossible to interpret the text of the bond or the subcontract to bind
Plaintiff to the arbitration clause.
II. STANDARD OF REVIEW
Though Defendant’s motion is styled as a motion to dismiss, a motion that seeks to
compel or preclude arbitration is evaluated under the summary judgment standard “as if it were a
request for ‘summary disposition of the issue of whether or not there had been a meeting of the
minds on the agreement to arbitrate.’” Aliron Int’l, Inc. v. Cherokee Nation Indus., Inc., 531
F.3d 863, 865 (D.C. Cir. 2008) (internal quotation marks omitted); see also W & T Travel Servs.,
LLC v. Priority One Servs., Inc., 69 F. Supp. 3d 158, 164 (D.D.C. 2014) (“Both motions to stay
and compel arbitration focus judicial scrutiny on the arbitrability of the dispute, rather than the
dispute itself and, when both motions are made concurrently, they may be addressed together as
cross-motions for summary judgment.”), appeal dismissed, No. 14-7152, 2015 WL 7693578
(D.C. Cir. Nov. 2, 2015).
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Summary judgment is appropriate where there is no disputed genuine issue of material
fact, and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a); Celotex
Corp. v. Catrett, 477 U.S. 317, 325 (1986). In determining whether a genuine issue of material
fact exists, the court must view all facts in the light most favorable to the non-moving party. See
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The moving party
bears the “initial responsibility of informing the district court of the basis for its motion, and
identifying those portions of the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits . . . which it believes demonstrate the absence of a
genuine issue of material fact.” Celotex Corp., 477 U.S. at 323 (internal quotation marks
omitted). The nonmoving party, in response, must “go beyond the pleadings and by [its] own
affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate
specific facts showing that there is a genuine issue for trial.” Id. at 324 (internal quotation marks
omitted). “If the evidence is merely colorable, or is not significantly probative, summary
judgment may be granted.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249–50 (1986)
(citations omitted). “[A]t the summary judgment stage the judge’s function is not himself to
weigh the evidence and determine the truth of the matter but to determine whether there is a
genuine issue for trial.” Id. at 249.
III. ANALYSIS
A. Arbitration Analysis
The parties’ motions turn on one issue—whether Plaintiff is bound by the arbitration
clause in the subcontract. The Supreme Court has held that “arbitration is a matter of contract . .
. on an equal footing with other contracts” and courts must “enforce them according to their
terms.” Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 67 (2010) (internal citations omitted).
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Since “[a]rbitration is a matter of contract . . . a party cannot be required to submit to arbitration
any dispute which he has not agreed so to submit.” BG Grp., PLC v. Republic of Argentina, 134
S. Ct. 1198, 1206 (2014) (quoting Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574,
582 (1960)).
“When deciding whether the parties agreed to arbitrate a certain matter, courts generally
should apply ordinary state-law principles that govern the formation of contracts.” Aliron Int’l,
Inc. v. Cherokee Nation Indus., Inc., 531 F.3d 863, 865 (D.C. Cir. 2008) (alterations omitted)
(quoting First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). The parties agree that
District of Columbia law governs this dispute, since the surety bond’s choice of law provision
specifies that disputes will be governed by the law of the state where the construction took place,
and “[t]he District of Columbia Court of Appeals has adopted the general rule ‘that parties to a
contract may specify the law they wish to govern, as part of their freedom to contract, as long as
there is some reasonable relationship with the state specified.’” Kroger v. Legalbill.com, 436 F.
Supp. 2d 97, 103 (D.D.C. 2006) (quoting Norris v. Norris, 419 A.2d 982, 984 (D.C. 1980)).
Under District of Columbia law, the court relies on the plain language of the contract
when examining parties’ intent to be bound. See Am. Fed’n of Gov’t Emps., Local 2924 v.
FLRA, 470 F.3d 375, 381 (D.C. Cir. 2006); see also Tillery v. D.C. Contract Appeals Bd., 912
A.2d 1169, 1176 (D.C. 2006). “Under D.C. law, ‘the written language embodying the terms of
an agreement will govern the rights and liabilities of the parties regardless of the intent of the
parties at the time they entered in the contract, unless the written language is not susceptible of a
clear and definite undertaking.’” Bazarian Int’l Fin. Assocs., L.L.C. v. Desarrollos Aerohotelco,
C.A., Civil Action No. 13-1981 (BAH), 2016 WL 471273, at *13 (D.D.C. Feb. 7,
2016)(alterations and internal quotation marks omitted)(quoting Abdelrhman v. Ackerman, 76
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A.3d 883, 888 (D.C. 2013)). If the language is clear, the court’s role is to rely on the clear
language, but if an integrated agreement contains ambiguous terms, the court, after admitting
parole evidence that may include habitual and customary practices, must interpret the contract
using a reasonable person standard. Tillery, 912 A.2d at 1176. Ambiguous terms are interpreted
against the drafter. Tower Ins. Co. of N.Y. v. Davis/Gilford, 967 F. Supp. 2d 72, 81 (D.D.C.
2013). As the party seeking to compel arbitration, Defendant bears the burden of showing that
there is an enforceable arbitration agreement. See Haire v. Smith, Currie & Hancock LLP, 925
F. Supp. 2d 126, 129 (D.D.C. 2013).
B. Arbitrability
There is “a liberal federal policy favoring arbitration agreements,” and an attendant
presumption in favor of arbitration. Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 24 (1983); see Data Mountain Sols., Inc. v. Giordano, Civil Action No. 06-1666 PLF,
2006 WL 6908604, at *1 (D.D.C. Nov. 21, 2006). Relying on this policy and presumption,
Defendant argues that Plaintiff agreed to arbitrate the issue of arbitrability because the arbitration
clause in the subcontract adopts the rules of the American Arbitration Association (“AAA”),
which various courts have determined leave the question of the arbitrability of a dispute to an
arbiter.
The Supreme Court has recognized that “parties can agree to arbitrate ‘gateway’
questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their
agreement covers a particular controversy.” Rent-A-Ctr., 561 U.S. at 68–69. “An agreement to
arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking
arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration
agreement just as it does on any other.” Id. at 70. However, “a heightened standard applies to
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the determination that the parties agreed to arbitrate arbitrability, requiring ‘clear and
unmistakable evidence that they did so.’” W & T Travel Servs., 69 F. Supp. 3d at 166 (quoting
First Options of Chi., 514 U.S. at 944).
As discussed below, the court finds that Plaintiff is not bound by the arbitration
agreement in Defendant’s subcontract. Accordingly, there is no “clear and unmistakable
evidence” that Plaintiff intended to arbitrate the issue of arbitrability. Thus, the federal
presumption in favor of arbitration does not guide the court’s analysis here. See Booker v.
Robert Half Int’l, Inc., 413 F.3d 77, 83 (D.C. Cir. 2005) (“[I]n deciding arbitrability, ‘courts
generally should apply ordinary state-law principles that govern the formation of contracts.’”)
(alterations omitted) (quoting First Options of Chi., 514 U.S. at 944)); Institut Pasteur v. Chiron
Corp., No. CIV.A.03-0932(JDB), 2005 WL 366968, at *10 (D.D.C. Feb. 16, 2005) (“[T]his
federal policy favoring arbitration does not apply to the determination of whether there is a valid
agreement to arbitrate between the parties; instead ordinary contract principles determine who is
bound.”) (internal quotation marks and some citations omitted) (quoting Fleetwood Enters. Inc.
v. Gaskamp, 280 F.3d 1069, 1073 (5th Cir. 2002)).
C. Plaintiff is Bound By the Terms of the Subcontract Even Though Plaintiff Was Not
a Party to the Contract
Next, Defendant argues that Plaintiff must arbitrate its claims because the surety bond
agreement explicitly “incorporates by reference” the subcontract between Defendant and United
Sheet Metal, which contains a binding arbitration provision. Under District of Columbia law,
“[w]hen a contract incorporates another writing, the two must be read together as the contract
between the parties.” Sheriff v. Medel Elec. Co., 412 A.2d 38, 41 (D.C. 1980) (finding that
employer who was not a party to a collective bargaining agreement (“CBA”) was still bound by
its terms because the employer had signed an agreement with a labor union that incorporated the
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terms of the CBA by reference). Therefore, a surety can “be required to arbitrate its claims
pursuant to an incorporated arbitration provision in [a] subcontract.” Tower Ins. Co., 967 F.
Supp. 2d at 82 (“The Performance Bond [executed by Tower] states that the Subcontract ‘is
hereby referred to and made a part’ of the Bond . . . . The Court can discern no other meaning or
effect of this language but to include the Subcontract’s terms as provisions of the Performance
Bond in their entirety.”) (citations omitted); see Jewish Fed’n of Greater New Orleans v. Fid. &
Deposit Co. of Md., No. 01-30371, 2001 WL 1085096, at *1 (5th Cir. 2001) (“[B]ecause its bond
incorporates by reference the construction contract’s arbitration provision, that provision is
binding on [the surety].”).
However, even though Plaintiff is bound by the subcontract as a whole, the court must
consider the separate question of whether Plaintiff is also bound by the terms of the arbitration
clause.
D. Plaintiff Is Not Bound by the Arbitration Clause in the Subcontract
The arbitration clause in the subcontract provides:
Any controversy or claim of Contractor [Defendant] against Subcontractor [United
Sheet Metal] or Subcontractor against Contractor shall be resolved by arbitration .
...
(Pl. Ex. 1, § 26) (emphasis added). In order to get around what seems to be an agreement that
controversies or claims involving only the contractor (Defendant) and the subcontractor must be
arbitrated, Defendant advocates linguistic gymnastics.
Defendant begins by pointing out that the word “or” is disjunctive, and therefore the
sentence contains two clauses—one on each side of the disjunctive “or.” Because of the
disjunctive “or,” Defendant argues, the sentence describes two separate categories of disputes
that must be arbitrated. First, “any controversies . . . shall be resolved by arbitration.”
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Additionally, any “claim of Contractor against Subcontractor or Subcontractor against
Contractor shall be resolved by arbitration.” In other words, Defendant contends that because
“controversy” and “claim” are separated by the disjunctive “or” and the phrase “Contractor
against Subcontractor or Subcontractor against Contractor” follows “claim,” the limiting
contractor/subcontractor language only modifies the word “claim.” Therefore, according to
Defendant, “any controversy” involving any parties must be arbitrated, as well as any “claim of
Contractor against Subcontractor or Subcontractor against Contractor.” (ECF No. 15, Defs. Br.
pp. 10–11).
Defendant contends that reading the arbitration clause any other way would mean that it
contains superfluous language. Specifically, Defendant argues that because the first phrase “any
controversy,” includes a “claim,” then the latter word is redundant unless the word “claim” is
limited to disputes between the contractor and subcontractor:
If the clause “any controversy” was intended to mean the same thing as “claim”,
the drafter would have added the word “between” and removed the word “of” from
the arbitration clause, as follows: “Any controversy or claim [between] of Contractor
against Subcontractor . . . shall be resolved by arbitration . . . ”. Also, if the clause
“any controversy” and “claim” were intended to mean the same thing, then you
should be able to remove the clause “or claim” and the arbitration clause should still
make sense. However, when you do so, the clause does not make sense, as follows:
“Any controversy or claim of Contractor against Subcontractor…shall be resolved by
arbitration…”.
The word “or” is a word of choice. There is only a choice in the arbitration clause
between “any controversy” or “claim of Contractor against Subcontractor . . . ”. There
is no choice if “any controversy” and “claim” are both later modified by “of
Contractor against Subcontractor. . .” language because “any controversy” would
include the “claim” described.
(Id. p. 12) (alterations and emphasis in original).
The court finds Defendant’s argument unpersuasive. As an initial matter, Defendant is—
or ought to be—well aware of lawyers’ propensity for drafting legal documents using redundant
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or repetitive terminology. Thus, any potential redundancy between the use of “controversy” and
“claim” does not require reading the clause the way Defendant proposes.
Instead, the court agrees with the Plaintiff’s argument, which is that the “of Contractor
against Subcontractor” language is actually a limiting clause that means only those two parties
are bound by the arbitration agreement, and not outside parties. Reading the clause as
Defendants propose would render the phrase “Contractor against Subcontractor or Subcontractor
against Contractor” superfluous: if “any controversy” must be arbitrated, then there would be no
reason to also provide that disputes between the contractor and subcontractor must be arbitrated.
Defendants essentially ask the court to read the arbitration clause as providing that “all
controversies or claims” are subject to arbitration or, similarly, that “all controversies or claims,
including those between the contractor and subcontractor” are subject to arbitration. But the
clause is not that broad and does not include punctuation suggesting such an interpretation.
The clause here is different from the broad arbitration clauses in the two cases upon
which Defendant primarily relies. Exchange Mutual Insurance Company v. Haskell Company,
742 F.2d 274 (6th Cir. 1984), involved a claim by a prime contractor against a surety company.
The prime contractor, Haskell, entered into a general contract that provided that
[a]ll claims, disputes and other matters in question arising out of, or relating to this
contract or the breach thereof, except for claims which have been waived by the
making or acceptance of final payment as provided by subparagraphs 8.6.5 and
8.6.6 and which cannot be settled by negotiation between the Contractor and the
Owner, shall be decided in accordance with the Construction Industry Arbitration
Rules of the American Arbitration Association.
Id. at 275 (emphasis added). The subcontract incorporated by reference the prime contract and
the surety contract incorporated by reference the subcontract. Id. at 276. When Haskell initiated
arbitration proceedings against the surety company, the latter refused to arbitrate and sought
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protection from the court. Id. at 275. The district court rejected the surety’s claims and directed
the parties to proceed to arbitration. Id. The Sixth Circuit Court of Appeals affirmed. Id.
Unlike the arbitration clause here, the arbitration clause in Exchange Mutual Insurance
did not have any limiting language. See id. at 275. Rather, the clause stated “[a]ll claims,
disputes and other matters in question arising out of, or relating to this contract or the breach
thereof . . . .” would go to arbitration, which is open-ended and different from “any controversy
or claim of subcontractor against contractor” will proceed to arbitration. See id. at 275.
In J.S. & H. Construction Company v. Richmond County Hospital Authority, 473 F.2d
212, 213 (5th Cir. 1973), the prime contract between the general contractor and the property
owner contained the following arbitration clause:
7. Arbitration. (a) It is mutually agreed that all disputes arising in connection with
this contract shall be submitted to arbitration in accordance with the provisions of
the current Standard Form of Arbitration Procedure of the American Institute of
Architects and that all findings of fact by the arbitrators under this agreement shall
be conclusive and binding on both parties. It is further mutually agreed that the
decision of the arbitrators shall be a prior condition to any right of legal action
which either party to the contract may have against the other.
Id. at 213 n.2 (emphasis added). When the subcontractor brought an action in court against the
property owner, the general contractor, and the surety company, the district court ordered the
subcontractor to arbitration. Id. at 214. The Circuit affirmed, reasoning that the subcontract
incorporated the terms of the prime contract and, therefore, the subcontractor was bound by the
arbitration agreement in the prime contract. Id. at 214–15. Unlike the arbitration clause here, the
clause in J.S. & H. Construction provided—without exception or limiting language—that “all
disputes arising in connection with th[e] contract” were subject to arbitration. See id. at 213 n.2.
Thus, neither J.S. & H. Construction nor Exchange Mutual Insurance is persuasive.
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Not only are the cases cited by Defendant unpersuasive because they contained broad
arbitration clauses, they are also unpersuasive because the parties objecting to arbitration in both
cases only challenged whether their contracts incorporated by reference the terms of the
contracts that contained the arbitration clauses. See Exch. Mut. Ins. 742 F.2d at 276; J.S. & H.
Constr., 473 F.2d at 214–15. None of the parties who challenged arbitration contested whether
the actual language of the arbitration clause was broad enough to include their particular type of
dispute. Thus, neither of these two cases support Defendant’s interpretation of the arbitration
clause in this case.
Moreover, as Defendant concedes, the law is clear that “[w]hen a contract incorporates
another writing, the two must be read together as the contract between the parties.” Sheriff v.
Medel Electric Co., 412 A.2d 38, 41 (D.C. 1980). In light of this principle of statutory
interpretation, it would be impossible for the court to ignore the fact that the bond agreement
includes a judicial resolution provision stating that “[a]ny proceeding, legal or equitable, under
this Bond may be instituted in any court of competent jurisdiction . . . .” (Pl. Ex. 2, § 11). While
the judicial resolution clause in a vacuum could be construed as “merely declar[ing] ‘ground
rules’ under which any formal litigation in a judicial forum must proceed,” Cianbro Corp. v.
Empresa Nacional de Ingenieria y Technologia, S.A., 697 F. Supp. 15, 19 (D. Me. 1988), if the
court is to give every provision in the surety agreement meaning, it cannot ignore that there is a
provision which calls for filing suit, not merely accepting arbitration as the sole avenue of
recourse.
Finally, any ambiguity in the contract must interpreted against the drafter. Tower Ins.
Co., 967 F. Supp. 2d at 81. Thus, to the extent there is any uncertainty about the scope of the
arbitration clause, in this case the clause must be interpreted against the Defendant.
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III. CONCLUSION
For the foregoing reasons, Plaintiff’s motion for partial summary judgment will be
GRANTED and Defendant’s motion will be DENIED. A corresponding order will issue
separately.
Date: September 30, 2016
Tanya S. Chutkan
TANYA S. CHUTKAN
United States District Judge
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