MEDFORD TOWNSHIP SCHOOL DISTRICT VS. SCHNEIDER ELECTRIC BUILDINGS AMERICAS, INC. (L-0787-18, BURLINGTON COUNTY AND STATEWIDE)

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-5798-17T4
MEDFORD TOWNSHIP
SCHOOL DISTRICT,
APPROVED FOR PUBLICATION
Plaintiff-Respondent, April 26, 2019
APPELLATE DIVISION
v.
SCHNEIDER ELECTRIC
BUILDINGS AMERICAS, INC.,
Defendant-Appellant.
Argued April 1, 2019 – Decided April 26, 2019
Before Judges Messano, Fasciale and Rose.
On appeal from Superior Court of New Jersey, Law
Division, Burlington County, Docket No. L-0787-18.
Mark A. Rosen argued the cause for appellant
(McElroy, Deutsch, Mulvaney & Carpenter, LLP,
attorneys; Mark A. Rosen, of counsel and on the
briefs).
Richard W. Hunt argued the cause for respondent
(Parker McCay PA, attorneys; Richard W. Hunt and
John Neckonchuk, on the brief).
The opinion of the court was delivered by
ROSE, J.A.D.
Defendant Schneider Electric Buildings Americas, Inc. (Schneider)
appeals from a July 3, 2018 Law Division order enjoining and dismissing
arbitration proceedings filed against plaintiff Medford Township School
District (District). 1 We affirm.
I.
The dispute arises from the implementation of an energy savings
improvement program (ESIP), N.J.S.A. 18A:18A-4.6, under which the District
contracted with Schneider to design and implement upgrades to several of the
District's schools and its transportation and operations center. Initially, the
parties executed the Performance Assurance Support Services Agreement
(PASS Agreement), requiring the District to monitor the ESIP's actual energy
savings and guaranteeing the District a certain level of monetary savings. The
PASS Agreement did not contain an arbitration provision. Instead, its
governing law clause provided, in pertinent part (emphasis added):
This PASS Agreement will be governed,
interpreted and construed by, under and in accordance
with the laws, statutes and decisions of the state in
which the [s]ervices are to be performed, without
regard to its choice of law provisions. Venue shall be
in the federal, state or municipal courts serving the
county in which the [s]ervices are performed.
1
See R. 2:2-3(a)(3) (deeming an order compelling or denying arbitration "a
final judgment of the court for appeal purposes").
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2
Thereafter, the District issued a request for proposals (RFP), seeking a
qualified energy services company (ESC) to perform the services of a general
contractor for its ESIP. Among other things, the RFP outlined the terms of the
ESIP Agreement, including development and implementation of an energy
savings plan. Paragraph 30 of the RFP contained a governing law clause,
which stated verbatim (emphasis added):
The ESIP Agreement shall be governed by the
laws of the State of New Jersey. The successful
[ESC] shall agree that any action or proceeding that
arises in any manner out of performance of the RFP or
ESIP Agreement, shall be litigated in the Superior
Court of New Jersey, Burlington County, State of New
Jersey, and the [ESC] shall consent and submit to the
jurisdiction of the Superior Court.
After Schneider was awarded the project, the parties executed the
Energy Services Construction Contract (ESCC). 2 Under the terms of the
ESCC, the parties agreed that Schneider would be paid $2,494,575 for
performing energy conservation measures, including lighting upgrades and
building automation systems throughout the District.
Article 5 of the ESCC contained a dispute resolution provision, which
2
The parties do not dispute that although the PASS Agreement predated the
ESCC, which was executed in June 2015, and the RFP, which was issued in
June 2014, the PASS Agreement applied to the project and Schneider's
obligations. Inexplicably, however, the PASS Agreement was signed by the
District's business administrator in January 2010 and Schneider's regional
director in February 2012.
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stated (emphasis added):
5.1 To the extent allowed by applicable law, any
controversy or claim arising out of or relating to this
[c]ontract, or [c]ontract [d]ocuments, or any breach
thereof, may be settled by binding arbitration in
accordance with the Construction Industry Arbitration
Rules of the American Arbitration Association
[(AAA)], and judgment upon the award rendered by
the arbitrator(s) may be entered in any court having
jurisdiction thereof.
5.2 The arbitration proceeding location shall be in
the county in which the [p]roject is located.
Schneider alleged it completed its scope of work under the ESCC in
January 2017 but the District withheld $462,269, claiming the work was
unsatisfactory. On March 14, 2018, Schneider filed a demand for arbitration
with the AAA pursuant to the arbitration provision set forth in Article 5.1 of
the ESCC.
One month later, the District filed a verified complaint and an order to
show cause (OTSC) in the Law Division, seeking to enjoin and dismiss
Schneider's arbitration action. The complaint also alleged breaches of the
ESCC and PASS Agreement and other causes of action related to Schneider's
performance of work on the project. The District claimed all of the contract
disputes should be litigated in the Law Division.
Schneider filed its answer to the complaint and opposition to the OTSC,
countering the ESCC's arbitration provision was valid and enforceable.
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Schneider further argued the District's "allegations of defective work under the
[ESCC] are inextricably intertwined with Schneider's claim for payment and
should be resolved in the [a]rbitration proceeding . . . ."
On the return date of the OTSC, the trial judge rendered a tentative
written decision granting the District's requested relief, but afforded the parties
an opportunity to be heard. Thereafter, the judge issued a well-reasoned
amplified statement of reasons, 3 thoroughly addressing the parties' arguments
and applying the relevant law.
The trial judge acknowledged the validity of the arbitration provision,
finding "no indication that [it] was included without negotiation or that it was
an inconspicuous part of the [ESCC]." However, the judge further found by
using the term, "may," the provision was permissive and not mandatory.
Comparing the plain terms of the arbitration provision to other terms in the
ESCC, the judge observed "the parties specifically used the word 'shall' when
the terms were intended as mandatory." For example, "mandatory 'shall'
language r[an] throughout the entirety of Article 2 [pertaining to payments],
except for where '[p]ayments may [have been] withheld.'"
The trial judge found additional support for his conclusion in the
governing law provision of the RFP, which "distinctly g[ave] the Burlington
3
See R. 2:5-1(b).
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Vicinage of the Superior Court . . . jurisdiction over disputes arising from the
implementation of the District's ESIP." As such, the judge reasoned the RFP,
which preceded the ESCC, "serve[d] as extrinsic evidence for the ESCC – an
agreement made to satisfy ESIP requirements – and help[ed] to uncover the
actual meaning of the arbitration clause in the ESCC."
In sum, the trial judge concluded:
the permissive, "may" in the ESCC arbitration clause
ma[d]e[] arbitration optional. In order for the ESCC
arbitration clause to require arbitration, the clause
needed to include mandatory language that waived the
right to adjudicate in the courts or there needed to be
mutual consent by the parties. As neither of [those]
scenarios exist[ed] here, . . . the District's injunction
request to restrain arbitration [is granted].
This appeal followed.
Schneider maintains the plain terms of the ESCC permit either party to
select binding arbitration as a means for dispute resolution, which then
compels the other party to arbitrate. In essence, Schneider claims the judge's
interpretation of the arbitration provision renders the clause "superfluous"
because a dispute resolution provision is unnecessary when both parties agree
to arbitrate. Schneider further argues the judge erred in considering parol
evidence because the ESCC contains a merger clause. We disagree.
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II.
Well-established legal principles guide our review. Because the validity
of an arbitration agreement is a question of law, we review the order enjoining
arbitration de novo. Barr v. Bishop Rosen & Co., 442 N.J. Super. 599, 605
(App. Div. 2015) (citing Hirsch v. Amper Fin. Servs., LLC, 215 N.J. 174, 186
(2013)); see also Kernahan v. Home Warranty Admin. of Fla., Inc., 236 N.J.
301, 316 (2019) ("Whether a contractual arbitration provision is enforceable is
a question of law," accordingly we need not defer to the trial court's
"interpretative analysis" unless it is "persuasive.").
Our jurisprudence and public policy favor alternative dispute resolution
and are consistent with our view that "[l]itigation ought to be a last resort, not
a first one." Billig v. Buckingham Towers Condo. Ass'n, 287 N.J. Super. 551,
564 (App. Div. 1996); see also Cole v. Jersey City Med. Ctr., 215 N.J. 265,
276 (2013). Consequently, an "agreement to arbitrate should be read liberally
in favor of arbitration." Angrisani v. Fin. Tech. Ventures, LP, 402 N.J. Super.
138, 148 (App. Div. 2008) (quoting Marchak v. Claridge Commons, Inc., 134
N.J. 275, 282 (1993)).
Nonetheless, the policy favoring arbitration "is not without limits."
Garfinkel v. Morristown Obstetrics & Gynecology Assocs., 168 N.J. 124, 132
(2001). Recently, our Supreme Court reiterated that "[a]n arbitration
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agreement is valid only if the parties intended to arbitrate because parties are
not required 'to arbitrate when they have not agreed to do so.'" Kernahan, 236
N.J. at 317 (quoting Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford
Junior Univ., 489 U.S. 468, 478 (1989)). The Court elaborated:
In this state, when called on to enforce an
arbitration agreement, a court's initial inquiry must be
-- just as it is for any other contract -- whether the
agreement to arbitrate all, or any portion, of a dispute
is "the product of mutual assent, as determined under
customary principles of contract law."
[Id. at 319 (quoting Atalese v. U.S. Legal Servs. Grp.,
LP, 219 N.J. 430, 442 (2014)).]
In Atalese, the Court found, in the context of a consumer contract for
debt-adjustment services, that "because arbitration involves a waiver of the
right to pursue a case in a judicial forum, 'courts take particular care in
assuring the knowing assent of both parties to arbitrate, and a clear mutual
understanding of the ramifications of that assent.'" 219 N.J. at 442-43 (quoting
NAACP of Camden Cty. E. v. Foulke Mgmt. Corp., 421 N.J. Super. 404, 425
(App. Div. 2011)). Consequentially, when a contract contains a waiver of a
right to pursue a statutory remedy in court, that waiver "must be clearly and
unmistakably established." Garfinkel, 168 N.J. at 132. Accordingly, a "court
may not rewrite a contract to broaden the scope of arbitration." Ibid. (quoting
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Yale Materials Handling Corp. v. White Storage & Retrieval Sys., Inc. , 240
N.J. Super. 370, 374 (App. Div. 1990)).
As with other contractual provisions, courts look to the plain language
the parties used in the arbitration provision. Id. at 135; see also Kernahan, 236
N.J. at 321 ("A basic tenet of contract interpretation is that contract terms
should be given their plain and ordinary meaning."); Quigley v. KPMG Peat
Marwick, LLP, 330 N.J. Super. 252, 270 (App. Div. 2000) (in construing an
arbitration clause, courts must honor the intentions of the parties as set forth in
the language).
At issue here is whether the terms of the arbitration clause permit or
mandate arbitration. In certain contexts, we have recognized that where a
provision permits the parties to select arbitration to resolve a dispute under the
contract, but does not mandate arbitration, the provision is optional. Riverside
Chiropractic Grp. v. Mercury Ins. Co., 404 N.J. Super. 228, 237-38 (App. Div.
2008).
In Riverside, we considered an arbitration clause in an automobile
insurance contract, which permitted an injured party, the insured, and the
assignee of the insured's provider to submit a claim to dispute resolution. Id.
at 233. However, "the applicable insurance contract d[id] not entitle the
insurer to elect arbitration over the wishes of the insured." Id. at 238.
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Pursuant to the plain language of the arbitration clause, we determined the use
of the word "may" did not mandate arbitration. Id. at 237. Instead, it afforded
the provider-assignee of the insured "the option of filing for arbitration, but
d[id] not require it to do so." Ibid. We thus determined "had plaintiff opted to
file its claim . . . initially in the trial court, nothing in the contract language
would have forbidden the suit from going forward." Ibid.Significantly, in Riverside, the policy at issue did not provide "[e]ither
party may make a written demand for arbitration." Id. at 238 (alteration in
original). Had the policy contained that language, we recognized it "could
[have] be[en] construed as making arbitration mandatory, because if the
insured elect[ed] to sue, the insurer c[ould] simply make a written demand for
arbitration, which must then be honored." Ibid. (emphasis added).
Accordingly, when an arbitration provision specifically permits either party to
select arbitration, once invoked, the other party may be bound to arbitrate the
dispute. See e.g., Local 771, I.A.T.S.E. v. RKO Gen., Inc., 546 F.2d 1107,
1115-16 (2d Cir. 1977) (recognizing a contract that provides "[t]he parties may
submit to arbitration" triggers mandatory arbitration and that "[n]either the
word 'may' nor any other language used in the [a]greement implies that the
parties had the option of invoking some remedy other than arbitration").
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Against that legal backdrop, we begin our analysis by reiterating the
arbitration clause at issue did not provide that either party may resolve
disputes under the ESCC by binding arbitration. Rather, the clause generally
provides "any controversy or claim arising out of or relating to [the ESCC], or
[c]ontract [d]ocuments, or any breach thereof, may be settled by binding
arbitration." Nonetheless, Schneider urges us to interpret the provision as
mandatory where, as here, it invoked arbitration and the parties to the contract
are "two sophisticated entities."
Notably, the District is not "an average member of the public[,]" nor is
the ESCC a consumer contract. Cf. Atalese, 219 N.J. at 442-43. Indeed, the
District is a public entity and was sophisticated enough to draft a fifty-five
page RFP to solicit bids for a multi-million dollar project. Nor is the ESCC a
contract of adhesion. As the judge aptly recognized, "[t]here is no indication
that the arbitration provision was included without negotiation or that it was an
inconspicuous part of the [ESSC]." We also agree with the trial judge that the
arbitration provision is prominently "identifiable" on the fifth page of the
nineteen-page ESCC.
Pursuant to its plain terms, under certain circumstances the arbitration
provision, standing alone, might support Schneider's argument that it is
mandatory because the term, "may" permitted either of the two "sophisticated"
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parties to invoke arbitration. Schneider contends interpreting the provision as
permissive renders it superfluous because, even absent an arbitration clause,
the parties to a contract can always submit a dispute to arbitration if the other
consents. Without any related conflicting agreements executed between the
parties mandating litigation, we might agree with Schneider's position. Such is
not the case here, however.
Rather, the terms of the arbitration clause, when read in pari materia
with the mandatory provisions of the two governing law provisions in the RFP
and PASS Agreement, both of which preceded the ESCC, mandate litigation
and do not evince a clear intent to waive the right to sue in court. Contrary to
Schneider's argument, the arbitration clause is not superfluous because the
governing law provision of the RFP specifically required the successful bidder
of the project to "agree" to "litigate[]" any disputes "aris[ing] in any manner
out of performance of the RFP or ESIP Agreement" in the Burlington
Vicinage. Likewise, interpretation and construction of the PASS Agreement
was required to be resolved in "federal, state or municipal courts serving the
county in which the [s]ervices [we]re . . . performed." Thus, the arbitration
provision in the ensuing ESCC permitted the parties to choose a forum not
previously agreed to, or permitted, under the mandatory governing law
provisions of the PASS Agreement and RFP. Because the ESCC's dispute
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resolution clause permitted arbitration when the parties previously did not have
that option, the clause was not superfluous.
Put another way, had the District consented to arbitration after that
forum was invoked by Schneider, the parties would not have violated the
governing law provisions of the PASS Agreement and RFP. Reading the
arbitration provision as a whole, however, the use of the permissive term,
"may" without a clear indication that the parties intended to waive litigation
cannot be harmonized with the PASS Agreement and RFP, both of which
clearly require resolution of disputes under the ESIP in a court of law.
We are likewise unpersuaded by Schneider's argument that the ESCC's
merger clause prohibits the introduction of extrinsic evidence under the parol
evidence rule. As the trial court recognized, "[t]he ESCC and the PASS
Agreement are in conflict regarding which contract's terms supersede if there
are varying terms and conditions related to the same subject matter."
Specifically, Article 13.5, the final article of the ESCC provides, in
pertinent part: "[The ESCC] sets forth the entire understanding between the
parties and supersedes all prior oral or written understandings related to the
subject matter herein." Conversely, the second sentence on the first page of
the PASS Agreement provides, "To the extent that the terms and conditions in
this PASS Agreement conflict with the terms and conditions in the Energy
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Services Contract, 4 the terms and conditions of this PASS Agreement shall
control."
Although the PASS Agreement and the ESCC apparently conflict
regarding merger, the trial judge properly considered extrinsic evidence to
support his decision that the arbitration clause was permissive. Our Supreme
Court has long recognized, "[e]vidence of the circumstances is always
admissible in aid of the interpretation of an integrated agreement. This is so
even when the contract on its face is free from ambiguity." Conway v. 287
Corp. Ctr. Assocs., 187 N.J. 259, 269 (2006) (alteration in original) (quoting
Atlantic Northern Airlines, Inc. v. Schwimmer, 12 N.J. 293, 301 (1953)); see
also Manahawkin Convalescent v. O'Neill, 217 N.J. 99, 118 (2014). Thus,
notwithstanding the ESCC's merger clause, interpretation of the arbitration
provision is not precluded by consideration of extrinsic evidence.
Based on our de novo review of the record, when viewed in conjunction
with the parties' related agreements, we agree with the trial judge that the
ESCC's arbitration provision was permissive and not mandatory. As the judge
correctly observed, the parties specifically used the term, "shall" when they
intended certain provisions of the ESCC to be mandatory. Had the District and
4
It is not entirely clear from the record whether the "Energy Services
Contract" is another term for the ESCC, which was not executed until June
2015.
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Schneider intended to resolve their disputes by mandatory arbitration, the
ESCC should have explicitly so stated. Instead, use of the permissive term,
"may" underscored their intention that the arbitration provision was
permissive. Further, Schneider drafted the agreement and, as such, to the
extent there exists any ambiguity in the arbitration provision, that ambiguity
should be construed against Schneider. See e.g., Roach v. BM Motoring, LLC,
228 N.J. 163, 174 (2017).
In sum, a permissive interpretation of the arbitration provision in the
ESCC is consistent with the parties' prior intentions that disputes between
them would be litigated in court, as expressed in both the PASS Agreement
and RFP. Thus, we conclude under the facts presented that, absent its consent,
the District was not bound to arbitrate its alleged breaches of the ESCC, nor
Schneider's alleged breaches of the ESCC and PASS Agreement and other
causes of action related to Schneider's performance of work on the project.
Affirmed.
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