Opinion
Case No. A3-99-26.
June 29, 1999.
MEMORANDUM AND ORDER
I. INTRODUCTION
Before the Court is a motion by defendant Ibberson Engineering, Inc., (Ibberson), to dismiss, (docket # 7), and a motion by defendant National Union Fire Insurance Company of Pittsburgh, PA., (National), for stay, (docket # 8). Ibberson, National and plaintiff AgGrow Oils, L.L.C., (AgGrow), had all moved for oral argument, (docket ## 18 and 21, respectively), which was heard on Wednesday, June 23, 1999, in Fargo, North Dakota. Upon consideration of the written and oral presentations of the parties, Ibberson's motion to dismiss is hereby DENIED, and National's motion for a stay is TAKEN UNDER ADVISEMENT.
II. DISCUSSION
A. Background
Plaintiff AgGrow was formed in October, 1996, to operate an oilseed screw press processing facility in Carrington, North Dakota. In May of 1997, AgGrow contracted with T.E. Ibberson Company, (TEI), for the design and construction of an oilseed processing facility in Carrington. The agreement contained certain performance guarantees, i.e., that the plant would process 200 tons of seed per day and that there would be no more than 5-8% residual oil content in the expeller press cake. There appears to be no dispute that the plant has failed to meet the contract production performance specifications/guarantees.
TEI subcontracted with defendants Ibberson and Anderson. Ibberson did the engineering work on the project for its parent company TEI. Anderson manufactured and supplied the processing equipment, e.g., presses, conditioners, expanders, expellers, screenings, and coolers. Defendant National issued a performance bond in the amount of $7,758,281.00 guarantying the performance of the construction contract for the benefit of AgGrow.
TEI is not named as a defendant in this suit, plausibly because there is a binding arbitration clause in the contract between AgGrow and TEI. It is asserted in the Complaint, that TEI National have failed to comply with the requirements of the performance bond by failing to perform pursuant to the contract or, in the alternative, to pay damages pursuant to the bond. AgGrow contends that TEI and National blame Anderson for the nonperformance while at the same time denying liability for the failures of that sub-contractor. Anderson denies liability. AgGrow also complains that National has not independently investigated the claim AgGrow has made against the bond. AgGrow asserts that it has complied with the requirements of the bond.
AgGrow's claims against National are based on breach of contract of insurance, (the performance bond), and bad faith. AgGrow's claim against Ibberson is for negligence in design and engineering. AgGrow's claims against Anderson are for engineering negligence, and miscellaneous contract-based claims with AgGrow as the intended third party beneficiary. National counters that AgGrow fraudulently induced the performance guarantees.
B. Motion to Dismiss
In its motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted, Ibberson suggests that, because of its relationship with TEI, Ibberson is somehow protected against a direct suit by AgGrow because the contract between TEI and AgGrow contains an arbitration clause. This argument fails to acknowledge that there is no privity of contract between Ibberson and AgGrow, thus, no arbitration obligation exists as between those two parties.
Further, North Dakota courts do recognize a tort claim for professional negligence, and contract privity is not required to maintain such an action. See, e.g., Sime v. Tvenge Associates Architects Planners, 488 N.W.2d 606, 610 (N.D. 1992). Ibberson can not and does not seriously suggest otherwise. In the Court's view, AgGrow has sufficiently stated a cause of action against Ibberson. Ibberson's motion to dismiss is DENIED.
C. Motion for Stay
In support of its motion for stay, National asserts that the claims asserted by AgGrow fall within the scope of a valid written arbitration agreement that exists between AgGrow and National. AgGrow does not agree; neither does the Court.
Federal law favors the right of private parties to agree to arbitration, and arbitration clauses are to be liberally construed by the Court. See Keymer v. Management Recruiters Int'l, Inc., 169 F.3d 501, 504 (8th Cir. 1999) (citing Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25(1983)). But, this pro-arbitration policy does not operate with out regard to the intent of the contracting parties as "arbitration is a matter of consent, not coercion." Id. (citing Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57 (1995)). Whether a valid, controlling arbitration clause exists is a matter of ordinary contract interpretation and a matter of law for the Court to decide. Id.
Here, the performance bond explicitly provides for judicial resolution of disputes relating to the surety's refusal or failure to perform its obligations under the bond. Ex. C, Attach. McCormick Aff. The construction contract, between AgGrow and TEI, provides for arbitration for any claims arising out of or related to the construction contract. Ex. A, Attach. McCormick Aff. The construction contract was incorporated into the terms of the performance bond by reference. Ex. C, Attach. McCormick Aff. In a suit on the performance bond, to the extent that the provisions of the bond and the construction contract conflict the provisions specifically set forth in the bond control. See, e.g., United States ex rel DDC Interiors, Inc. v. Dawson Constr. Co., Inc., 895 F. Supp. 270, 273 (D. Colo. 1995) (since prime contract disputes clause was not specifically referenced anywhere in the subcontract, the incorporation by reference of the prime contract's disputes clause is general rather then specific); see also Oakes Farming Ass'n v. Martinson Bros., 318 N.W.2d 897, 908 (N.D. 1982) (providing that if a conflict exists between a specific provision and a general provision in a contract, the specific provision qualifies the general provision).
However, the Court need not and does not here conclude that the terms of the construction contract and the performance bond conflict. By incorporating into the bond the construction contract that contains AgGrow's promise to arbitrate with TEI, the bond literally incorporates only AgGrow's promise to arbitrate with TEI; it does not enlarge AgGrow's obligation to encompass mandatory arbitration with National. See Hartford Accident Indem. Co. v. Scarlett Harbor Assocs. Ltd. Partnership, 695 A.2d 153, 156-57 (Md. 1997) (holding that surety, by issuing performance bond which incorporated by reference arbitration clause from contract between developer and contractor, could not enforce arbitration agreement against developer in action on bond).
The Court concludes that no valid written arbitration agreement exists between AgGrow and National, thus National is not entitled to a stay. See 9 U.S.C. § 3 (requiring written arbitration agreement before mandating stay); Keymer, 169 F.3d at 504 (applying 9 U.S.C. § 3). An action on the performance bond here is properly pursued in this judicial forum.
Although the Court rejects National's reasoning in support of its request for a stay, the question of whether it is nonetheless appropriate for the Court to grant a stay remains. The Court, without the aid of parties' counsel, initially concludes that a separate and independent parallel cause of action by AgGrow against the surety, National, is appropriate and may go forward.See, e.g., E.R. Christenson v. Diversified Builders Inc., 331 F.2d 992, 995 (10th Cir. 1964) ("surety's obligation is primary and original as well as direct . . . creditor's right to proceed against the surety exists independently of his right to proceed against the principal"); see also 74 Am.Jur. 2d Suretyship § 135 (1974) (where bond is joint and several, an action against the principal for breach of contract and an action against the surety for the penalty of the bond may be pursued at the same time until the plaintiff's damages are satisfied; remedies are not inconsistent, merely cumulative). However, it may be appropriate, albeit not required, to stay the action against the surety on the bond, to allow the disputes on the merits to be resolved between the principal/contractor and obligee/owner via arbitration. See, e.g.,United States ex. rel. Frank A. Trucco Sons Co. v. Bregman Constr. Corp., 256 F.2d 851 (7th Cir. 1958); Agostini Bros. Bldg. Corp. v. United States ex. rel. Virginia-Carolina Elec. Works, 142 F.2d 854 (4th Cir. 1944); United States ex. rel. Commonwealth Coatings Corp. v. Continental Cas. Co., 214 F. Supp. 949 (D. P.R. 1963); Modern Brokerage Corp. v. Massachusetts Bonding Ins. Co., 54 F. Supp. 939 (S.D.N.Y. 1944). In this regard, the Court solicits reactions by means of supplemental memorandum from counsel, to be filed on or before July 30, 1999.
The Court is mindful that the resolution of the court action, even if favorable to AgGrow, will not completely resolve its problems. The Court assumes that AgGrow ultimately wants a plant that works. The Court encourages the parties to discuss whether the parties are amenable to voluntary participation in arbitration or some other form of alternative dispute resolution, which would necessarily include Anderson and National. To this end, the Court would offer its assistance, through the expertise of the Honorable Karen K. Klein, U.S. Magistrate Judge, and make available alternative dispute resolution through mediation, early neutral judicial evaluation, or guided settlement conferences. Given that only one relief can be granted, with or without the Court's help, there would likely be a better overall solution to parties' dispute than simple resolution of the bond case.
It appears to the Court that AgGrow's case against National on the bond is properly before this Court and, given the defendants' concession that the performance guarantees have not been satisfied, likely meritorious. In this regard, Court holds some influence to promote a private resolution of parties' problems before resolution is forced in this court action. The Court recognizes that Anderson and National are not contractually bound to arbitration, but the Court can and does direct participation in discussion of alternative dispute resolution methods.
The Court is not granting National's motion for a stay at this time. The Court is willing to wait and see how private resolution progresses, and await advice of counsel in whether granting a stay is appropriate, notwithstanding the Court's determination that a stay is not required. The Court directs AgGrow's counsel to keep the Court advised that the private resolution proceedings progress in a reasonably speedy manner. The Court also directs the Magistrate to proceed with setting a 16(b) conference and entering a scheduling order consistent with this opinion.
III. CONCLUSION
The motion by defendant Ibberson Engineering, Inc., to dismiss, (docket # 7), is DENIED. The motion by defendant National Union Fire Insurance Company of Pittsburgh, PA., for stay, (docket # 8), is TAKEN UNDER ADVISEMENT. Parties are DIRECTED to submit supplemental briefs as outlined above. Parties are DIRECTED to proceed with pretrial scheduling matters as noticed by the Court through the Honorable Karen K. Klein, U.S. Magistrate Judge.
IT IS SO ORDERED.
RODNEY S. WEBB, CHIEF JUDGE UNITED STATES DISTRICT COURT