Opinion
199:CV00002
September 6, 2002
MEMORANDUM OPINION AND ORDER
The court today revisits, for the fourth time, the ongoing dispute between MCI Constructors, LLC (MCI) and the City of Greensboro regarding the expansion and upgrade of the T.Z. Osborne Wastewater Treatment Plant in Greensboro, North Carolina. The matter is presently before the court on MCI's motion to vacate the order of the City Manager issued April 16, 2002, finding that the contract between MCI and the City of Greensboro was terminated properly and for cause. MCI has also moved for a preliminary injunction to halt the damages phase of the hearing before the City Manager pending the court's decision on the motion to vacate. MCI has further moved to consolidate this case with Case No. 1:02CV00396, involving the same parties as the present case, and for leave to conduct additional discovery.
The court conducted a hearing on these issues on August 27, 2002. For the reasons set forth herein, the court will grant the motion to consolidate and will deny the other motions.
I. FACTS AND PROCEDURAL HISTORY
The facts and procedural history of this controversy are set forth in the court's opinions of March 24, 2000, October 6, 2000, and January 18, 2001. The court's March 24, 2000 opinion dismissed MCI's claims for payment under the contract for failure to comply with Article 16 of the contract, which requires that such claims be submitted to the City Manager as a condition precedent to payment. The court also dismissed MCI's claims for wrongful termination and declaratory judgment for failure to state a claim. The court further dismissed MCI's claims for breach of contract and negligent misrepresentation to the extent they alleged the inaccuracy of the contract documents; however, MCI's breach of warranty and negligent misrepresentation claims were preserved to the extent they asserted that the contract documents affected the project bid.
The text of Article 16 appears on pages 6 and 7 of this opinion.
The City subsequently filed its answer and asserted a counterclaim against MCI, as well as a third-party claim against National Union Fire Insurance Company, issuer of the performance bond. In its order of October 6, 2000, the court dismissed these claims, stating that the City would need to submit them to the City Manager pursuant to the contract's condition precedent. Furthermore, upon MCI's motion for reconsideration of its March 24, 2000 order, the court found that MCI had stated a claim for wrongful termination but required that claim also to be submitted to the City Manager. The court also reinstated MCI's claims for breach of contract and negligent misrepresentation to the extent they related to the subsurface data provided to MCI. In all other respects, the court's March 24, 2000 ruling was left intact.
MCI, meanwhile, filed an amended complaint, adding to its existing claims a request for a declaratory judgment that Article 16 of the contract, the clause requiring that claims be submitted to the City Manager as a condition precedent to payment, violated MCI's due process rights under the U.S. Constitution and was void as against public policy. In its opinion issued January 18, 2001, the court dismissed this claim, calling it "nothing more than a creative rephrasing of [MCI's] objection to the City Manager's presumptive bias in favor of Defendant." (Mem. Op. Order, 1/18/2001, at 6.) The court noted that a government entity's alleged breach of contract does not raise a constitutional issue and affirmed that MCI would have to "jump through the hoops as prescribed in the contract" before bringing the matter before the court. (Id. at 9.)
On March 26-28, 2002, the parties participated in a contested evidentiary hearing before the City Manager, Mr. Ed Kitchen. Both the City and MCI were represented by counsel, and Mr. Kitchen was assisted by an attorney. After agreeing to bifurcate the contract termination issues from the damages issue, the parties proceeded to present evidence on the issue of termination through witness testimony and exhibits, and also submitted briefs in support of their respective positions. On April 16, 2002, the City Manager issued a decision finding that the City's termination of MCI was proper and was a termination for cause.
MCI responded with a motion to vacate the City Manager's order. On the same day as it filed its motion to vacate, May 20, 2002, MCI filed a second suit against the present defendants, MCI Constructors, LLC v. City of Greensboro and Hazen and Sawyer, P.C., Case No. 1:02CV00396. That suit seeks a declaratory judgment that Change Order #6, an adjustment in the contract price proposed by the City, is invalid, and also alleges breach of contract by the City and bad faith/breach of duty by Hazen and Sawyer for the manner in which Change Order #6 was generated.
On June 6, 2002, MCI filed a third suit, MCI Constructors, LLC v. J. Edward Kitchen and City of Greensboro, Case No. 1:02CV00448, asserting that the City and Mr. Kitchen deprived MCI of its due process rights in violation of 42 U.S.C. § 1983. The complaint also asserts one count simply entitled "Bad Faith by Mr. Kitchen," alleging that Mr. Kitchen acted in bad faith by deciding the parties' disputes.
On June 20, 2002, MCI moved for a preliminary injunction to halt the damages phase of the hearing before the City Manager pending the court's decision on the motion to vacate. MCI also filed on that date a motion to consolidate the present action with the 1:02CV00396 action.
II. DISCUSSION
MCI has moved for vacatur of the City Manager's order of April 16, 2002, on the grounds that the City Manager's decision that MCI's termination was proper and for cause was tainted with evident partiality. As the City points out in its response brief, however, vacatur is a unique remedy available only under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (the "FAA"), the statutory scheme established by Congress to govern arbitration proceedings involving commerce. Therefore, in order to determine whether it is proper for the court to consider vacatur as a remedy for the harms complained of by MCI, the court must first decide whether the FAA applies to this matter.
Section 2 of the FAA defines an arbitration clause as a "written provision in . . . a contract evidencing a transaction involving commerceto settle by arbitration a controversy thereafter arising out of such contract or transaction." 9 U.S.C. § 2 (emphasis added). Thus, the basic requirement for coverage under the FAA is an agreement to arbitrate. See Nicholas A. Califano, M.D., Inc. v. Shearson Lehman Bros. Inc., 690 F. Supp. 1354, 1355 (S.D.N.Y. 1988). Although the FAA ordained a strong federal policy favoring arbitration, "`parties cannot be required to submit to arbitration any dispute which they have not agreed to submit.'" Id. (quoting Oriental Comm'l Shipping Co. v. Rosseel, N.V., 609 F. Supp. 75, 78 (S.D.N.Y. 1985)).
Article 16 of the Contract between MCI and the City provides the following:
CITY MANAGER TO BE REFEREE:
To prevent disputes and litigations, the City Manager shall in all cases, determine the amount, quality, and acceptability of the work and materials which are to be paid for under the contract; shall determine all questions in relation to said work and supplies, and the performance thereof; and shall in all cases decide every question which may arise relative to the fulfillment of the Contract on the part of the Contractor. His estimate and decision shall be final and conclusive, and in case any question touching the Contract shall arise between the parties, such estimate and decision shall be a condition precedent to the right of the Contractor to receive any monies under the Contract.
(Defs.' Br. Supp. Mot. Dismiss, Ex. 1-B) ("Article 16"). The court notes that the terms "arbitration," "arbitrate," or arbitrator" do not appear anywhere in this clause, nor has the court found their appearance at any other place in the contract. Although MCI has correctly pointed out that the words "arbitrate" or "binding arbitration" are not required to invoke the FAA, see AMF Inc. v. Brunswick Corp., 621 F. Supp. 456, 460 (S.D.N.Y. 1985), the parties still must provide evidence of an agreement to settle their disputes by arbitration. See Shearson Lehman, 690 F. Supp. at 1355. No clear evidence of such an agreement has been presented here.
MCI's primary reliance for its argument that the parties have agreed to arbitrate is upon the court's own use of arbitration language in previous opinions and at a hearing between the parties. (Mem. Op., 10/6/2000; Mem. Op. Order, 1/18/2001; Mot. Hr'g Tr., 6/26/2000.) While the court is flattered by the weight the Plaintiff evidently places upon the court's choice of terminology in its opinions, it is the language of the contract itself that controls a contract interpretation dispute; the court cannot alter by fiat the language agreed to by the parties. See Woods v. Nationwide Mutual Ins. Co., 295 N.C. 500, 506, 246 S.E.2d 773, 777 (1978) (courts may not rewrite contract under guise of construing ambiguous term). Moreover, the opinions in which the court has construed this particular clause have uniformly upheld its enforceability not under the FAA, but under North Carolina case law construing substantially similar clauses in which architects or engineers were designated to make nearly identical determinations as the City Manager in this case.
The court's first opinion issued in this case, on March 24, 2000, considered Article 16, as follows:
Municipal governments have used identical contract language as that used by MCI and the City since the 19th and early 20th centuries for public work projects. See Thomas Crimmins Contracting Co. v. City of New York, 530 N.Y.S.2d 779, 781-82 (N.Y.App.Div. 1988). North Carolina has recognized and upheld contracts that initially refer disputes to a project architect or engineer. See Elec-Trol, Inc. v. C.J. Kern Contractors, Inc., 54 N.C. App. 626, 628, 284 S.E.2d 119, 120 (1981). In reference to such contracts, the North Carolina Supreme Court provided the following:
In building and construction contracts the parties frequently provide that the completion, sufficiency, classification, or amount of the work done by the contractor shall be determined by a third person, usually an architect or engineer. Such stipulations which . . . were designed to avoid harassing litigation over questions that can be determined honestly only by those possessed of scientific knowledge, have generally been held valid. This is true even though the architect or engineer is employed by the owner. . . .
[T]he decision of the architect or engineer is conclusive as to any matter connected with the contract if the parties . . . constitute the architect or engineer the final arbiter of such matter as between the parties. Accordingly, where the contract provides that the work shall be done to the satisfaction, approval, or acceptance of an architect or engineer, such architect or engineer is thereby constituted sole arbitrator between the parties, and the parties are bound by his decision. . . .Welborn Plumbing and Heating Co. v. Randolph County Bd. of Educ., 268 N.C. 85, 90, 150 S.E.2d 65, 68 (1966) (citations omitted). (Mem. Op., 3/24/2000, at 5-7) (emphasis added). The last sentence cited by the court from Welborn concluded, "and the parties are bound by his decision, in the absence of fraud or gross mistake." Welborn, 268 N.C. at 90, 150 S.E.2d at 68 (emphasis added).
The import of that statement will become apparent later in the court's discussion.
Significantly, the clause at issue in Welborn was substantially similar to the one here. Both include the responsibility to "determine the amount, quality, and acceptability" of the "work and materials which are to be paid for under the contract," and call for the decision maker to decide all questions which arise in relation to "said work and the construction thereof" (Welborn) or the "fulfillment of the Contract on the part of the Contractor" (Art. 16). Both clauses state that the decision maker's "estimate and decision shall be final and conclusive." Welborn, 268 N.C. at 89, 150 S.E.2d at 68; Article 16.
The clause in Welborn provided, in part:
The Architect shall give all orders and directions contemplated under this contract and specifications relative to the execution of the work. He shall determine the amount, quality, acceptability, and fitness of the several kinds of work and materials which are to be paid for under this contract, and shall decide all questions which may arise in relation to said work and the construction thereof. His estimates and decisions shall be final and conclusive.268 N.C. at 89, 150 S.E.2d at 68.
The other North Carolina authority cited by the court in its opinion of March 24, 2000, Elec-Trol, Inc. v. C.J. Kern Contractors, Inc., also involved a similar clause. It provided that if the owner and contractor could not agree on the amount of any adjustment to the contract price, a third party (there, the architect) would decide the matter. The court noted that "[w]hen the contract so provides, the architect's certificate is a condition precedent to the contractor's recovery, absent a showing of bad faith or failure to exercise honest judgment." Elec-Trol, 54 N.C. App. at 628, 284 S.E.2d at 120 (emphasis added); compare Article 16 ("such estimate and decision shall be a condition precedent to the right of the Contractor to receive any monies under the Contract" (emphasis added)). The Elec-Trol court, citing the same authorities as Welborn, held the provision "constitute[d] a final determination of the parties' rights unless plaintiff shows bad faith or failure to exercise honest judgment." 54 N.C. App. at 629-30, 284 S.E.2d at 121. This court affirmed the applicability of that standard. (Mem. Op., 3/24/2000, at 11 (stating that North Carolina law "allows MCI to have a court review the City Manager's decision for bad faith or gross mistake")).
Arbitration terminology first appeared in the court's October 6, 2000, memorandum opinion. However, this language arose in the context of deciding the scope and extent of Article 16, not in a determination of the governing law for decisions arrived at under Article 16. The court had previously found that MCI's wrongful termination claim was outside of Article 16's scope. However, upon reconsideration, the court decided its original interpretation had been too narrow, and MCI's claim for wrongful termination did qualify as a "question which may arise relative to the fulfillment of the Contract by the Contractor." (Art. 16.) Accordingly, the court reinstated the claim but affirmed that under Article 16 the claim still must be submitted to the City Manager for resolution. (Mem. Op., 10/6/2000, at 6-7.)
The court's opinion provided,
MCI's wrongful termination claim is not properly before this court. Anytime a contract contains an arbitration clause, there arises a presumption of arbitrability. . . . When a doubt arises as to whether an issue is arbitrable, the issue should be resolved in favor of arbitration.
(Mem. Op., 10/6/2000, at 5-6) (citations omitted).
MCI has also quoted several passages from the court's most recent ruling in this case, the January 18, 2001 memorandum opinion and order, which include the terms "arbitration," "arbiter," and "arbitration clause." These references were made in the context of MCI's amended complaint, which itself used the term "arbiter" in Count XII, in a ruling granting the City's motion to dismiss that count for failure to state a claim. The court opined as follows:
Once the constitutional underpinnings of Count XII are stripped away, it is clear Plaintiff is, indeed, attempting to beat the same horse that the court laid to rest in its previous orders. No matter how Plaintiff characterizes the arbitration clause, MCI agreed to abide by the provision and sought to have Defendant do the same. If MCI disapproved of the selection of the City Manager as arbiter, it should have voiced any such objections before it ever entered into the contract. Regardless, MCI will have to jump through the hoops as prescribed in the contract before it can bring its wrongful termination claim before this court.
(Mem. Op. Order, 1/18/2001, at 9) (emphasis added).
Again, as in the October 6, 2000 opinion, the term arbitration clause" was not used in a discussion determining the governing law for reviewing decisions arrived at under the disputes clause, but in its decision to throw out yet another challenge to its general enforceability. The court affirmed the clause's fundamental validity, yet stated that MCI's characterization of the clause was irrelevant (see emphasis, supra).
The court has not, in any of its three opinions to date, found that Article 16 is in fact an arbitration clause governed by the FAA. The court has never been called upon to settle this question until now. Upon necessary consideration of the clause, the issue having come to the fore, the court finds no evidence that the parties intended to submit their disputes to arbitration by a neutral third party. As the Supreme Court has noted, the provisions of the FAA "show a desire of Congress to provide not merely for any arbitration but for an impartial one."Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 147, 89 S.Ct. 337, 338 (1968) (vacating award where arbitrator failed to disclose close financial relationship with party). The clause at issue here does not contemplate an impartial arbitration process as envisioned by Congress and codified in the FAA. To the contrary, the clause is more closely analogous to provisions designating architects or engineers, who are often employed by or affiliated with one of the parties, as decision makers. It is precisely because of that similarity that this court has repeatedly held Article 16 enforceable, and in so holding, the court has consistently rendered its rulings under North Carolina law. For these reasons, the court declines to consider this clause under the FAA.
The parties here have chosen, for reasons unknown to the court, a decision maker who is closely aligned with the City and who was by virtue of his office closely involved in all stages of this contractual relationship. MCI could have bargained for a dispute resolution process involving a third-party, neutral arbitrator with no relationship to the parties; alternatively, MCI could have declined to agree to the contract in the absence of more favorable terms. The fact remains that MCI did not do so. As the court expressed in its January 18, 2001 memorandum opinion, "[i]f MCI disapproved of the selection of the City Manager as arbiter, it should have voiced any such objections before it ever entered into the contract." (Mem. Op. Order, 1/18/2001, at 9.) As the North Carolina Supreme Court noted in Welborn,
Plaintiff finds itself in a helpless position, but it is a position of its own making. It agreed in the contract . . . that the architect should decide such question of damages or any other question which might arise in relation to the work, and that the architect's decision should be final and conclusive. "Ordinarily, when parties are on equal footing, competent to contract, enter into an agreement on a lawful subject, and do so fairly and honorably, the law does not permit inquiry as to whether the contract was good or bad, whether it was wise or foolish."268 N.C. at 92, 150 S.E.2d at 69-70 (citation omitted).
The court today rules that Article 16 is not governed by the FAA and that the provision is, rather, governed by North Carolina law as described in the court's previous opinions in this case. However, even if the court were to construe Article 16 as an arbitration clause, there is considerable question as to whether MCI would have any grounds to challenge the order of the City Manager on the basis of acts and relationships which flow logically from his very status as City Manager and of which MCI was certainly aware at the contract's inception. In this connection, the court finds the case of Thomas v. Howard, 51 N.C. App. 350, 276 S.E.2d 743 (1981), particularly instructive:
Indeed, it is only natural that parties will attempt to appoint arbiters, who tend to be biased in their favor. A noted author has explained that:
One who submits his case to an arbitrator selects his own judge; and he selects one, if he can induce the other party to agree, who is likely to be prejudiced in his own favor. If two parties are willing to take their chances before an arbiter so selected, it is now believed that there is no public interest that makes it necessary to forbid them.
6A Corbin, Contracts § 1433, at 394 (1962). Thus, the common sense rule evolved that, even though partiality of an arbitrator is a well-recognized ground for the setting aside of awards, a party may, nonetheless, be concluded by an award when he knew of the facts alleged to constitute the bias or prejudice of the arbitrator at the time the agreement was made.51 N.C. App. at 353, 276 S.E.2d at 745-46 (emphasis added). Here, as inThomas, the facts which constitute the alleged partiality of the City Manager were certainly foreseeable. One who contracts with a municipality to construct a $30 million project cannot reasonably expect that the municipality's chief executive officer will not be intimately involved in the supervision of such a contract.
By contrast, Fourth Circuit cases addressing the FAA-governed standard for vacating an award on grounds of evident partiality of an arbitrator generally involve a hitherto-unknown business relationship or other connection between an arbitrator and party, and, most commonly, a failure to disclose such relationship to the unconnected party. See, e.g., ANR Coal Co. v. Cogentrix of North Carolina, Inc., 173 F.3d 493 (4th Cir. 1999); Consolidation Coal Co. v. Local 1643, United Mine Workers of America, 48 F.3d 125 (4th Cir. 1995); Peoples Security Life Ins. Co. v. Monumental Life Ins. Co., 991 F.2d 141 (4th Cir. 1993). Once the moving party brings to light specific facts indicating an arbitrator's improper motives, the court must weigh whether "a reasonable person would have to conclude that an arbitrator was partial" to the party not seeking vacatur. Consolidation Coal, 48 F.3d at 129. Such an inquiry seems entirely inapposite to the present case, where the relationship complained of was manifest to all parties from the beginning.
Moreover, in connection with this inquiry, the Fourth Circuit has identified four factors to be examined to determine if an award should be vacated for evident partiality:
(1) any personal interest, pecuniary or otherwise, the arbitrator has in the proceeding; (2) the directness of the relationship between the arbitrator and the party he is alleged to favor; (3) the connection of the relationship to the arbitration; and (4) the proximity in time between the relationship and the arbitration proceeding.48 F.3d at 1301. These are undoubtedly critical factors to consider in an FAA-governed failure-to-disclose case. However, the present case stands at an entirely different posture than these cases. Here it makes no sense to examine the "directness" of the relationship between the City Manager and the City; it is glaringly self-evident. The connection of the City Manager's status as an employee of the City and the arbitration proceeding is strong and undeniable. Since his relationship to the City (through his employment as City Manager) is ongoing, proximity in time is also an unnecessary inquiry.
Despite the fact that under the Consolidation Coal test, the City Manager's acts would seem veritably steeped in partiality, none of these factors should have come as a surprise to MCI. The likelihood of these problems is inherent in the agreement itself. The parties knew from the very beginning that the City Manager would be playing two roles in any disputes that arose. Even assuming, arguendo, that Article 16 is an FAA-governed arbitration clause (despite the absence of any contract language indicating such an intent), MCI would not prevail. Having contracted for the City Manager as "referee" with full knowledge of the City Manager's employment status, MCI cannot be heard to complain that the City Manager is partial to the City. See Thomas, 51 N.C. App. at 353, 276 S.E.2d at 745-46; see also Commonwealth Coatings, 393 U.S. at 150, 89 S.Ct. at 340 (arbitrators "are not automatically disqualified by a business relationship with the parties before them if both parties are informed of the relationship in advance") (White, J. concurring).
Having determined that the FAA does not apply to this case, the court cannot entertain MCI's motion to vacate. Therefore, it will be denied. MCI's motion for leave to conduct additional discovery on the issue of arbitrator bias will be denied, as it is premised on an inappropriate standard. MCI's motion for a preliminary injunction also will be denied, and the parties are ordered to proceed with the damages phase of the hearing before the City Manager at the earliest possible date. As the court has explained, supra, Article 16 is governed by North Carolina law, and the decision reached by the City Manager is final absent a showing of bad faith or a failure to exercise honest judgment. See Welborn, 268 N.C. at 90, S.E.2d at 68; Elec-Trol, 54 N.C. App. at 629- 30, 284 S.E.2d at 121.
Finally, in the interests of judicial economy, the court will grant MCI's motion to consolidate Case No. 1:02CV00396 with the present case.
For the reasons set forth herein,
IT IS HEREBY ORDERED that MCI Constructors, LLC's Motion to Vacate [138], Motion for a Preliminary Injunction [147], and Motion for Leave to Conduct Discovery [140] are denied.
IT IS FURTHER ORDERED that MCI's Motions to Consolidate Case No. 1:99CV00002 with Case No. 1:02CV00396 [Doc. No. 145, Doc. No. 6, respectively] are granted.
IT IS FURTHER ORDERED that following the completion of proceedings before the City Manager, MCI has 30 days in which to designate experts and provide expert reports. The City and Hazen Sawyer's expert reports are due 25 days thereafter. The parties are allowed 90 days from the completion of the proceedings before the City Manager to complete discovery, with dispositive motions due 30 days following the close of discovery.