Summary
holding that a provision stating that arbitration shall proceed under the Construction Industry Arbitration Rules of the AAA did not provide clear and unmistakable evidence of an intent to empower the arbitrator to determine arbitrability
Summary of this case from Willie Gary LLC v. James Jackson LLCOpinion
Civil No. AMD 04-3302.
February 9, 2005
MEMORANDUM OPINION
This diversity case, in which plaintiff seeks a declaratory judgment, arises out of a dispute over the performance of a contract for architectural design and construction administration services. The dispositive issue is whether the dispute is subject to arbitration.
I.
There is no dispute as to the underlying facts of the parties' relationship. Plaintiff David Diesselhorst, individually and trading as The Diesselhorst Group ("Diesselhorst"), entered into an oral agreement with Richard Brinker ("Brinker") in the spring of 1999 to provide architectural services pertaining to the design and planning of, and obtaining a building permit for, the renovation of a historic bank building in downtown Baltimore known as the Munsey Building. Diesselhorst produced a set of approximately thirty permit documents for the Munsey Building project ("the Project") in November 1999. In or about July 2000, Brinker transferred some or all of his interest in the Project to defendant, Munsey Building, L.L.L.P. ("Munsey"), an entity formed by Brinker and other investors for the purpose of completing the renovation. A building permit for the Project was obtained on July 19, 2000.
According to Diesselhorst, the oral agreement is "consistent in many respects with" an April 16, 1999, unexecuted document that purports to be a contract between Diesselhorst and an as yet to be formed entity called Omega Development III, L.L.C. ("Omega"), to be owned by Brinker. Records of the Maryland Department of Assessments and Taxation reflect that Omega was formed on September 15, 1999. The April 16, 1999, document took the form of an American Institute of Architects ("AIA") "Standard Form of Agreement Between Owner and Architect for Housing Services."
On December 1, 2000, Diesselhorst and Munsey entered into a written contract (the "Agreement," a copy of which is attached to the complaint) which obligates Diesselhorst to provide "Basic Services," which span a "Design Phase," a "Construction Documents Phase," and a "Construction Phase — Administration." The Agreement is in the form of an American Institute of Architects ("AIA") "Standard Form of Agreement Between Owner and Architect for Housing Services." The Agreement obligates Diesselhorst to furnish, inter alia, "Construction Documents (plans and specifications) . . . sufficient to obtain building permits" and "overall project coordination with . . . consultants during the design and construction document phase." Agreement Art. 12. As reflected in the Agreement, Diesselhorst had been paid $36,500 prior to the date of the Agreement, and such amount was "credited to [Munsey's] account." Agreement ¶ 11.1. The Agreement specifies that Diesselhorst would receive an additional $104,500 at the time Munsey closed on its construction loan, and an additional $32,000 during construction. Agreement ¶ 11.2.1. The Agreement reflects that the payments of $36,500 and $104,500 represent payment to Diesselhorst for the "Design Phase" of the Basic Services, and the payment of $32,000 represents payment for "Construction Phase" services. Agreement ¶ 11.2.2.
There is no assertion in the record that Diesselhorst was not paid this sum.
At least for the purpose of calculating compensation, the "Construction Documents Phase" is included in the "Design Phase." See Agreement ¶ 11.2.2; see also Agreement ¶ 11.2.1 (referring to the "Design and Construction Document Phase").
The Agreement contains an arbitration clause which provides as follows, in pertinent part:
Claims, disputes or other matters in question between the parties to this Agreement, arising out of or relating to this Agreement or the breach thereof, shall be subject to and decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect, unless the parties mutually agree otherwise.
Agreement ¶ 7.1.1.
Disputes arose between the parties over the adequacy of Diesselhorst's performance under the Agreement. Accordingly, on March 12, 2004, Munsey initiated arbitration proceedings against Diesselhorst by filing a demand for arbitration with the American Arbitration Association ("AAA"). In its complaint, Munsey maintained that "[u]nder the terms of the Contract, [Diesselhorst] was obligated to provide all those reasonable and necessary architectural and design related services . . . to facilitate [Munsey's] renovation of the Munsey Building, including but not limited to the performance of pre-renovation conditions, site measurements, preparation of construction documents, supply of construction administration services, and all those other services as more fully set forth in the Contract." Munsey alleged that Diesselhorst failed to satisfy the standard of care owed by design professionals and thereby breached the Agreement, causing Munsey to suffer "significant damages." Diesselhorst filed his answer and a counter-demand for unpaid fees on April 2, 2004. In October 2004, Munsey filed an amended demand for arbitration.
On October 13, 2004, Diesselhorst filed in this court the instant complaint for declaratory judgment, requesting that the court: (1) dismiss the arbitration, pending completion of mediation of the disputes between plaintiff and defendant; and/or (2) dismiss or stay the arbitration, pending resolution of the issues described in the complaint; and (3) declare that some or all of the claims asserted in arbitration by Munsey against Diesselhorst do not arise out of and/or are not related to the contract between them and therefore are not subject to resolution via arbitration. Thereafter, Munsey filed a motion to dismiss this case pursuant to Fed.R.Civ.P. 12(b)(1) and (6). In the alternative, Munsey sought, pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 2 et seq., and the Maryland Uniform Arbitration Act, Md. Code Ann., Cts. Jud. Proc. §§ 3-201 et seq., a stay of these proceedings pending the outcome of arbitration.
Diesselhorst also has pending in a Maryland state court certain claims which are related to the dispute between the parties here. That case has been stayed pending the completion of the arbitration instituted by Munsey.
II.
Diesselhorst maintains that the Federal Arbitration Act and the Maryland Uniform Arbitration Act require the court, rather than an arbitrator, to determine which claims are arbitrable. Diesselhorst argues that this court should declare that some and perhaps all of Munsey's claims are not properly before the arbitrator because any errors or omissions by Diesselhorst arose, if at all, out of the oral contract he formed with Brinker and not out of the Agreement. Diesselhorst points out that he never consented to the assignment to Munsey of Brinker's rights against Diesselhorst under the Brinker contract.
Although he suggests that "some" of Munsey's claims may be arbitrable, Diesselhorst does not indicate which claims, specifically, might be arbitrable. The overarching claim is one for breach of contract. In its "claim package" against Diesselhorst, Munsey asserts more than a dozen Project "changes," including changes to walls, ramps, electrical design, among others, due to Diesselhorst's alleged errors in plans or lack of coordination of sub-consultants.
Diesselhorst alleges that the Brinker contract contains an anti-assignment clause, which states that neither party can assign its rights to anyone else without the express written consent of the other party. As the Brinker contract was an oral agreement, Diesselhorst presumably is referring to the April 16, 1999, unexecuted document between Diesselhorst and Omega. See supra note 1.
Munsey makes two primary arguments. First, Munsey argues that this court must dismiss or stay this action because this court must enforce the Agreement in accordance with its terms, which provide that "[c]laims, disputes, or other matters in question between the parties . . . arising out of or relating to this Agreement or the breach thereof, shall be subject to and decided by arbitration." Agreement ¶ 7.1.1. Munsey maintains that the dispute giving rise to its demand for arbitration arose out of duties Diesselhorst owes to Munsey under the Agreement, and not solely out of errors or omissions made by Diesselhorst during his contractual relationship with Munsey's predecessor. Second, Munsey contends that it is the province of the arbitrator to determine arbitrability of the claims because the Agreement obligates the parties to be bound by the Construction Industry Arbitration Rules of the AAA (the "AAA Rules"), which give the arbitrator the power to rule on the scope of his or her jurisdiction.
A.
A threshold issue is whether the Federal Arbitration Act ("FAA") or the Maryland Uniform Arbitration Act (the "Maryland Act") supplies the governing law in this matter. Diesselhorst maintains that the FAA applies to the Agreement because it involves interstate commerce. See Am. Home Assurance Co. v. Vecco Concrete Constr. Co., Inc., 629 F.2d 961 (4th Cir. 1980) (holding that the contract at issue evidenced a transaction involving interstate commerce because, inter alia, the parties had principal places of business in different jurisdictions and performance involved the transportation of materials and workers in interstate commerce). Munsey contends that the provisions of the Maryland Act should control because the Agreement was created and performed in Maryland.I need not decide which law governs because, applying either law, the outcome is the same. The Maryland Act provides that "[a] written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy arising between the parties in the future is valid and enforceable, and is irrevocable, except upon grounds that exist at law or in equity for the revocation of a contract." Md. Code Ann., Cts. Jud. Proc. § 3-206. Similarly, the FAA provides that such a written agreement or provision in the context of a maritime transaction or contract involving interstate commerce "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Both the Maryland Act and the FAA dictate that courts "shall" stay any court proceedings involving an issue subject to arbitration. Md. Code Ann., Cts. Jud. Proc. § 3-209; 9 U.S.C. § 3. Further, both the state and federal acts embody a legislative policy favoring voluntary and private dispute resolution. See, e.g., Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983) (noting the "liberal federal policy favoring arbitration agreements"); Holmes v. Coverall North Am., Inc., 336 Md. 534, 649 A.2d 365, 368 (Md. 1994) (stating that "[t]he same policy favoring enforcement of arbitration agreements is present in both our own and the federal acts" and "[w]e therefore rely on decisions interpreting the Federal Arbitration Act").
B.
A second threshold issue is whether (1) this court or (2) the arbitrator determines the arbitrability of some or all of Munsey's claims. Generally, it is for the court to decide as a matter of contract interpretation whether a particular dispute is arbitrable under a contractual arbitration clause. Virginia Carolina Tools, Inc. v. Int'l Tool Supply, Inc., 984 F.2d 113, 117 (4th Cir. 1993). As with other contractual matters, it is the parties' intent which determines the arbitrability of arbitrability disputes. Carson v. Giant Food, Inc., 175 F.3d 325, 330 (4th Cir. 1999). "When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . should apply state-law principles that govern the formation of contracts." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995). The qualification to this general rule is that "[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is `clea[r] and unmistakabl[e]' evidence that they did so." Id. (quoting ATT Techs., Inc. v. Communication Workers of Am., 475 U.S. 643, 649 (1986)) (emphasis added). "[B]road arbitration clauses that generally commit [to arbitration] all interpretive disputes `relating to' or `arising out of' the agreement do not satisfy the clear and unmistakable test." Carson, 175 F.3d at 330. In the absence of the parties' clearly expressed intent that the arbitrator is to determine the scope of her own jurisdiction, an "[e]xpansive general arbitration clause will not suffice to force the arbitration of arbitrability disputes." Id.
The arbitration clause in the instant case provides that "[c]laims, disputes or other matters in question . . . arising out of or relating to this Agreement or breach thereof, shall be subject to and decided by arbitration." Agreement ¶ 7.1.1. The clause does not explicitly provide that the arbitrator shall have the authority to decide which issues are arbitrable. That the parties agreed to arbitrate in accordance with the AAA Rules, which provide that "[t]he arbitrator shall have the power to rule on his or her own jurisdiction," see Rule R-8(a), does not confer authority on the arbitrator to decide which claims are arbitrable. Simply by agreeing that any matters sent to arbitration would be governed by the AAA Rules, Diesselhorst and Munsey did not clearly and unmistakably demonstrate an intent to have an arbitrator determine the question of arbitrability. See Martek Biosciences Corp. v. Zuccaro, No. Civ. AMD 04-3349, 2004 WL 2980741, at *3 (D. Md. Dec. 23, 2004) (holding that the parties' contracting to arbitrate in accordance with Judicial Arbitration and Mediation Services rules providing the arbitrator with jurisdiction over the issue of arbitrability did not express a clear and unmistakable intent to have an arbitrator decide the question of arbitrability). Thus, it is for this court, rather than the arbitrator, to determine whether some or all of Munsey's claims are subject to arbitration.
C.
I shall now turn to the issue of arbitrability of the parties' dispute. The Agreement provides that it shall be governed by the law of Maryland. See Agreement ¶ 9.1 ("this Agreement shall be governed by the law of the place of the Project"). Maryland follows the objective theory of contract interpretation. Sy-lene of Washington, Inc. v. Starwood Urban Retail II, LLC, 376 Md. 157, 829 A.2d 540, 546 (2003). Under settled principles of objective contract interpretation, the terms of the contract control, irrespective of the subjective intent of the parties. Id. "When the clear language of a contract is unambiguous, the court will give effect to its plain, ordinary, and usual meaning, taking into account the context in which it is used." Id. Whether a contract is ambiguous is determined by the court as a matter of law. State Highway Admin. v. David A. Bramble, Inc., 351 Md. 226, 717 A.2d 943, 949 (1998).
In Maryland, "[w]here the language of the arbitration clause is clear, and it is plain that the dispute sought to be arbitrated falls within the scope of the arbitration clause, arbitration should be compelled." Gold Coast Mall, Inc. v. Larmar Corp., 298 Md. 96, 468 A.2d 91, 95 (1983). On the other hand, if the language of the clause clearly indicates that the issue sought to be arbitrated is outside the scope of the arbitration clause, the parties should not be compelled to arbitrate the issue. Id. The question as to whether the particular dispute is arbitrable is left to the decision of the arbitrator only when the language of the arbitration clause is unclear as to whether the subject matter of the dispute falls within the scope of the arbitration agreement. Id. at 97.
It is the law in Maryland that arbitration should be compelled "if the arbitration clause is broad and does not `expressly and specifically exclude' the dispute." Allstate Ins. Co. v. Stinebaugh, 374 Md. 631, 824 A.2d 87, 94 (2003) (quoting Gold Coast Mall, 298 Md. 96, 468 A.2d at 95); Crown Oil and Wax Co. of Delaware, Inc. v. Glen Constr. Co. of Virginia, Inc., 320 Md. 546, 578 A.2d 1184, 1189 (1990) (stating that "where the parties use a broad, all encompassing clause, it is presumed they intended all matters to be arbitrated"). The Supreme Court and other courts have labeled as "broad" those arbitration clauses requiring the arbitration of disputes "arising out of or relating to" a contract, or containing similarly sweeping language, and have held that "broad" arbitration clauses generally cover all issues arising between the parties. See, e.g., Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 398 (1967) (characterizing as "broad" a clause requiring arbitration of "[a]ny controversy or claim arising out of or relating to this Agreement"); J.J. Ryan Sons v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 321 (4th Cir. 1988) (holding that a clause providing for arbitration of "[a]ll disputes arising in connection with the present contract" encompasses "every dispute between the parties having a significant relationship to the contract"); see also United Steelworkers of Am. v. Warrior and Gulf Navigation Co., 363 U.S. 574, 582-83 (1960) (stating that "[a]n order to arbitrate . . . should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute").
The arbitration clause in the instant case is a broad one. As discussed above, the terms of the Agreement provide that "[c]laims, disputes, or other matters in question between the parties to this Agreement, arising out of or relating to this Agreement or the breach thereof, shall be subject to and decided by arbitration." Agreement ¶ 7.1.1. The parties did not expressly exclude disputes in connection with the Agreement where such disputes involve work that Diesselhorst may have done or started prior to the execution of the Agreement. Thus, Diesselhorst's argument that he is not required to arbitrate claims that involve errors or omissions that arose, if at all, during the term of the Diesselhorst-Brinker oral contract is unavailing. Whether or not the origins of any of Munsey's claims date back to the period during which Diesselhorst was performing services under his oral contract with Brinker is not the relevant question. Rather, the appropriate question is simply whether Munsey's claims "aris[e] out of or relat[e] to" the Diesselhorst-Munsey contract (the Agreement). Whether or not Diesselhorst incorrectly calculated the height of the Munsey Building prior to the execution of his contract with Munsey, for example, as Munsey contends, it remains the case that any dispute involving any such mismeasurement either arises out of or relates to his contractual obligations under the Agreement.
Indeed, I reject the very premise of Diesselhorst's theory of the case: his insistence that the court should parse Munsey's allegations against him and thereby create two categories of "claims:" those rooted in his early work for Brinker and those rooted in the Agreement. As a matter of law, Munsey has asserted only one "claim:" a claim for breach of contract, i.e., the Agreement. Plaintiff's contentions regarding the separability of his duties (and the breach thereof) go to the merits of the breach of contract claim, not to the arbitrability of the unitary breach of contract claim asserted against him. It seems obvious that if Munsey asserts a breach of duty that is not encompassed by plaintiff's undertaking in the Agreement (and therefore not encompassed by the broad arbitration clause), then no damages based on such a breach of duty will be or can be awarded.
Diesselhorst argues that his contract with Munsey encompasses only the provision of construction phase documents and services, not design phase services. To the contrary, however, the plain terms of the Agreement state that "[t]he Architect's Basic Services" consist of a design phase, among other services. Agreement ¶ 2.1.1. The Agreement reflects that Diesselhorst was paid $36,500 for "design phase" work and that such payment was credited to Munsey's account. Agreement ¶ 11.1. Diesselhorst also was obligated to provide construction documents which were "[b]ased on the approved Design Documents and any further adjustments in the scope or quality of the Project." Agreement ¶ 2.3.1. Diesselhorst was the "Architect of Record" for the entirety of the Project. Even if Diesselhorst committed errors or was negligent in the work he originally performed for Brinker, it is Diesselhorst's compounding of errors and omissions, and incorporation of errors and omissions into his work product for Munsey, that serve as a basis of Munsey's demand for arbitration. It would be wholly illogical to conclude that the dispute between Diesselhorst and Munsey does not "aris[e] out of or relat[e] to" the Agreement.
The parties dispute whether Munsey received a legal and/or equitable assignment of the rights of Brinker or Omega, an entity formed by Brinker. Because I find that Munsey's claims against Diesselhorst arise out of and relate to the Agreement, I need not address this argument.
I also need not address Diesselhorst's argument that, under the Agreement, mediation was a condition precedent to arbitration, and that Munsey failed to request mediation before demanding arbitration. The Agreement provides, in pertinent part, as follows:
In addition to and prior to arbitration, the parties shall endeavor to settle claims, disputes or other matters in question by mediation in accordance with the Construction Industry Mediation Rules of the American Arbitration Association currently in effect, unless the parties mutually agree otherwise. Demand for mediation shall be filed in writing with the other party to this Agreement and with the American Arbitration Association.
Agreement ¶ 7.2.1. Diesselhorst concedes that "prior counsel to Diesselhorst and Munsey's counsel discussed allowing arbitration to go forward with a plan to mediate, or reserve the right to mediate after 2-3 key depositions were taken" and "the status of such discussions are not clear at this point." There is no evidence that Diesselhorst has filed a demand for mediation.
III.
The effect of my ruling is to give the very declaratory judgment that plaintiff seeks (i.e., that all of the claims asserted in arbitration by Munsey are arbitrable), but of course in favor of defendant rather than plaintiff. Nevertheless, rather than enter a declaratory judgment, and in lieu of staying this case pending the outcome of arbitration, I shall grant Munsey's motion to dismiss for failure to state a claim. "[D]ismissal is a proper remedy when all of the issues presented in a lawsuit are arbitrable." Choice Hotels Int'l, Inc. v. BSR Tropicana Resort, Inc., 252 F.3d 707, 709-10 (4th Cir. 2001). An order follows.