Opinion
Civil Action No. 3:01-CV-1147-M.
December 3, 2001
MEMORANDUM ORDER COMPELLING ARBITRATION
Before the Court is Defendant's Motion to Compel and Consolidate Arbitration and to Stay or Dismiss the Federal Court Proceeding, filed October 16, 2001. Because it finds the claims asserted in this case are inherently inseparable from those asserted in a pending proceeding, the Court compels the parties to arbitration.
BACKGROUND
This dispute arises from the 1998 expansion of a cement manufacturing facility. Several different agreements connect the various parties involved in the expansion. The owner of the facility, Holnam Texas Limited Partnership ("Holnam") contracted, under the terms of the "Turnkey Agreement," with the Plaintiff contractor, Watkins Engineers Constructors, Inc. ("Watkins"), to design and build the expansion. To supply the major equipment for the expansion, Watkins contracted with Humboldt Wedag, Inc. ("HWI"). On September 22, 1998, Watkins issued a Purchase Order to HWI to memorialize the sale and purchase of goods between them. This Purchase Order expressly incorporates other documents — the Purchase Agreement between HWI and Watkins, and the Turnkey Agreement, Standard General Conditions, and Supplementary Conditions, between Holnam and Watkins — and forms the contract between Watkins and HWI. As an enticement to Holnam to contract with Watkins, so Watkins would contract with HWI, Deutz AG ("Deutz"), as the parent company of HWI, issued Guarantee No. 1442/98 ("Guarantee") to Holnam, guaranteeing HWI's work under the project. The Supplementary Conditions to the Turnkey Agreement, made a part of the contract between HWI and Watkins through the Purchase Order, contains a mandatory arbitration clause. The Purchase Agreement, expressly made a part of the Purchase Order contract, acknowledges and adopts the dispute resolution provisions of the Turnkey Agreement. Deutz signed only the Guarantee.
The Purchase Order states, in relevant part:
The services and equipment described herein shall be furnished in accordance with and meet the requirements of the following documents which form the Contract, and all are as fully a part of the Contract as if attached to this Purchase Order, and are repeated herein.
Section 1.00: The Purchase Agreement Section 2.00: Turnkey Agreement Between Owner and Contractor (Design/Builder) Section 3.00: Standard General Conditions of the Contract Between Owner and Design/Builder Section 4.00: Supplementary Conditions.
Disputes arose between Holnam, Watkins, and HWI out of or related to the obligations set forth in the various agreements. On August 21,2000, pursuant to the arbitration provision contained in the Supplementary Conditions to the Turnkey Agreement, Holnam commenced an arbitration proceeding against Watkins. On December 18, 2000, Watkins asserted a counterclaim against Holnam and a third-party claim against HWI.
On March 28, 2001, Watkins sued Deutz, in state court, for breach of the Guarantee. On June 15, 2001, Deutz removed the action to this Court. Deutz argues that under the terms of the Turnkey Agreement, the parties should be compelled to arbitration and this action consolidated with the pending arbitration proceeding. Watkins argues its claim only involves the Guarantee, which contains no such arbitration provision, and that since Deutz is not a signatory to any agreement governed by an arbitration clause, it cannot compel Watkins to arbitrate its claims against Deutz. The Court's task is thus to determine whether Watkins can be bound to arbitrate with Deutz even though Deutz never signed the arbitration agreement.
ANALYSIS
For the Court to compel arbitration, the Federal Arbitration Act ("FAA") and the Texas General Arbitration Act ("TGAA") require a valid, written agreement to arbitrate. The parties do not contest the existence of a valid agreement to arbitrate. However, it is undisputed that Deutz did not sign it. Deutz raises two arguments in its effort to nevertheless compel arbitration: (1) the arbitration clause in the Turnkey Agreement is incorporated into the Guarantee; and (2) the theory of equitable estoppel allows Deutz, as a non-signatory, to compel arbitration.
9 U.S.C. § 4 (West 1994); TEX. CIV. PRAC. REM. CODE § 171.021 (Vernon 1997). Here, the transactions required to supply, design, and build the expansion indisputably involve interstate commerce. Project participants are all citizens of different states and the underlying contracts necessitate interstate travel. Though the outcome is unaffected by whether this the FAA, rather than the TGAA, governs this case, the interstate commerce link required for applicability of the FAA is met under the facts of this case. See Ford v. NylCare Health Plans of the Gulf Coast, Inc., 141 F.3d 243, 246 (5th Cir. 1998).
A valid arbitration agreement is found in the Supplementary Conditions to the Turnkey Agreement. The Supplementary Conditions, Article 15.0, incorporated into the Turnkey Agreement and the Purchase Order, state that all parties necessary to resolve a claim shall be parties to the same consolidated arbitration proceeding governed by the American Arbitration Association:
a. INITIAL DISPUTE RESOLUTION. If a dispute arises out of or relates to this agreement or its breach, the parties shall endeavor to settle the dispute first through direct discussions. If the dispute cannot be settled through direct discussions, the parties shall endeavor to settle the dispute by mediation under the construction Industry Mediation Rules of the American Arbitration Association before recourse to arbitration. The location of the mediation or arbitration [sic] be the location of the Work.
b. MULTIPARTY PROCEEDING. The parties agree that all parties necessary to resolve a claim shall be parties to the same mediation or arbitration proceeding. [Watkins] shall include appropriate similar provisions in all other contracts and subcontracts relating to the Work to provide for arbitration of disputes in accordance with the provision of [the Standard General Conditions] and the consolidation of arbitration.
The Purchase Order, through the Purchase Agreement, acknowledges and adopts the dispute resolution provisions of the Turnkey Agreement:
(j) Dispute Resolution; Governing Law. Seller acknowledges the dispute resolution provisions of the [Turnkey Agreement] (General Conditions, Article 15 and Exhibit GC-A, Supplementary Conditions Article SC-15) and agrees that these dispute resolutions shall apply to any dispute arising out of this [Purchase Order], whether or not such dispute involves [Holnam].
A. The Turnkey Agreement Arbitration Clause
Watkins correctly contends that the Deutz Guarantee does not contain an express arbitration agreement. It does, however, contain language referencing general "obligations" found under the other contract agreements:
The obligations of Deutz AG ("Guarantor") under this Guarantee are identical with the obligations of HWI under the Contract Documents and [Holnam] may proceed directly to enforce all of its rights under this guarantee without proceeding against or joining HWI, Watkins, or any other person.
Deutz points to this language in support of its argument that it should be able to both "suffer the burden and derive the benefit of the multiparty consolidated arbitration provision." This language does not expressly incorporate all the contract documents as if they were set out in the Guarantee. Without a more specific incorporation, the Court cannot assume that the Guarantee's reference to "obligations" allows Deutz to assume responsibility for anything more than HWI's performance obligations under the contract. Nothing in the Guarantee language reflects a desire or intention of the parties to submit their disputes to arbitration.
See Grundstad v. Ritt, 106 F.3d 201, 204 n. 4 (7th Cir. 1997) ("[i]t has been established that a mere reference to the main contract," without a specific incorporation, "will not be sufficient to establish consent to the arbitration provision") (quoting Gabriel M. Wilner, ed., 1 Domke on Commercial Arbitration § 10.07, at 133 (Supp. 1996))).
Watkins argues that the Guarantee expressly contemplates dispute resolution in a "court" rather than an arbitration setting. In support of this assertion, it points to the following language:
Deutz agrees that it will not challenge personal jurisdiction over its company in any court or administrative body and hereby consents to personal jurisdiction in the State of Texas.
However, the clause relates to personal jurisdiction, not the forum for dispute resolution.
Because the Guarantee does not expressly contain a written agreement to arbitrate or specifically incorporate by reference an agreement in any other contract, it, alone, cannot serve as a basis for the Court to compel the parties to arbitration.
B. Equitable Estoppel
Equitable estoppel allows a non-signatory to compel arbitration in two circumstances. First, application is warranted when the signatory to a contract containing an arbitration clause raises allegations of substantially interdependent and concerted misconduct by both the non-signatory and one or more signatories. Second, equitable estoppel may be applied if the nature of the underlying claims requires the signatory to rely on the terms of the written agreement containing the arbitration provision in asserting its claims against the non-signatory. Here, although Watkins characterizes its claims as arising only under the Guarantee, the resolution of those claims will necessarily depend on the terms of the Purchase Order, which incorporates the terms of the Turnkey Agreement.
See Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 527 (5th Cir.), cert. denied, 531 U.S. 1013 (2000). In Grigson, the Fifth Circuit adopted the equitable estoppel theory announced by the Eleventh Circuit. See Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 758 (11th Cir. 1993), cert. denied, 513 U.S. 869 (1994).
In re Koch Ind., Inc., No. 01-67, 2001 WL 388475, *7 (Tex.App. — San Antonio April 18, 2001) (orig. proceeding).
See ANCO Ins. Serv. of Houston, Inc. v. Romero, 27 S.W.3d 1, 6 (Tex.App.-San Antonio 2000, pet. denied).
In its Original Petition, Watkins seeks relief from Deutz's acts or omissions allegedly constituting a breach of the Guarantee. Watkins thus cites the general rule that an action on a guarantee arises from the guarantee as a separate and independent contractual agreement. However, cases cited by Watkins on this point do not focus on the key issues here — the equitable estoppel doctrine and a related contract to arbitrate.
Deutz claims the Guarantee was written for Holnam, not Watkins, and can only be enforced by Holnam. Watkins points to Section 2.5 of the Turnkey Agreement as evidence of its ability to enforce the Guarantee, which provides:
[Holnam] and [Watkins] acknowledge that the parent company of HWI, Deutz AG has provided [Holnam] with a Guarantee of HWI's performance of all of HWI's obligations under this contract with [Watkins]. During the contract performance and warranty period, and to the extent permissible under such Guarantee and under the law, [Holnam] agrees to cooperate with [Watkins] and/or enable [Watkins] to proceed against Deutz AG directly or in [Holnam's] name at [Watkin's] sole cost and expense, to enforce Deutz AG's guarantee of the performance by HWI of its obligations to [Watkins].
Citing another provision, Deutz disputes that this clause gives Watkins standing to sue under the Guarantee:
This guarantee shall be binding upon Guarantor and its permitted successors and assigns. None of the interests, rights or obligations of Guarantor shall be assignable without the prior written consent of [Holnam].
Thus, a question exists as to whether Watkins can sue, under the Guarantee, in its own right as a third party beneficiary of the Guarantee. The Court finds it unnecessary to now resolve that issue.
See Gooch v. American Sling Co., Inc., 902 S.W.2d 181, 185 (Tex.App.-Fort Worth 1995, no writ).
See Eikel v. Bristow Corp., 529 S.W.2d 795, 799-800 (Tex.Civ.App. — Houston [1st Dist.] 1975, no writ), abrogated on other grounds, Qantel Bus. Sys., Inc. v. Custom Controls Co., 761 S.W.2d 302 (1988); Gooch, 902 S.W.2d 181, 185 (Tex.App.-Fort Worth 1995, no writ).
In Part C of its Initial Disclosures, Watkins characterized its claim against Deutz as follows:
Watkins claims that [HWI's] failure to properly perform its responsibilities caused damage to Watkins. Watkins seeks these damages against [HWI] in arbitration. Deutz, as its parent company, guaranteed [HWI's] performance on this Project . . . In this action, Watkins seeks to recover damages from Deutz based on its guarantee of [HWI's] timely, complete and full performance.
This disclosure demonstrates the necessary link between HWI's obligations under the Purchase Order and Deutz' obligation under the Guarantee if HWI's obligations under the Purchase Order were breached. Adjudication of Watkins's claims against Deutz will certainly entail a determination of whether HWI failed to "properly perform its responsibilities," a question the arbitrators will decide.
In J.J. Ryan Sons, an importer sued a manufacturer of imported products and its parent company. The parent sought to compel the plaintiff importer to arbitration under a mandatory arbitration agreement the parent had not signed. The Fourth Circuit held that the importer was required to arbitrate its claims against the parent even though the parent was not a party to the arbitration agreement because the claims against the parent were "inherently inseparable" from the claims against the subsidiary manufacturer under the contract subject to binding arbitration. Here, Watkins would have no claim against Deutz without the existence of the Purchase Order between it and HWI. The arbitrators are to decide whether HWI breached this Purchase Order, and if so, to what extent. Contrary to Watkins's assertions, its claims against Deutz do not stand alone, independent of the Purchase Order. Rather, those claims are inherently inseparable from those asserted in the arbitration because the relief claimed under the Guarantee must necessarily flow from that allowed under the underlying Purchase Order. Further, Deutz correctly claims that Watkins's ability to sue on the Guarantee, either on its own or as a third party beneficiary, will turn on construction of the language in the Turnkey Agreement, and the terms of the Turnkey Agreement are before the arbitrators.
J.J. Ryan Sons v. Rhone Poulenc Textile, S.A., 863 F.2d 315,320 (4th Cir. 1988). See also Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576, 592 (Tex.App.-Houston [14th Dist.] 1999, no pet.) (finding signatory with claims against non-signatories was required to arbitrate its claims that were "fundamentally grounded or intertwined" with obligations under the agreement).
Watkins asks this Court to decline to exercise its discretion to compel arbitration in this case contending, among other things, that Deutz's delay in requesting such relief would prejudice Watkins in the arbitration. The Court is not persuaded by this contention. After Holnam brought its arbitration suit, Watkins waited nearly four months before asserting, in the arbitration proceeding, counterclaims against Holnam and third-party claims against HWI and waited nearly seven months before bringing a case against Deutz in state court. Deutz removed Watkins's state court suit against it within the requisite statutory period. Admittedly, Deutz filed its Motion to Compel Arbitration approximately four months after removal, but the Court does not find that delay unreasonable under these circumstances.
The claims on the Purchase Order will necessarily determine liability under the Guarantee, and thus liability under the Guarantee depends on the issues being decided by the arbitration panel. As stated in Grigson, "the linchpin for equitable estoppel is equity — fairness." It would be inequitable for the Court to allow Watkins, which agreed to arbitrate its disputes with HWI and Holnam, to avoid arbitration of intimately related matters simply because Deutz did not sign the arbitration agreement. "Because [Texas] state and federal policies continue to favor arbitration, a presumption exists favoring agreements to arbitrate under the FAA."
Grigson, 210 F.3d at 528-29.
In re First Merit Bank, 52 S.W.3d 749, 751 (Tex. 2001).
Watkins opposes the consolidation of its claims with the existing arbitration proceeding, claiming that "[a]lthough there may be certain issues on which Deutz or Watkins could be collaterally estopped, it is entirely possible that the Panel's `reasoned' decision will not be sufficiently clear to allow that to occur." That may be so, but the contention argues for consolidation, not against it. Adjudication of Watkins's claim against Deutz in federal court while Watkins's claims against HWI and Holnam are simultaneously being adjudicated in arbitration will not promote the efficient use of resources and will increase the likelihood of inconsistent outcomes. As stated by the J.J. Ryan court, "[i]f the [non-signatory] was forced to try the case, the arbitration proceedings would be rendered meaningless and the federal policy in favor of arbitration effectively thwarted.'" Equities favor the compelling of a consolidated arbitration as anticipated by the express language of the Purchase Order. The claims are too intertwined to permit a different result. Section 3 of the FAA authorizes the Court to "stay the trial of the action until . . . arbitration has been had in accordance with terms of the agreement." The parties are hereby COMPELLED to arbitration. The Court STAYS this case pending the outcome of the arbitration proceeding, and directs the clerk to administratively close the case during that period.
In a telephone hearing conducted with the Court on October 9, 2001, Watkins argued that its claims in federal court and its claims in arbitration could be treated differently due to the issue of "notice." Specifically, Watkins argued that it may recover in a court proceeding without giving Deutz notice because Deutz expressly waived certain defenses under the terms of the Guarantee, but may be barred from recovery in arbitration because of a failure to provide timely notice. Deutz, in its Motion, argues the illogic of this distinction, given that "proper notification `is an integral part of a buyer's cause of action and is not an affirmative defense of the seller.'" Def.'s Mot. at 11 ( quoting Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 970 n. 31 (5th Cir. 1976). In its Response to Deutz's Motion to Compel Arbitration, Watkins varies the distinction slightly: "the proof required due to the waiver of affirmative and other defenses under the Guarantee will be different in this proceeding than in the arbitration. Deutz and HWI may be responsible for different damages to the extent the Arbitration Panel is inclined to enforce any limitation on liquidation or other damages contained in the Purchase Order." Again, the Court concludes that such arguments mandate resolution by a single tribunal. See Del E. Webb Constr. v. Richardson Hosp. Auth., 823 F.2d 145, 150 (5th Cir. 1987) ("[t]he arbitrator, with the full case before it, can better determine whether there has been contractual compliance"). A determination of Deutz's liability under the Guarantee is integrally intertwined with HWI's claimed breach under the Purchase Order and will require the adjudicating body to rely on the terms of the Purchase Order. That intertwining is the foundation on which the Court must rest its determination of whether it should compel arbitration under the equitable estoppel doctrine.
J.J. Ryan Sons, Inc., 863 F.2d at 320-21.
The dispute resolution provision in the Turnkey Agreement expresses an unambiguous intent by Holnam and Watkins to consent to a single, consolidated, multi-party proceeding involving all parties necessary to resolve the dispute arising out of or relating to the contractual agreements. Article 15.0 of the Supplementary Conditions, incorporated into the Turnkey Agreement and Purchase Order, reads:
MULTIPARTY PROCEEDING. The parties agree that all parties necessary to resolve a claim shall be parties to the same mediation or arbitration proceeding. [Watkins] shall include appropriate similar provisions in all other contracts and subcontracts relating to the Work to provide for arbitration of disputes in accordance with the provision of [the Standard General Conditions] and the consolidation of arbitration.
(emphasis added). Watkins was to make that consolidation manifest in all of its documents. Were Deutz contesting Watkins's efforts to require it to arbitrate, the analysis might be different. Here, however, since the language in this clause evidences an express intent by Watkins and Holnam and HWI that all parties be brought into a single arbitration proceeding, it gives the Court authority to consolidate the proceedings. See Volt Info. Sciences v. Bd. of Trustees, 489 U.S. 468, 478 (1989) ("[the FAA] simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with the terms"); Del E. Webb Constr. v. Richardson Hosp. Auth., 823 F.2d 145, 150 (5th Cir. 1987) (issue of whether disputes subject to arbitration should be consolidated in a single arbitration is a question for the district court, looking to the express terms of the agreement among the parties, rather than the arbitrator). The express terms of the contracts equitably estop Watkins from contesting that its claims against Deutz should be consolidated into the arbitration.
This result accords with the weight of authority in analogous settings. See Am. Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349,352 (2d Cir. 1999); J.J. Ryan Sons, 863 F.2d at 321; Hughes Masonry Co., Inc. v. Greater Clark City Sch. Building Corp., 659 F.2d 836, 838-41 (7th Cir. 1981); Bank One Arizona, N.A. v. Wilton Hurst G.P. Corp., No. 00-2254, 2001 WL 276891, *2 (N.D. Tex. Mar. 19, 2001); Blount v. Nat'l Lending Corp., Inc., 108 F. Supp.2d 666, 671 (S.D. Miss. 2000); Gulf Guaranty Life Ins. Co. v. Connecticut General Life Ins. Co., 957 F. Supp. 839, 841 (S.D. Miss. 1997). See also In re Koch Ind., Inc., 49 S.W.3d 439, 447 (Tex.App.-San Antonio 2001) (orig. proceeding); Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576, 592-93 (Tex.App.-Houston [14th Dist.] 1999, pet. filed).
9 U.S.C. § 3.