Great American Ins. Co. v. Hinkle Contracting Corp.

826 F.Supp.2d 969

GREAT AMERICAN INSURANCE COMPANY, Plaintiff,

v.HINKLE CONTRACTING CORPORATION, et al., Defendants.

Civil Action No. 2:11–cv–00396.

United States District Court, S.D. West Virginia.

Dec. 5, 2011.

H.F. Salsbery, Frost Brown Todd, Charleston, WV, Timothy D. Martin, Ward Hocker & Thornton, Louisville, KY, for Plaintiff.

Buckner Hinkle, Jr., Stites & Harbison, Lexington, KY, Stephen L. Thompson, Barth & Thompson, Charleston, WV, Steven M. Henderson, Stites & Harbison, Louisville, KY, for Defendant.

MEMORANDUM OPINION AND ORDER

JOSEPH R. GOODWIN, Chief Judge.

Pending before the court is the Defendant's Motion to Dismiss or Stay Proceedings Pending Arbitration [Docket 15]. For the reasons discussed below, this motion is DENIED.

I. BackgroundA. Facts and Procedural Posture

Hinkle Contracting Company, LLC (“Hinkle” and “HCC”) entered into a contract with the West Virginia Department of Transportation to construct portions of the King Coal Highway project in Mingo County, West Virginia. Hinkle and Chapman–Martin Excavation and Grading, Inc. (“CME”) then entered into a subcontract for CME to perform grade and drain work on the project. Great American Insurance Company (“Great American”) issued a Subcontract Performance Bond and Subcontract Labor and Material Payment Bond for CME, with Hinkle as obligee.

On June 2, 2011, Great American filed a Complaint for Declaratory Judgment in this court. Great American alleges that beginning in September 2010, Hinkle notified CME on several occasions of its delays and inadequate performance. To address these issues, Great American maintains that Hinkle and CME began discussing a change order to the subcontract in December 2010. The change order was signed in February 2011, and Great American contends that it “constitute[s] a material change to the terms and conditions of the Subcontract, which Great American did not agree to, nor consent to, when it wrote its Bond for the Project.” (Compl. [Docket 1], at ¶ 18.) Great American alleges that on March 15, 2011, Hinkle declared CME in default under the subcontract because it did not complete its work under the subcontract and change order. It further asserts Hinkle again declared CME in default on March 22, 2011, because it did not pay its sub-subcontractors and suppliers. On March 24, 2011, Hinkle notified Great American of CME's alleged default. In sum, Great American argues that:

Despite the repeated alleged defaults by CME, HCC failed to put Great American on notice of such alleged defaults until its letter dated March 24, 2011. Such failure by HCC to provide notice to Great American of its principal's, CME, alleged defaults is in breach of HCC's obligations to Great American under the Bond.

( Id. at ¶ 21.) Great American asks this court to declare the Performance Bond void ab initio and to find that Great American is not liable to Hinkle under it. Alternatively, Great American requests that the court declare the change order a material alteration to the subcontract and unenforceable against Great American “in establishing its rights, duties, and obligations arising out of, or under its Performance Bond.” ( Id. at ¶ 31.) Finally, if the court does not grant either of these requests, Great American seeks a reduction of its liability pro tanto under the Performance Bond.

Hinkle filed a Motion to Dismiss or Stay Proceedings Pending Arbitration. Hinkle argues that the Performance Bond incorporates by reference the subcontract's arbitration clause. The arbitration clause applies to all disputes “arising out of, or relating to” the subcontract. This includes, according to Hinkle, the allegations made by Great American in its Complaint against Hinkle. In opposing the motion, Great American asserts that while the arbitration clause requires arbitration of issues related to claims under the subcontract, it does not require arbitration of claims or defenses unique to the bond. This motion is now ripe for review.

II. Analysis

The Federal Arbitration Act (the “FAA”) provides that written agreements to arbitrate in contracts relating to 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. “The FAA requires a court to stay ‘any suit or proceeding’ pending arbitration of ‘any issue referable to arbitration under an agreement in writing for such arbitration.’ ” Adkins v. Labor Ready, Inc., 303 F.3d 496, 500 (4th Cir.2002) (quoting 9 U.S.C. § 3). “[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). However, “[b]ecause the FAA is at bottom a policy guaranteeing the enforcement of private contractual arrangements, we look first to whether the parties agreed to arbitrate a dispute, not to general policy goals, to determine the scope of the agreement.” E.E.O.C. v. Waffle House, Inc., 534 U.S. 279, 294, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002) (internal citation and quotation marks omitted). While state law controls issues of “validity, revocability, or enforceability of contracts generally,” Perry v. Thomas, 482 U.S. 483, 492 n. 9, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987), the FAA “create[s] a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act.” Moses H. Cone, 460 U.S. at 24, 103 S.Ct. 927.

A party can compel arbitration under the FAA by demonstrating: “(1) the existence of a dispute between the parties, (2) a written agreement that includes an arbitration provision which purports to cover the dispute, (3) the relationship of the transaction, which is evidenced by the agreement, to interstate or foreign commerce, and (4) the failure, neglect or refusal of the defendant to arbitrate the dispute.” ¹ Adkins v. Labor Ready, Inc., 303 F.3d 496, 500–01 (4th Cir.2002) (quoting Whiteside v. Teltech Corp., 940 F.2d 99, 102 (4th Cir.1991)). The Fourth Circuit has explained that, “even though arbitration has a favored place, there still must be an underlying agreement between the parties to arbitrate.” Id. (quoting Arrants v. Buck, 130 F.3d 636, 640 (4th Cir.1997)). The resolution of the defendant's motion turns on the second requirement: whether the written agreement to arbitrate in the subcontract covers the instant dispute. This determination is a matter of contract interpretation. Am. Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 92 (4th Cir.1996). Specifically, I apply state law principles of contract interpretation, while giving due regard to the federal policy favoring arbitration. Washington Square Sec., Inc. v. Aune, 385 F.3d 432, 435 (4th Cir.2004).

A number of courts have addressed the question of whether an arbitration provision in a contract or subcontract binds a surety when it is incorporated by reference in the bond. Some of these cases do not distinguish between the obligation of a surety to arbitrate its unique surety defenses versus obligations grounded in the underlying contract or subcontract. In addition, they typically rely on the federal policy favoring arbitration and the effectiveness of incorporation by reference. See U.S. Fid. & Guar. Co. v. West Point Constr. Co., Inc., 837 F.2d 1507, 1508 (11th Cir.1988) (“We conclude that the incorporation of the subcontract into the bond expresses an intention of the parties, including [the surety] to arbitrate disputes. Our conclusion is supported by the strong policy favoring arbitration expressed by Congress in the Federal Arbitration Act.”); Exch. Mut. Ins. Co. v. Haskell Co., 742 F.2d 274, 276 (6th Cir.1984) (“[T]he performance bond incorporates by reference the subcontract, the subcontract incorporates by reference the general contract and hence the duty to arbitrate.”); Compania Espanola de Petroleos v. Nereus Shipping, S.A., 527 F.2d 966, 974 (2d Cir.1975) (“[T]he duty to arbitrate was indeed one of the rights and obligations under the contract which Cepsa, as guarantor, agreed to assume.”); Developers Sur. & Indem. Co. v. Resurrection Baptist Church, 759 F.Supp.2d 665, 668 (D.Md.2010) (“The First, Second, Fifth, Sixth and Eleventh Circuits and several district courts have held that a surety must arbitrate disputes related to a performance bond where the performance bond specifically incorporated by reference a contract containing an arbitration clause.”); Rashid v. U.S. Fid. & Guar. Co., Inc., No. 2:91–0141, 1992 WL 565341, at *9 (S.D.W.Va.1992) (“[Surety] is bound by the arbitrator's award against [contractor] at least insofar as it was rendered with respect to [contractor's] performance under the contract incorporated into the bond.”); Transamerica Premier Ins. Co. v. Collins & Co., Gen. Contractors, Inc., 735 F.Supp. 1050, 1051 (N.D.Ga.1990) (“This case presents ... a single question of law: does a performance bond that incorporates by reference a subcontract incorporate an unequivocal arbitration clause contained in that subcontract?”); Cianbro Corp. v. Empresa Nacional de Ingenieria y Technologia, S.A., 697 F.Supp. 15, 20 (D.Me.1988).

In contrast, some cases have explicitly held that disputes over bond obligations must be arbitrated. See Jewish Fed'n of Greater New Orleans v. Fid. & Deposit Co. of Md., No. 01–30371, 2001 WL 1085096, at *2 (5th Cir. Aug. 29, 2001); Commercial Union Ins. Co. v. Gilbane Bldg. Co., 992 F.2d 386, 389 (1st Cir.1993); U.S. Surety Co. v. Hanover R.S. Ltd. P'ship, 543 F.Supp.2d 492, 496 (W.D.N.C.2008); Ohio Cas. Ins. Co. v. City of Moberly, Mo., No. 4:05–cv–5, 2005 WL 2491461, at *3 (E.D.Mo. Oct. 7, 2005); Hoffman v. Fid. & Deposit Co. of Md., 734 F.Supp. 192, 195 (D.N.J.1990).

For example, in United States Surety Co. v. Hanover R.S. Limited Partnership, the contractor and subcontractor arbitrated their dispute. 543 F.Supp.2d at 493. The surety participated in the arbitration but...