MPACT CONST. GROUP LLC v. Superior Concrete Constructors, Inc.

802 N.E.2d 901

MPACT CONSTRUCTION GROUP, LLC, Appellant (Defendant below), v. SUPERIOR CONCRETE CONSTRUCTORS, INC., Appellee (Plaintiff below), and Flying J, Inc., FJI Plaza Company III, LLC, Lehman Brothers Holdings, Inc. d/b/a Lehman Capital, a Division of Lehman Brothers Holdings, Inc., Gary's Plumbing Service, Inc., Koberstein Trucking, Inc., Combs Landscape & Nursery, Inc, B & B Electric Co., Inc., June Rinsch, in her capacity as the Gibson County Treasurer, Appellees (Defendants below), and J.D. Music Tile Company, Inc., and E & B Paving, Inc., Appellees (Intervenors below).

No. 26S01-0307-CV-349.

Supreme Court of Indiana.

February 4, 2004.

Steven S. Hoar, Evansville, IN, Don L. Smith, Nashville, TN, Attorneys for Appellant.

Angela L. Freel, James D. Johnson, R. Steven Krohn, James E. Stoltz, Robert F. Stayman, Evansville, IN, Jerry D. Stilwell, Princeton, IN, Attorneys for Appellees.

ON PETITION TO TRANSFER FROM THE INDIANA COURT OF APPEALS, NO. 26A01-0209-CV-345.

SULLIVAN, Justice.

When the owner failed to pay for work and supplies on its travel plaza, a subcontractor foreclosed on its mechanic's lien. The general contractor sought to compel arbitration among the owner, general, and all subcontractors. While we acknowledge arbitration's utility in this kind of multiparty dispute, our inspection of the contract documents indicates that the subcontractors did not agree to arbitrate the issues in dispute here.

Background

MPACT Construction Group, LLC, a general contractor, entered into a contract with Flying J, Inc. to construct a travel plaza in Gibson County, Indiana.¹ Flying J was the owner of the construction plaza at the time, and it is now owned by FJI Plaza III, LLC. MPACT entered into several contracts with subcontractors² ("Subcontractors") to do the project work. Flying J failed to pay for all of the work and supplies, and so MPACT and some of the Subcontractors recorded mechanic's liens against Flying J. One of the Subcontractors, Superior Concrete Constructors, Inc., filed an action to foreclose its mechanic's lien. Several counterclaims and cross-claims for the foreclosure of mechanic's liens and for breach of contract were filed among the various parties.

The contract between MPACT and Flying J is an American Institute of Architects ("AIA") Standard Form Agreement Between Owner and Contractor ("General Contract"). Articles 1 and 9 of the General Contract incorporate by reference the AIA General Conditions of the Contract for Construction ("General Conditions"), and the General Conditions contain an arbitration clause. However, the subcontracts were not AIA standard form contracts but instead were contracts prepared by MPACT. After approximately six months of preparing for litigation, MPACT filed a motion to stay litigation and compel arbitration. The trial court summarily denied its motion. The Court of Appeals reversed in part, granting the motion as to Flying J, and affirmed in part, denying the motion as to the Subcontractors. MPACT Constr. Group, LLC v. Superior Concrete Constructors, Inc., 785 N.E.2d 632, 639, 640 (Ind.Ct.App.2003). We reach the same result as the Court of Appeals.

Discussion

The main issue is whether MPACT and the Subcontractors agreed to arbitrate disputes arising out of their business dealings. Because no explicit arbitration provision is contained in the subcontracts, we must determine if the arbitration provision in the General Conditions was incorporated by reference into the subcontracts.

I

The Federal Arbitration Act ("FAA") applies to written arbitration provisions contained in contracts involving interstate commerce. 9 U.S.C. §§ 1, 2 (2000). MPACT, Flying J, FJI Plaza III, LLC, and many of the Subcontractors are from different states, and so this project constitutes interstate commerce. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 400-01, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967); Univ. Casework Sys., Inc. v. Bahre, 172 Ind.App. 624, 634-35, 362 N.E.2d 155, 162 (1977); Pathman Constr. Co. v. Knox County Hosp. Ass'n, 164 Ind.App. 121, 133-34, 326 N.E.2d 844, 852-53 (1975).

The FAA applies only if parties agree to arbitrate. The Supreme Court has stated that both state law contract principles and federal substantive law of arbitration apply to answering this question. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995) (state law); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (federal law). In dicta, the Court has said:

[T]he text of § 2 [of the FAA] provides the touchstone for choosing between state-law principles and the principles of federal common law envisioned by the passage of that statute: An agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, `save upon such grounds as exist at law or in equity for the revocation of any contract.' Thus state law ... is applicable if that law arose to govern issues concerning the 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) (quoting 9 U.S.C. § 2). Recently, the Court clarified this statement, declaring that laws generally applicable to contracts may be applied to arbitration agreements, but "[c]ourts may not ... invalidate arbitration agreements under state laws applicable only to arbitration provisions." Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 686-87, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996); see also PaineWebber Inc. v. Elahi, 87 F.3d 589, 593 (1st Cir.1996) (referring to Doctor's Associates, the court stated "the Supreme Court explained that if a state law is applicable to contracts generally, it may be applied to arbitration agreements, but a state law that is specifically and solely applicable to arbitration agreements is displaced by the FAA").

The Court of Appeals, the Seventh Circuit, a federal district court applying Indiana law, and most other federal circuit courts of appeal have concluded that state law contract principles apply to determine whether parties have agreed to arbitrate. St. John Sanitary Dist. v. Town of Schererville, 621 N.E.2d 1160, 1162 (Ind.Ct.App. 1993); Gibson v. Neighborhood Health Clinics, Inc., 121 F.3d 1126, 1130 (7th Cir. 1997); Ziegler v. Whale Sec. Co., L.P., 786 F.Supp. 739, 741 (N.D.Ind.1992); Fazio v. Lehman Bros., 340 F.3d 386, 393 (6th Cir. 2003); Bank One, N.A. v. Shumake, 281 F.3d 507, 513 (5th Cir.2002),cert. denied, 537 U.S. 818, 123 S.Ct. 94, 154 L.Ed.2d 25 (2002); Mirra Co. v. Sch. Admin. Dist. # 35, 251 F.3d 301, 304 (1st Cir.2001); Int'l Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 417 n. 4 (4th Cir.2000); Schooley v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 133 Lab. Cas. (CCH) ¶ 58,234, 1997 WL 45271, at * 2, 1997 U.S.App. LEXIS 1884, at * 5 (10th Cir. Feb. 5, 1997); PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1198 (2nd Cir. 1996).

MPACT contends, however, that whenever state law presents an obstacle to arbitration, federal law preempts the application of state law. It argues that the Court of Appeals, in finding no agreement to arbitrate, either misconstrued Indiana law or properly construed Indiana law but should have applied federal law instead. The Subcontractors respond that the "FAA only pre-empts state law which requires the parties to resolve their disputes in a judicial forum when the contracting parties have agreed to resolve their disputes through arbitration." (Joint Br. in Resp. to Pet. for Transfer at 6.) That is not the case here, they argue, because there was no agreement to arbitrate.

"The FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration." Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Jr. Univ., 489 U.S. 468, 477, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989). Nevertheless, "state law may ... be pre-empted to the extent that it actually conflicts with federal law— that is, to the extent that it `stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'" Id. (quoting Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 85 L.Ed. 581 (1941)). Preemption has been found in cases where state statutes explicitly made certain arbitration clauses unenforceable or placed serious burdens on the enforceability of arbitration provisions. See, e.g., Doctor's Assocs., 517 U.S. at 683, 688, 116 S.Ct. 1652 (finding preemption where Montana law made arbitration clauses unenforceable unless the first page of the contract contained in underlined capital letters a statement that the contract was subject to arbitration); Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 269, 272-73, 282, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995) (reversing Alabama Supreme Court's denial of arbitration based on a state statute rendering predispute arbitration agreements invalid and unenforceable); Southland Corp. v. Keating, 465 U.S. 1, 10-16, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984) (holding invalid on preemption grounds state statute making agreements to arbitrate franchise claims unenforceable). But no such statute is involved here. Nor is it the case that state law is hostile to arbitration. Indeed, Indiana policy favors arbitration. PSI Energy, Inc. v. AMAX, Inc., 644 N.E.2d 96, 98 (Ind.1994) (stating that "Indiana was surely among the first jurisdictions to sanction arbitration as a means of dispute resolution" as it had a law allowing arbitration before Indiana became a state in 1816); Ind. CPA Soc'y v. GoMembers, Inc., 777 N.E.2d 747, 750 (Ind.Ct.App. 2002) ("Indiana recognizes a strong policy favoring enforcement of arbitration agreements."); see also Uniform Arbitration Act, Ind.Code § 34-57-2-1 (1998).

MPACT focuses solely on the result. It is just not true, however, that preemption occurs every time a court finds that the parties did not...