AgGrow Oils, L.L.C. v. Nat'l Union Fire Ins. Co. of Pittsburgh

• Citation: 242 F.3d 777
• Decision Date: 15 November 2000
• Docket Number: No. 99-4319,99-4319
• Parties: (8th Cir. 2001) AGGROW OILS, L.L.C., PLAINTIFF - APPELLEE, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, DEFENDANT - APPELLANT, Submitted:
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 777

242 F.3d 777 (8th Cir. 2001)

AGGROW OILS, L.L.C., PLAINTIFF - APPELLEE, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, DEFENDANT - APPELLANT,

No. 99-4319

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Submitted: November 15, 2000

Filed: March 7, 2001

Appeal from the United States District Court for the District of North Dakota. [Copyrighted Material Omitted] Before Loken, Lay, and Morris Sheppard Arnold, Circuit Judges.

Loken, Circuit Judge.

National Union Fire Insurance Company ("National") issued a performance bond guaranteeing the obligations of T.E. Ibberson Company ("TEI") under a contract between TEI and AgGrow Oils, L.L.C. ("AgGrow"). AgGrow filed this action against National to recover on the bond, claiming that TEI was in default of its contractual obligations. National moved to stay the litigation pending mandatory arbitration under the TEI/AgGrow contract, which was incorporated by reference in National's bond. The district court denied a stay, and National appeals. We agree with the district court there is no arbitration agreement between AgGrow and National mandating a stay under section 3 of the Federal Arbitration Act, 9 U.S.C. § 3. However, we conclude the district court should reconsider whether to stay this action, at least in part, because arbitration of the underlying contract dispute between AgGrow and TEI is now pending. Accordingly, we affirm in part and remand.

I. Background.

AgGrow was established in 1996 to construct and operate a plant to process oilseeds grown by farmer-investors into edible and industrial oils. In May 1997, AgGrow and TEI entered into a Construction Contract in which TEI agreed to design and build the processing facility near Carrington, North Dakota, and AgGrow agreed to pay TEI a "not to exceed" price of $7,758,281. TEI purchased the processing equipment from Anderson International Corporation ("Anderson"). A TEI subsidiary, Ibberson Engineering, provided engineering services on the project. Consistent with prior direct dealings between AgGrow and Anderson, TEI guaranteed that the completed plant would process 200 tons of five specified oilseeds per day, and that the "expeller cake" would have a residual oil content of five to eight percent. National issued a performance bond binding National "to the Owner [AgGrow] for the performance of [TEI's obligations under] the Construction Contract, which is incorporated herein by reference."

After completion, the plant did not meet TEI's performance guarantees, and AgGrow notified TEI and National of its intent to claim a default and seek relief under the bond. AgGrow commenced this action in February 1999, suing National to recover on the bond and for bad faith, Ibberson Engineering for negligence, and Anderson for negligence and breach of warranty. AgGrow did not sue TEI. Ibberson Engineering cross claimed against Anderson, and Anderson cross claimed against Ibberson Engineering and National. Some months later, TEI filed an arbitration claim against AgGrow under the arbitration provision in the Construction Contract;¹ AgGrow counterclaimed for damages, including damages for TEI's alleged breach of the performance guarantees. TEI also sued Anderson in the District of Minnesota seeking indemnity for any liability to AgGrow. That action was transferred to the District of North Dakota and has been consolidated with this action.

National moved to stay AgGrow's lawsuit, arguing that AgGrow is obligated to arbitrate its claim under the performance bond because the bond expressly incorporated by reference the Construction Contract, including its arbitration provision. AgGrow opposed that motion, arguing the bond itself contains no agreement to arbitrate and instead provides that "[a]ny proceeding, legal or equitable, under this Bond may be instituted in any court of competent jurisdiction in the location in which the work or part of the work is located . . . within two years after the Surety refuses or fails to perform its obligations under this Bond." The district court initially denied National's motion for a mandatory stay, concluding that AgGrow's claim on the bond is not arbitrable because "the bond literally incorporates only AgGrow's promise to arbitrate with TEI; it does not . . . encompass mandatory arbitration with National." Four months later, after the parties advised that Anderson refused to arbitrate, and that no arbitration proceedings had been commenced,² the district court denied a discretionary stay. National appeals. We have jurisdiction to review this interlocutory order. See 9 U.S.C. § 16(a)(1)(A); In re Piper Funds, Inc., 71 F.3d 298, 300 (8th Cir. 1995).

II. Is National Entitled to a Mandatory Stay?

Section 3 of the Federal Arbitration Act provides that the district court shall stay the trial of an action brought "upon any issue referable to arbitration under an agreement in writing for such arbitration." 9 U.S.C. § 3. However, "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Techs., Inc. v. Communications Workers, 475 U.S. 643, 648 (1986) (quotation omitted). "We apply ordinary state law contract principles to decide whether parties have agreed to arbitrate a particular matter," giving "healthy regard for the federal policy favoring arbitration." Keymer v. Management Recruiters Int'l, Inc., 169 F.3d 501, 504 (8th Cir. 1999) (quotation omitted). The question of arbitrability is for the court, not the arbitrator. See McLaughlin Gormley King Co. v. Terminix Int'l Co., 105 F.3d 1192, 1193-94 (8th Cir. 1997).

The issue is whether AgGrow and National agreed to arbitrate AgGrow's claim on the performance bond. That issue turns on the meaning of the provision in the bond incorporating by reference the Construction Contract between AgGrow and TEI. Applying North Dakota law, the first question is whether the incorporation provision is ambiguous, a question of law we must decide from the four corners of the written agreement. See Burk v. Nance Petroleum Corp., 10 F.3d 539, 542 (8th Cir. 1993). As a general matter of contract law, an incorporation clause is effective only when the "provision to which reference is made has a reasonably clear and ascertainable meaning." J.S. & H. Constr. Co. v. Richmond County Hosp. Auth., 473 F.2d 212, 215 (5th Cir. 1973). Without question, incorporation of the Construction Contract clarified the performance obligations of TEI that National as surety undertook to guarantee. See Hollerman Mfg. Co. v. Standard Accident Ins. Co., 239 N.W. 741, 744-45 (N.D. 1931) (unpaid supplier may sue on bond issued in favor of owner and incorporating builder's contractual obligation to pay suppliers); accord Home Indem. Co. v. F.H. Donovan Painting Co., 325 F.2d 870, 874 (8th Cir. 1963). However, it is less clear that the incorporation clause reflected an intent by AgGrow and National to arbitrate their disputes under the bond -- that intent is not clearly expressed, and it seems to be negated by the bond provision referring to the judicial resolution of disputes and by the provision in the Construction Contract that it "not be construed to create a contractual relationship of any kind . . . between any persons or entities other than [AgGrow and TEI]." We conclude the incorporation clause is ambiguous on the issue of arbitrability, that is, "rational arguments can be made in support of contrary positions as to the meaning of the language in question." Johnson v. Mineral Estate, Inc., 343 N.W.2d 778, 780 (N.D. 1984).

When a contract is ambiguous, extrinsic evidence may be considered to determine the parties' intent. See Case Int'l Co. v. T.L. James & Co., 907 F.2d 65, 67 (8th Cir. 1990) (testimony of drafter considered in finding that prime contract's arbitration clause was not incorporated by reference into a subcontract). In this case, we have no extrinsic evidence regarding the parties' intent on the arbitrability question. An ambiguous contract may also be explained "by reference to the circumstances under which it was made and the matter to which it relates." N.D. CENT. CODE § 9-07-12. In general, a performance bond provides recourse to an obligee (AgGrow) against a secondary obligor (National, the surety) in the event the principal obligor (TEI) fails to perform the underlying obligation. See RESTATEMENT (THIRD) OF SURETYSHIP AND GUARANTY § 1 (1996). In defending a claim on the bond, the surety may raise nearly all defenses available to the principal obligor, plus defenses unique to the surety, such as actions by the obligee that impair the surety's position or release the principal obligor. Id. §§ 34, 37-47. When the surety has performed the underlying obligation or has discharged the principal obligor by settling with the obligee, the surety usually has a right to be reimbursed by the principal obligor. Id. §§ 22-24.

National argues that, as surety, it "steps into the shoes" of TEI and may compel AgGrow to arbitrate its claim on the bond under the arbitration provision in the Construction Contract. In support of its position, National marshals an impressive array of cases from other jurisdictions in which a bond provision incorporating the underlying contract was held to include the contract's arbitration provision and to justify a stay of litigation on the bond. Some of these cases are not quite on point, either because the surety was not seeking the stay, or because the stay was granted pending arbitration between the parties to the underlying contract, not between the bonding company and the obligee.³ Whether a lawsuit on the bond should be stayed while the obligee and the principal obligor arbitrate the underlying performance dispute is a different question than whether the obligee and the surety have separately agreed to arbitrate any disputes under the bond. See United States v. Bregman Constr. Corp., 256 F.2d 851, 854 (7th Cir. 1958).

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