American Cas. Co. of Reading, Pennsylvania v. L-J, Inc.

• Citation: 35 F.3d 133
• Decision Date: 13 September 1994
• Docket Number: No. 93-2339,INCORPORATED,L-,93-2339
• Parties: AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Plaintiff-Appellant, v.; U.S. Construction Company, Incorporated, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 133

35 F.3d 133

AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Plaintiff-Appellant, v. L-J, INCORPORATED; U.S. Construction Company, Incorporated,

Defendants-Appellees.

No. 93-2339.

United States Court of Appeals,

Fourth Circuit.

Argued July 12, 1994.

Decided Sept. 13, 1994.

ARGUED: Charles E. Carpenter, Jr., Richardson, Plowden, Grier & Howser, P.A., Columbia, SC, for appellant. Amy M. Snyder, Henry Pickett Wall, Sr., Haynsworth, Marion, McKay & Guerard, Greenville, SC, for appellees. ON BRIEF: Francis M. Mack, Deborah Harrison Sheffield, Richardson, Plowden, Grier & Howser, P.A., Columbia, SC, for appellant.

Before NIEMEYER, MICHAEL, and MOTZ, Circuit Judges.

Dismissed by published opinion. Judge MOTZ wrote the opinion, in which Judge NIEMEYER and Judge MICHAEL joined.

OPINION

MOTZ, Circuit Judge:

A surety for a subcontractor appeals from the district court's order granting the general contractor's motion to compel arbitration and stay litigation "pending the outcome of arbitration between the parties." Because the arbitration claim was embedded in an action asserting other claims, the district court's order was not final. Accordingly, we lack jurisdiction to consider the appeal and so it must be dismissed.

I.

This action arose from a $35.9 million road construction project initiated by the Georgia Department of Transportation. The general contract for this project was awarded to appellee, L-J, Inc. (L-J), who, in turn, subcontracted portions of the project to U.S. Construction Company, Inc. (U.S.). In a written subcontract, U.S. agreed to perform excavation, engineering, and traffic control.

On September 19, 1991, appellant American Casualty Company of Reading, Pa. (American), as surety for U.S., executed performance and payment bonds in the amount of $5,317,640 obligating American to L-J in the event of a default by U.S. on the subcontract. Both the performance and payment bonds included the following language:

WHEREAS, Principal [U.S.] has by written agreement dated June 20, 1991 entered into a subcontract with Obligee [L-J] for clearing, grading, project management and all work associated with items in Attachment # 1 of subcontract agreement ... which subcontract is by reference made a part hereof ....

L-J and U.S. included, among other provisions in the subcontract, a clause governing the resolution of disputes related to the subcontract that provided in pertinent part:

The Subcontractor agrees that if any controversy arises between Subcontractor and the Contractor and/or the Owner in respect to the amount, quantity, kind, classification, price or value of the work performed or to be performed by the subcontractor, or in respect to the kind, character, condition, suitability, utility price or value of any material or supplies furnished or to be furnished by the Subcontractor, or the proper interpretation of the plans, specifications, or original contract, or in respect to any alleged delay or delays in the prosecution or completion of the work made or caused to be made by the Subcontractor, or in respect to any kind of labor or manner of performance thereof, or in respect to any other matter or thing pertaining to or connected with the work provided for herein, the Contractor may, in its direction [sic], compromise and settle the same.... Arbitration of any controversy hereunder shall be at the sole option of the Contractor, and such arbitration, if elected by the Contractor, shall proceed under the Construction Industry Rules of the American Arbitration Association.

(emphasis added).

During the course of the project, a dispute arose over U.S.'s ability to complete its obligations under the subcontract. L-J accordingly sent a demand for arbitration to both U.S. and American, which L-J also filed with the American Arbitration Association. In its demand, L-J stated that U.S. had encountered financial difficulties, which caused U.S. to be unable to fulfill its obligations without advance payments from L-J for labor and materials. L-J further stated that when U.S. defaulted under the subcontract and was unable to repay L-J for these advance payments, L-J had requested that American cure the default, which American refused to do. L-J sought to recover over $2.1 million in "actual damages" from U.S. and American and over $2.6 million in punitive damages from American for its alleged "bad faith refusal to honor its obligations under the performance bond."

In response to this demand, American filed the instant action seeking (1) a declaration that the "payment and performance bonds," which it had executed as surety for U.S., were "null, void, and of no effect[,]" (2) a preliminary injunction to stay arbitration pending litigation as to the underlying bonds and contracts, (3) a permanent injunction barring "all arbitration proceedings related to this matter," and (4) a declaration as to American's obligations under its bonds and whether it "acted in bad faith" in its handling of this matter. American moved to stay arbitration; L-J moved to stay litigation and compel arbitration. The court granted L-J's motion to stay litigation and compel arbitration and denied American's motion to stay arbitration. When American asked the court to reconsider its order the court denied the motion. American now appeals the court's order compelling arbitration and "statistically stay[ing]" the litigation "pending the outcome of arbitration between the parties."

American challenges the lower court's order, asserting that it is not bound by the terms of the arbitration clause contained in the subcontract. American further argues that even if it had a duty to arbitrate certain aspects of the subcontract, the "narrowly drawn" arbitration clause does not encompass the issues of the surety bond's validity or L-J's allegations as to American's bad faith. We cannot reach these issues because the district court's decision was not final and so we have no jurisdiction over this appeal. ¹

II.

Section 16 of the Federal Arbitration Act governs the appealability of arbitration orders, and provides:

(a) An appeal may be taken from--

(1) an order--

(A) refusing a stay of any action under section 3 of this title,

(B) denying a petition under section 4 of this title to order arbitration to proceed,

(C) denying an application under section 206 of this title to compel arbitration,

(D) confirming or denying confirmation of an award or partial award, or

(E) modifying, correcting, or vacating an award;

(2) an interlocutory order granting, continuing, or modifying an injunction against an arbitration that is subject to this title; or

(3) a final decision with respect to an arbitration that is subject to this title.

(b) Except as otherwise provided in section 1292(b) of title 28, an appeal may not be taken from an interlocutory order--

(1) granting a stay of any action under section 3 of this title;

(2) directing an arbitration to proceed under section 4 of this title;

(3) compelling arbitration under section 206 of this title; or

(4) refusing to enjoin an arbitration that is subject to this title.

9 U.S.C. Sec. 16 (Supp. V 1994). ²

Thus, Sec. 16 authorizes immediate appellate review of an order "refusing a stay" of litigation pending arbitration or an order denying a motion to compel arbitration. 9 U.S.C. Sec. 16(a)(1)(A), (B), & (C) (Supp. V 1994). It matters not whether these orders are final or interlocutory because orders that favor litigation over arbitration are "immediately appealable, even if interlocutory in nature." Stedor Enterprises, Ltd. v. Armtex, Inc., 947 F.2d 727, 730 (4th Cir.1991) (emphasis added). On the other hand, Sec. 16 generally precludes appellate review of orders that favor arbitration over litigation " 'until after the arbitration has gone forward to a final award.' " Id. (quoting David D. Siegel, Practice Commentary, 9 U.S.C.A. Sec. 16, at 219 (West Supp.1991), now found at 9 U.S.C.A. Sec. 16, at 270 (West Supp.1994) [hereinafter Practice Commentary ]. See also Edith H. Jones, Appeals of Arbitration Orders--Coming out of the Serbonian Bog, 31 S. Tex. L.Rev. 361, 375 (1990) (observing that appealability "principle is in accord with the pro-arbitration outlook of the [Federal Arbitration Act]").

Although an order favoring arbitration, like the one issued by the court below, is generally not immediately appealable, appellate jurisdiction may exist if that order is " 'a final decision with respect to an arbitration.' " Stedor, 947 F.2d at 730 (quoting Sec. 16(a)(3)). Appellate jurisdiction to review such an order, thus, depends on whether the order is "final" or "interlocutory" within the meaning of Sec. 16. ³ Id. at 731. Because these terms are not expressly defined in the statute, "Congress intended courts to continue the prior, settled usage of those terms." Id. Accordingly, an order is a " 'final decision' " if it " 'ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.' " Id. (quoting Catlin v. United States, 324 U.S. 229, 233, 65 S.Ct. 631, 633, 89 L.Ed. 911 (1945)); see 134 Cong.Rec. S16,309 (daily ed. Oct. 14, 1988) (section-by-section analysis of legislation placed in record by Sen. Heflin), quoted in Stedor, 947 F.2d at 731; see also Bernstein by Bernstein v. Menard, 728 F.2d 252, 253 (4th Cir.1984).

Relying on these principles, our prior decisions concerning appellate jurisdiction to review orders favoring arbitration have focused on the question of whether arbitrability was the sole issue presented in the action or whether the issue of arbitrability originated as part of an action raising other claims for relief. See Humphrey v. Prudential Sec. Inc., 4 F.3d 313, 315-19 (4th Cir.1993); Delta Fin. Corp. v. Paul D. Comanduras & Assoc., 973 F.2d 301, 304-05 (4th Cir.1992); Stedor, 947 F.2d at 729-32; Jeske v. Brooks, 875 F.2d 71, 73-74 (4th Cir.1989). The latter circumstance, in which the arbitrability issue is raised as "an...