UNITED STATES FIDEL. & G. CO. v. BANGOR AREA JT. SCH. AUTH., Civ. A. No. 72-764.

• Decision Date: 07 March 1973
• Docket Number: Civ. A. No. 72-764.
• Citation: 355 F. Supp. 913
• Parties: UNITED STATES FIDELITY AND GUARANTY COMPANY v. BANGOR AREA JOINT SCHOOL AUTHORITY.
• Court: U.S. District Court — Eastern District of Pennsylvania

355 F. Supp. 913

UNITED STATES FIDELITY AND GUARANTY COMPANY v. BANGOR AREA JOINT SCHOOL AUTHORITY.

Civ. A. No. 72-764.

United States District Court, E. D. Pennsylvania.

March 7, 1973.

Stradley, Ronon, Stevens & Young, Philadelphia, Pa., for plaintiff.

Edmund P. Turtzo, Bangor, Pa., L. Carter Anderson, Philadelphia, Pa., for defendant.

MEMORANDUM AND ORDER

TROUTMAN, District Judge.

On January 29, 1968, Fraim Construction Company entered into a contract with defendant school authority for the construction of a new junior high school in Bangor, Pennsylvania, for the sum of $2,058,839.68. On or about the same date, plaintiff U.S.F.&G., as surety, and Fraim, as principal, executed and delivered performance and labor and material payment bonds in connection with the construction project with defendant school authority as obligee. In February 1971, Fraim defaulted and purportedly assigned all his rights under the construction contract to U.S.F.&G. At defendant's request, U.S.F.&G. completed the construction contract at a cost to it in excess of $240,000. Prior to Fraim's default, the total contract price, except for $41,092.25, had been paid to Fraim. In October 1971, upon U.S.F.&G.'s completion of the construction contract, it made application to the defendant for the payment of the contract balance, i. e., $41,092.25. Upon defendant's refusal to tender the balance, U.S.F.&G., as subrogated surety, commenced this action to recover the contract balance. Jurisdiction is based solely on diversity of citizenship and an amount in controversy in excess of $10,000. 28 U.S.C. § 1332. Before the Court is defendant's motion to dismiss or, in the alternative, to stay the action pending arbitration.

The contract entered into between Fraim, U.S.F.&G.'s principal, and defendant provides in Section 7.10.1 of the Supplementary General Conditions thereof for the resolution of all disputes, with certain exceptions not pertinent here "* * * by arbitration in accordance with the Construction Industry Arbitration rules * * *."¹ The contract further chooses Pennsylvania law as the governing law Section 7.1.1 and provides that the contract shall be binding on successors and assigns. Section 7.2.1² Thus, the terms of the contract are completely binding on U.S.F. &G. and Pennsylvania law governs the construction of the contract. It should also be noted at this time that Section 16 of the Pennsylvania Arbitration Act, 5 P.S. § 176³ makes the application of the state act, 5 P.S. § 161 et seq., mandatory in all written contracts to which the Commonwealth or any of its political subdivisions is a party. See Merritt-Chapman & Scott Corp. v. Pennsylvania Turnpike Comm'n., 387 F.2d 768, 773 (3rd Cir. 1967). Thus, even if the instant contract had not chosen Pennsylvania law as governing and provided for arbitration of disputes, the provisions of the Pennsylvania Arbitration Act would nonetheless be applicable by operation of law by virtue of 5 P.S. § 176.

I.

Initially, plaintiff contends that its claims are not within the scope of the arbitration provision. In Hussey Metals v. Lectromelt Furnace, 471 F.2d 556 (3rd Cir. 1972) the Court of Appeals restated the guidelines to be followed by the Courts in determining this issue:

"It is settled under both Federal and Pennsylvania law that the court must decide whether a party is bound to arbitrate and what issues he must arbitrate. Arbitration is a matter of contract, and a party cannot be forced to arbitrate something which he did not agree to. citations omitted

"In view of the favorable policy towards arbitration, Mendelson v. Shrager, 432 Pa. 383, 248 A.2d 234 (1968), doubts as to whether an arbitration clause may be interpreted to cover the asserted dispute should be resolved in favor of arbitration unless a court can state with `positive assurance' that this dispute was not meant to be arbitrated. See United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-583, 80 S.Ct. 1347, 4 L.Ed.2d 1409."

U.S.F.&G. contends, relying on Hussey Metals, that this dispute is not arbitrable because the contract provides that work shall remain in progress during any arbitration proceeding.⁴ It argues that since the work has been completed the above provision renders the arbitration clause inapplicable. In Hussey Metals, the contract contained a similar provision and, in addition, a clause providing that, in no case, shall a demand for arbitration be made later than the time for final payment. In holding that the dispute involved was not arbitrable, the Court reasoned that because of these two clauses, arbitration was required only when work was in progress.⁵ It would be difficult to rationalize their inclusion, the Court continued, if there was no work which could have been stopped. In the instant case, the contract includes only the "work stoppage" clause and omits the "no demand" clause. It is the latter clause, omitted in this case, which clearly evinces an intent that there be no arbitration following the completion of the work. The absence of a "no demand" clause is significant, for we see nothing in a "work stoppage" clause, standing alone, which is inconsistent with the intention that the arbitration clause remain viable after completion of the work. This arbitration clause is broad and comprehensive. Thus resolving any doubts in favor of arbitration, we conclude that the present dispute falls within the purview of the arbitration clause.

II.

Defendant argues that since this Court's jurisdiction is based solely on diversity of citizenship, this Court clearly has the inherent power to stay the action pending arbitration. Defendant urges that we exercise our power for two reasons: (1) because of the size of this contract, it probably involves interstate commerce, thereby rendering the federal arbitration act, 9 U.S.C. § 1 et seq., applicable. Under Section 3 of that act, the Court would be statutorily required to stay proceedings pending arbitration, and (2) because this is a diversity case and the policy of Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) would be effectuated by a stay.

A.

Under the federal arbitration act, an arbitration provision in any maritime transaction or a contract evidencing a transaction involving commerce is valid, irrevocable, and enforceable. 9 U.S.C. § 2.⁶ Where an action is filed in federal court on any issue referable to arbitration under an arbitration clause as previously described, the Court must stay the proceeding pending arbitration, provided the applicant for the stay is not in default in proceeding with such arbitration. 9 U.S.C. § 3.⁷ The matter presently before the Court is obviously not a "maritime transaction" nor is there any evidence on the record before the Court "evidencing a transaction involving commerce", as required by 9 U.S.C. § 2. Absent an initial factual determination on the record, this Court may not speculate whether this was a transaction involving commerce. Merritt-Chapman & Scott Corp. v. Pennsylvania Turnpike Comm'n., supra, 387 F.2d at 772. The jurisdictional allegations of the complaint are founded solely on diversity of citizenship and make no reference to commerce. Thus, the federal arbitration act is inapplicable to the matter presently before this Court.

B.

Under the Pennsylvania Arbitration Act, an arbitration provision in any written contract, except one for personal services, is valid, irrevocable and enforceable. 5 P.S. § 161.⁸ Where an action is filed on any issue referable to arbitration under the arbitration clause, the Court must stay the proceeding pending arbitration provided the applicant for the stay is not in default in proceeding with such arbitration and provided that the application for a stay is made before the suit or proceeding is at issue. 5 P.S. § 162.⁹ Although this provision authorizes such relief by "the court" in which the action is pending, a separate definition provides:

"Except as otherwise specifically indicated, all references in this act to the courts are to be construed to mean the common pleas courts of the county having jurisdiction of the parties or the subject matter."¹⁰

Both of these provisions must be read together, and in Monte v. Southern Delaware County Authority, 321 F.2d 870 (3rd Cir. 1963), the Court held that since the entire Pennsylvania Arbitration Act was incorporated into the contract and formed an integral and essential part of its terms, the federal court was precluded from reviewing the arbitrator's award. In commenting on the Monte decision, the Court of Appeals in Merritt-Chapman, supra, stated:

"We gave full effect, however to the definition provision of the Pennsylvania Act in Monte v. Southern Delaware County Authority, 321 F.2d 870 (1963) and held that because of it a district court had no power to exercise the authority given by the Act to conform or to vacate or modify an award, because under the definition provision exclusive jurisdiction was vested in the common pleas courts of the state. We also held that in limiting the remedy to the Pennsylvania courts there was not statutory interference by the state with federal diversity jurisdiction, because we were enforcing the contract which the parties had made rather than the Pennsylvania statute which they had contracted to apply." 387 F.2d at 772.

Thus, since the parties in the instant case adopted by contract and by operation of law the Pennsylvania Arbitration Act into the terms of the agreement and since the Court which may stay proceedings under Section 162 is defined in the act as a court of common pleas, a federal court may conceivably lack the power to order a stay pending arbitration under the Pennsylvania Act.

C.

We need not decide this issue, for there remains our inherent power to stay this action pending arbitration. In Merritt-Chapman, supra, the Court of Appeals affirmed the stay of a proceeding on these identical grounds, stating:

"For the Mo

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