Choctaw Generation v. American Home Assurance

• Decision Date: 01 August 2001
• Docket Number: PLAINTIFF-APPELLEE,Docket No. 01-7899,DEFENDANT-APPELLANT
• Citation: 271 F.3d 403
• Parties: (2nd Cir. 2001) CHOCTAW GENERATION LIMITED PARTNERSHIP,v. AMERICAN HOME ASSURANCE COMPANY,
• Court: U.S. Court of Appeals — Second Circuit

Page 403

271 F.3d 403 (2nd Cir. 2001)

CHOCTAW GENERATION LIMITED PARTNERSHIP, PLAINTIFF-APPELLEE v. AMERICAN HOME ASSURANCE COMPANY, DEFENDANT-APPELLANT

Docket No. 01-7899

August Term, 2001

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: September 20, 2001

Decided: November 16, 2001

Jeffrey Gilmore, Wickwire Gavin, P.C., Vienna, Va, Cowan, Liebowitz & Latman, P.C., (Michael F. Maschio and Susan Schick, on the brief), for Plaintiff-Appellee.

Mark Friedman, Debevoise & Plimpton, New York, NY (David W. Rivkin and Mark W. Friedman, on the brief), for Defendant-Appellant.

Before: Feinberg, Jacobs, and Cabranes, Circuit Judges.

Dennis Jacobs, Circuit Judge

The expedited appeal in this diversity case concerns an $81 million surety bond issued by defendant-appellant American Home Assurance Co. ("American Home") to secure performance under a construction contract pursuant to which (non-party) Bechtel Power Co. ("Bechtel") is building an innovative power-generation facility for the owner, plaintiff-appellee Choctaw Generation Limited Partnership ("Choctaw"). Provisional acceptance of the power-generation facility has been long delayed for reasons that are the subject of a good faith dispute: Bechtel attributes the delay to force majeure; Choctaw disagrees, and is claiming liquidated damages in an ongoing arbitration proceeding with Bechtel pursuant to the arbitration clause of the construction contract. To obtain payment of the liquidated damages pending the outcome of the arbitration, Choctaw drew down in full a $33 million letter of credit that the construction contract required Bechtel to post. The present dispute has to do with Choctaw's demand--arguably pursuant to a provision of the construction contract--that American Home as surety replenish the letter of credit as necessary until the full $81 million is drawn down to fund the rapidly accruing liquidated damages.

After the $33 million was drawn down and Choctaw's replenishment demand was made and rejected by American Home Choctaw commenced this action seeking a preliminary injunction to compel serial replenishment of the letter of credit by American Home. The United States District Court for the Southern District of New York (Cote, J.), acting with extraordinary expedition and thoroughness, conducted a hearing and issued a seventy page ruling from the bench. The district court:

(A) Mandated that American Home replenish the letter of credit on the ground (in a nutshell) that the construction contract required replenishment by the surety notwithstanding the existence of a good faith dispute between builder and owner concerning whether liquidated damages are payable;

(B) Refused to order Choctaw to arbitrate its surety dispute with American Home, on the ground that the surety contract signed by American Home does not contain an arbitration clause and that American Home did not sign the construction contract (which does); and

(C) Denied a stay.

After a panel of this Court likewise denied American Home's motion for a stay, Bechtel as principal replenished the letter of credit.

As of the date of oral argument, almost all of the $81 million had been drawn down, and it was anticipated that the whole $81 million would be drawn down shortly. This expedited appeal, however, is saved from mootness by the availability of an order directing that Choctaw make repayment, which would affect American Home's rights and duties as surety.

Among the defenses to this action asserted by American Home is that the present dispute is subject to arbitration. The surety contract contains no arbitration clause; so the decisive question on this appeal is whether surety American Home can compel Choctaw to arbitrate the present controversy over the surety contract under or by virtue of the arbitration clause of the construction contract to which Choctaw is a signatory and American Home is not. We conclude that this controversy is arbitrable because Choctaw agreed that controversies that are unable to be resolved pursuant to the construction contract "shall be settled by arbitration," and because (under our case law) Choctaw, as signatory, is estopped from avoiding arbitration with a non-signatory "when the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed." Smith/Enron Cogeneration Ltd. Partnership, Inc. v. Smith Cogeneration Int'l, Inc., 198 F.3d 88, 98 (2d Cir. 1999); Thomson-CSF, S.A. v. American Arbitration Ass'n, 64 F.3d 773, 779 (2d Cir. 1995). We further conclude that arbitration is not foreclosed by a term of the construction contract that allows the remedy of specific performance, and reject Choctaw's argument that this term authorizes it to seek specific remedies in court notwithstanding the arbitration clause.

We therefore do not reach the many substantive and procedural issues addressed in the district court's careful and comprehensive opinion. We vacate that judgment solely to clear the way for rulings on the merits in arbitration, and we remand for the framing of an order directing arbitration.

I.

Bechtel and Choctaw entered into a series of contracts, dated June 30, 1998 (referred to collectively hereinafter as the "Construction Contract"), under which Bechtel agreed to provide engineering, procurement and construction services to Choctaw. In certain stated respects, Bechtel's performance under the Construction Contract was secured by a Performance and Payment Bond ("Bond") issued by American Home. The Bond contains no arbitration clause, but the Construction Contract, which does, is "referred to" in the Bond "and made a part" of the Bond "as if fully set forth" therein. The arbitration clause in the Construction Contract provides in Article 17.1 that "[i]f any dispute arises on matters concerning this Contract, either Party may initiate the dispute resolution procedures of this Article 17" by notice. The word "Party" is a defined term that includes only Choctaw and Bechtel. The Article 17 dispute-resolution procedures provide that disputes that remain unresolved after mandatory negotiations are to be resolved by binding arbitration subject to the construction industry rules of the American Arbitration Association ("AAA"), with each Party selecting one arbitrator and the third selected by the two (or if necessary, in accordance with procedures of the AAA). The procedural wording is set forth in the margin.¹

There are other provisions of the Construction Contract in dispute between and among the parties, and there are disputes concerning the structure and architecture of the Construction Contract as a whole that may bear upon the merits of these controversies.

II.

American Home argued in the district court that Choctaw's claims against it were subject to arbitration on two theories: (A) under the Bond, because the Bond incorporates by reference the terms of the Construction Contract, including the arbitration clause; and (B) under the Construction Contract, because Choctaw as signatory is estopped from avoiding arbitration of a dispute with a non-signatory (such as American Home) where the non-signatory has a close relationship with the parties bound to arbitrate, where the dispute concerns that relationship, and where the dispute is closely linked to a dispute that is subject to arbitration in the underlying contract. Appellant's Brief at 51-56.

As to Choctaw's duty to arbitrate (A) under the Bond, the district court ruled that, "[e]ven as incorporated into the [B]ond, the contract's arbitration clause still pertains solely to disputes between Choctaw and Bechtel" because the contract wording compels arbitration only between the "Parties," a contractually defined term that does not include American Home. We do not review Judge Cote's conclusion on this point, because we decide this appeal on the ground that arbitration is mandated under (B) the alternative theory of arbitrability pressed by American Home.

III.

As to Choctaw's obligation to arbitrate with American Home under the Construction Contract, the district court ruled that "a party [such as Choctaw] cannot be estopped from denying the existence of an arbitration clause to which it is a signatory where no such clause exists." This sound observation seemingly misapprehends the precise argument advanced by American Home.

In Thomson-CSF, 64 F.3d at 776-79, this Court classified five theories, including estoppel, under which a signatory can compel a non-signatory to arbitrate--none of them applicable here because among other things in this case it is the non-signatory that seeks to invoke the arbitration clause. As Thomson-CSF added, however, "[s]everal courts of appeal have recognized an alternative estoppel theory requiring arbitration between a signatory and nonsignatory. [Citations omitted.]" 64 F.3d at 779. Those courts looked to the relationships of persons, wrongs and issues, in particular whether the claims that the nonsignatory sought to arbitrate were "`"intimately founded in and intertwined with the underlying contract obligations."'" 64 F.3d at 779 (quoting Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 757 (11th Cir. 1993); McBro Planning & Dev. Co. v. Triangle Elec. Constr. Co., 741 F.2d 342, 344 (7th Cir. 1984)). In this way, "the circuits have been willing to estop a signatory from avoiding arbitration with a nonsignatory when the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed." Id. at 779. The fact scenario in Thomson-CSF offered no occasion to apply or reject this principle, because the claims in Thomson-CSF were not "integrally related to the contract containing the arbitration clause." Id.

In a later case, however, this Court did apply that reasoning to compel a party that signed a contract containing an arbitration clause to arbitrate with a non-signatory. Thus in Smith/Enron, 198...