Cianbro Corp. v. Empresa Nacional de Ingenieria

• Decision Date: 14 October 1988
• Docket Number: No. 88-0019B.,88-0019B.
• Citation: 697 F. Supp. 15
• Parties: CIANBRO CORPORATION, Plaintiff, v. EMPRESA NACIONAL DE INGENIERIA Y TECHNOLOGIA, S.A., et al., Defendants.
• Court: U.S. District Court — District of Maine

697 F. Supp. 15

CIANBRO CORPORATION, Plaintiff, v. EMPRESA NACIONAL DE INGENIERIA Y TECHNOLOGIA, S.A., et al., Defendants.

No. 88-0019B.

United States District Court, D. Maine.

October 14, 1988.

Joanne F. Cole, W. John Amerling, Amerling & Burns, Portland, Me., for plaintiff.

William G. Meserve, Douglas H. Meal, Christopher R. Hall, Ropes & Gray, Boston, Mass., John A. Mitchell, Verrill & Dana, Portland, Me., for ENSA Initec.

Elizabeth G. Stouder, Richardson & Troubh, Portland, Me., Robert McL. Boote, William G. Frey, Francine Friedman, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., for Ins. Co. of North America.

ORDER GRANTING PLAINTIFF'S MOTION TO COMPEL ARBITRATION

GENE CARTER, District Judge.

I. Introduction

This case comes before the Court on Plaintiff's Motion for Order Compelling Arbitration, filed on April 21, 1988. Plaintiff Cianbro Corporation ("Cianbro") brings this motion pursuant to the Federal Arbitration Act, 9 U.S.C. § 4, to compel Defendant Insurance Company of North America ("INA") to arbitrate all disputes arising out of a construction subcontract for which INA provided payment and performance bonds. For the reasons set out herein the Court hereby grants this motion.

II. Factual Background

On or about December 20, 1985, Cianbro entered into a $34.4 million contract with Fairfield Energy Venture (the "Contract") under which Cianbro would provide all design, engineering, construction and materials for a wood-fired boiler and electrical generating facility in Fort Fairfield, Maine. On or about that date, Cianbro also entered into a contract with Defendants Empresa Nacional de Ingenieria y Technologia, S.A. and Equipos Nucleares, S.A. (jointly "ENSA-INITEC") (the "Subcontract"), under which ENSA-INITEC would design and provide certain products and provide certain services called for under the Contract. Under the Subcontract, ENSA-INITEC was required to obtain payment and performance bonds in favor of Cianbro as obligee. INA underwrote and issued Performance Bond No. 677HF-9989 (the "Performance Bond") and Payment Bond No. 67HF-9989A (the "Payment Bond") for the project.

The Subcontract contained a clause requiring the parties to decide "all claims, disputes, and other matters in question arising out of or relating to the Subcontract" through arbitration.¹ INA, as surety, is not a signatory to the Subcontract. Both the Payment Bond and the Performance Bond, however, specifically incorporate the Subcontract by reference.²

On December 16, 1987, Cianbro issued a Demand for Arbitration ("Demand"), pursuant to the Construction Industry Arbitration Rules of the American Arbitration Association ("AAA"), to ENSA-INITEC and INA. The Demand alleged breach of contract and negligence on the part of ENSAINITEC under the Subcontract, and included INA as surety for ENSA-INITEC's payment and performance obligations. In response to this Demand for Arbitration, INA prepared and sent a letter to the AAA dated February 4, 1988, requesting a ruling that INA was not a proper party to the arbitration because no arbitration agreement existed between Cianbro and INA. On March 9, 1988, the AAA granted INA's request, stating that INA could not be included in the arbitration proceedings absent either their agreement or a court order. Plaintiff Cianbro now moves this Court to compel INA to participate in the arbitration proceedings.

III. Analysis

A threshold issue to be addressed is whether the language in the Subcontract's arbitration clause encompasses this matter between the general contractor and the surety for the subcontract. The language in the arbitration clause provides that "all ... claims, disputes, and other matters in question arising out of or relating to this Subcontract or the breach thereof, if not settled between the parties by agreement, shall be decided by arbitration...." The core conflict arises between the general contractor, Cianbro, and the subcontractor, ENSA-INITEC, concerning performance of the Subcontract obligations. The conflict raised on this Motion to Compel Arbitration is between Cianbro and INA as the surety for the subcontractor's obligations. As surety for ENSA-INITEC's payment and performance obligations under the Contract, INA incurs no obligation unless and until a breach of the agreement occurs. Because a breach of the underlying agreement is required to trigger the surety's obligations, the issue between Cianbro and INA concerning INA's obligations under the payment and performance bonds is a matter "arising out of or relating to" the Subcontract.

The Court must next address whether INA is bound by the arbitration agreement. In arguing that it is not bound to arbitrate, INA places great weight on the fact that the arbitration clause is embodied only in the Subcontract, to which INA is not a party. INA argues that the arbitration agreement binds only the signatories to the Subcontract. The mere fact that INA is not a signatory to the Subcontract, however, does not preclude it from being subject to the arbitration clause. Hartford Financial Systems, Inc. v. Florida Software Services, Inc., 550 F.Supp. 1079, 1086 (D.Me.1982) ("nonsignatories to a contract containing an arbitration clause may be deemed parties thereto ... for purposes of the Federal Arbitration Act"); see Compania Espanola de Petroleos, S.A. v. Nereus Shipping, S.A., 527 F.2d 966, 973 (2d Cir. 1975), cert. denied, 426 U.S. 936, 96 S.Ct. 2650, 49 L.Ed.2d 387 (1976).

Both the Payment Bond and the Performance Bond issued by INA incorporate the Subcontract terms by reference, each stating that the "Subcontract is by reference made a part hereof." Such incorporation by reference is generally effective to accomplish its intended purpose where the contract provision to which reference is made has a "reasonably clear and ascertainable meaning." J.S. & H. Construction Co. v. Richmond County Hospital Authority, 473 F.2d 212, 215 (5th Cir.1973). The Court finds that the arbitration clause employed in the Subcontract, which reads in pertinent part that "all ... claims, disputes, and other matters in question arising out of or relating to this Agreement or the breach thereof ... shall be decided by arbitration," has such a reasonably clear and ascertainable meaning and is, therefore, validly incorporated into the INA bonds. See J.S. & H. Construction Co., 473 F.2d at 215 (arbitration agreement that read in pertinent part "it is mutually agreed that all disputes arising in connection with this contract shall be submitted to arbitration" found to have a reasonably clear and ascertainable meaning).

Because the surety's bond clearly incorporates the subcontract terms by reference, and the incorporated subcontract contains a mandatory arbitration clause, the surety is bound to arbitrate. The Eleventh Circuit has recently so held in a case involving facts parallel to those presented here. In United States Fidelity and Guaranty Co. v. West Point Construction Co., 837 F.2d 1507 (11th Cir.1988), West Point Construction Company, a general contractor, entered into a subcontract agreement with Pruett Brothers Paint Contractors. This subcontract agreement, which contained an arbitration clause, was incorporated by reference into the performance bond issued by the United States Fidelity and Guaranty Company "USF & G". When West Point Construction sought to enforce the arbitration agreement, USF & G opposed, arguing in part that the bond's incorporation by reference clause did not incorporate the arbitration clause.³ The Court of Appeals for the Eleventh Circuit decided that USF & G was bound to arbitrate:

The condition of the USF & G bond was proper performance of the subcontract by Pruett. The subcontract was referred to and made a part of the bond. Disputes arising under the contract, including disputes concerning the adequacy of Pruett's performance, were subject to arbitration pursuant to the arbitration provisions of the subcontract. We conclude that the incorporation of the subcontract into the bond expresses an intention of the parties, including USF & G, to arbitrate disputes.

837 F.2d at 1508.

The Court of Appeals for the Sixth Circuit decided similarly when presented with largely parallel facts in Exchange Mutual Insurance Co. v. Haskell Co., 742 F.2d 274 (6th Cir.1984). In Exchange Mutual Insurance, general contractor Haskell subcontracted with Rogersville Company to construct a portion of the shopping center for which Haskell had contracted. Rogersville obtained a performance bond from Exchange Mutual Insurance Company. The general contract contained an arbitration clause, which the subcontract incorporated by reference. The performance bond in turn incorporated the terms of the subcontract. Even though the arbitration clause found in the general contract in Exchange Mutual Insurance is one step further removed from the surety bond than is the arbitration clause in the instant case, the surety was still bound to arbitrate:

Here, the performance bond

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