Commercial Union Ins. Co. v. Gilbane Bldg. Co.

• Decision Date: 10 December 1992
• Docket Number: No. 92-1904,92-1904
• Citation: 992 F.2d 386
• Parties: COMMERCIAL UNION INSURANCE COMPANY, Plaintiff, Appellant, v. GILBANE BUILDING COMPANY, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 386

992 F.2d 386

61 USLW 2699

COMMERCIAL UNION INSURANCE COMPANY, Plaintiff, Appellant, v. GILBANE BUILDING COMPANY, Defendant, Appellee.

No. 92-1904.

United States Court of Appeals First Circuit.

Heard Dec. 10, 1992.

Decided May 11, 1993.

Michael P. Duffy, with whom Bert J. Capone, John J. O'Connor, and Peabody & Arnold, Boston, MA, were on brief for appellant.

Peter B. Krupp, with whom Thomas R. Murtagh, Joseph P. Crawford-Kelly, and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, MA, were on brief for appellee.

Before TORRUELLA, Circuit Judge, BOWNES, Senior Circuit Judge, and STAHL, Circuit Judge.

STAHL, Circuit Judge.

In this appeal, plaintiff-appellant Commercial Union Insurance Company ("CU") challenges the district court's summary denial of its motion to stay defendant-appellee Gilbane Building Company's ("Gilbane") counterclaim pending arbitration. Finding error in the district court's decision, we reverse.

I. Factual Background

During the latter half of the 1980's, Gilbane, a general contractor, entered into thirteen subcontracts with Thames Valley Steel Corporation ("TVS"), a structural steel subcontractor, under which TVS agreed to perform structural steel work for Gilbane on thirteen separate construction projects in Massachusetts and Rhode Island. On each project, CU acted as surety for TVS, issuing various performance, labor, and material bonds guarantying TVS's proper completion of its obligations. As such, each of the thirteen construction projects was governed by at least three contracts: (1) the prime contract between Gilbane and the individual owner; (2) the subcontract between Gilbane and TVS; and (3) CU's performance bond.

In 1990, TVS ceased doing business and, as a result, defaulted on its obligations under each of the thirteen subcontracts. Disputes then arose between CU and Gilbane concerning CU's obligations as the guarantor of TVS' performance on these projects. On August 16, 1991, CU commenced this diversity action against Gilbane alleging that Gilbane wrongfully withheld contract balances owed CU in connection with the completion of the first twelve construction projects. In its answer, Gilbane denied CU's allegations and also brought a two-count counterclaim. In Count I of its counterclaim, Gilbane alleged that, in relation to the thirteenth construction project, TVS breached the terms of its subcontract by failing to perform in a good and workmanlike manner, and that CU breached the terms of its performance bond by failing to correct TVS' work. In Count II, Gilbane charged that CU committed unfair and deceptive trade practices in violation of Mass.Gen.Laws Ann. ch. 93A, §§ 2 and 11 (West 1984 and Supp.1992) (hereinafter referred to simply as "ch. 93A"), and unfair claim settlement practices in violation of Mass.Gen.Laws Ann. ch. 176D, § 3(9) (West 1987 and Supp.1992), by failing "to effectuate a prompt, fair and equitable settlement of Gilbane's claims...."

In response to Gilbane's counterclaim, CU filed a reply denying any liability in connection with the thirteenth project and amended its complaint to add a count alleging that Gilbane committed unfair and deceptive trade practices in violation of ch. 93A by withholding an undisputed amount "solely in order to gain leverage with respect to a dispute arising in connection with a different project." At that time, CU also filed a third-party complaint against L. Antonelli Iron Works and The Thompson and Lichter Company, Inc., both of whom had entered into subcontracts with TVS to perform certain services in connection with the thirteenth construction project. In that complaint, CU alleged that the third-party defendants were liable to CU for any amounts Gilbane might recover against CU on Count I of its counterclaim.

On November 6, 1991, CU filed the instant motion to stay Gilbane's counterclaim pending arbitration, arguing that the counterclaim was subject to an express arbitration agreement. ¹ Gilbane opposed the motion to stay, contending that the counterclaim was not subject to an arbitration agreement, and in the alternative, that CU had waived its right to arbitrate by filing the instant lawsuit. On May 18, 1992, the district court entered a margin order denying CU's motion to stay. CU appeals from that decision.

II. Discussion

Although not raised by the parties, we first explain the basis of our appellate jurisdiction. Section 3 of the Federal Arbitration Act ("FAA") contains a procedure by which parties to an arbitration agreement may file a motion to stay the trial of arbitrable claims pending arbitration. See 9 U.S.C.A. § 3 (West 1970). Pursuant to that section of the statute, a district court must grant the stay "upon being satisfied that the issue involved ... is referable to arbitration under such an agreement...." The FAA further provides that "[a]n appeal may be taken from ... an order ... refusing a stay under section 3 of this title...." 9 U.S.C.A. § 16(a)(1)(A) (West Supp.1992). As CU is appealing from a denial of a motion to stay under section 3 of the FAA, we therefore have appellate jurisdiction.

A. Arbitrability

The arbitrability of this dispute turns on the interpretation of contractual terms, a question of law which we can determine in the first instance. See, e.g., Fashion House, Inc. v. K Mart Corp., 892 F.2d 1076, 1083 (1st Cir.1989).

1. Relevant Contract Language

Gilbane's counterclaim is based upon CU's alleged breach of its performance bond on the thirteenth project ("the Performance Bond"). Thus, the arbitrability of this counterclaim depends upon whether there is language in that contract subjecting disputes between Gilbane and CU to arbitration.

Although the Performance Bond has no language dealing with arbitration, it does contain a clause incorporating the subcontract between Gilbane and TVS ("the Subcontract"), which, in turn, has a clause incorporating the prime contract between Gilbane and the owner of the thirteenth project ("the Prime Contract"). It is the Prime Contract that contains the arbitration clause. That clause reads as follows:

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 in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then obtaining unless the parties mutually agree otherwise. This agreement to arbitrate shall be specifically enforceable under the prevailing arbitration law by a three-member panel.

The Subcontract, which was drafted by Gilbane, contains a clause incorporating certain provisions of the Prime Contract:

[Gilbane] shall be bound to [TVS] by the terms of this agre[e]ment, to the extent that the provisions of the contract documents between the owner and [Gilbane] apply to the work of [TVS] as defined in this agreement[.] [Gilbane] shall assume toward [TVS] all the obligations and responsibilities that the owner, by those documents, assumes toward [Gilbane]. [Gilbane] shall have the benefit of all rights, remedies, and redress against [TVS] which the owner, by those documents, has against [Gilbane].... ²

Finally, the Performance Bond has a clause incorporating the Subcontract by reference: "Whereas, [TVS] has by written agreement ... entered into a [S]ubcontract with [Gilbane] ... which [S]ubcontract is by reference made a part hereof...."

2. Relevant Law

In deciding whether a chain of incorporation rendering Gilbane's counterclaim arbitrable exists within these three contracts, we are mindful of the strong federal policy favoring arbitration agreements, a policy which requires us to resolve "any doubts" concerning arbitrability in favor of arbitration. See Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). See also J & S Constr. Co., Inc. v. Travelers Indem. Co., 520 F.2d 809, 810 (1st Cir.1975) (construing incorporation language in a subcontract broadly in light of "the policy favoring arbitration"). This policy applies "whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses H. Cone, 460 U.S. at 25, 103 S.Ct. at 941.

In a remarkably similar case, the Sixth Circuit held that a chain of incorporation running through a prime contract, a subcontract, and a performance bond rendered disputes under the performance bond subject to the prime contract's arbitration clause. Exchange Mut. Ins. Co. v. Haskell Co., 742 F.2d 274, 275-76 (6th Cir.1984). Like the Performance Bond at issue here, the bond in that case did not itself contain an arbitration clause. Rather, the bond in Haskell incorporated the subcontract by reference, (employing incorporation language almost identical to that involved here), which, in turn, incorporated the prime contract by reference. Id. The incorporation clause in that subcontract read as follows: "Subcontractor hereby assumes the same obligations and responsibilities with respect to his performance under this Subcontract, that Contractor assumes towards Owner with respect to his performance on the [prime] [c]ontract." Id. at 275. The prime contract in Haskell contained an arbitration provision almost identical to that in the Prime Contract at issue here. Id.

Without reference to the federal policy requiring it to construe any doubts in favor of arbitrability, the Sixth Circuit nevertheless reasoned that the incorporation language in the performance bond and subcontract was broad enough to include the prime contract's arbitration agreement:

Here, the performance bond specifically referred to and incorporated the subcontract. The subcontract provides that the same obligations and responsibilities apply in the subcontract as apply in the [prime] contract. And, finally, the [prime] contract provides that there is a duty to arbitrate. Thus, the performance bond incorporates by...