Elite Precision Fabricators, Inc. v. Gen. Dynamics Land Sys., Inc.

• Decision Date: 18 December 2015
• Docket Number: CIVIL ACTION NO. H-14-2086
• Citation: Elite Precision Fabricators, Inc. v. Gen. Dynamics Land Sys., Inc., CIVIL ACTION NO. H-14-2086 (S.D. Tex. Dec 18, 2015)
• Parties: ELITE PRECISION FABRICATORS, INC., Plaintiff, v. GENERAL DYNAMICS LAND SYSTEMS, INC., Defendant.
• Court: U.S. District Court — Southern District of Texas

ELITE PRECISION FABRICATORS, INC., Plaintiff, v. GENERAL DYNAMICS LAND SYSTEMS, INC., Defendant.

CIVIL ACTION NO. H-14-2086

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

December 18, 2015

MEMORANDUM OPINION AND ORDER

Elite Precision Fabricators, Inc. ("Plaintiff" or "Elite") brings this action against Defendant General Dynamics Land Systems ("Defendant" or "General Dynamics") for breach of contract, fraud, and quantum meruit.¹ Elite has also filed for Chapter 11 bankruptcy protection. In re: Elite Precision Fabricators, Inc., Debtor, Bankruptcy No. 14-31773 (Bankr. S.D. Tex. March 31, 2014).² Elite filed an adversary proceeding in the bankruptcy court,³Adversary No. 14-03289, which was consolidated with the district court case.⁴ Pending before the court are Defendant's Motions to Compel Arbitration (Docket Entry No. 9 and Adv. Docket Entry No. 12). For the reasons explained below, the Motions will be granted.

I. Background

A. Procedural History

Elite filed a voluntary petition for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of Texas on March 31, 2014.⁵ Elite then sued General Dynamics in this court on July 21, 2014, for breach of contract, quantum meruit, and fraud.⁶ Elite instituted the adversary proceeding in bankruptcy court on September 3, 2014, seeking toavoid and recover transfers as a debtor in bankruptcy.⁷ Both cases were abated pending mediation ordered by the bankruptcy court.⁸

General Dynamics filed its Subject To and Without Waiving Arbitration Rights, Defendant's Motion to Lift Abatement, Withdraw the Reference, and Consolidate Cases ("Motion to Consolidate") on July 24, 2015.⁹ While that motion was pending, General Dynamics filed Motions to Compel Arbitration in the district court action and the adversary proceeding.¹⁰ General Dynamics also filed contemporaneous motions to dismiss in both actions.¹¹ The Motion to Consolidate was granted on September 18, 2015, and the adversary proceeding was withdrawn from the bankruptcy court.¹²

B. Factual Background

Elite is "a small, privately-owned metal fabrication shop located in Montgomery, Texas."¹³ This action stems from a business relationship between Elite, General Dynamics, and Tamor SR, an Israeli company.¹⁴ The Israeli government had contracted with General Dynamics for construction of armored personal carriers ("APCs") as part of a United States Foreign Military funded project.¹⁵ Due to the nature of the contract, subcomponents had to be manufactured by qualified U.S. manufacturers like Elite.¹⁶ Tamor America, a subsidiary of the Israeli company, acquired fifty percent of Elite so that Tamor could continue to participate in the contracts.¹⁷ Elite agreed to construct Namer kits, a subcomponent of the APCs, for General Dynamics (the "APC Contract").¹⁸

Tamor negotiated the contract with General Dynamics before Elite became involved, and the parties "grossly underestimated" the pricing for the kits.¹⁹ Thus, Elite and General Dynamics "abandoned the fixed price purchase order terms and moved first to aprogressive billing arrangement."²⁰ According to the Amended Complaint, General Dynamics continued to push for production and promised payment without delivering.²¹ Finally, the financial strain was too great, and the parties allegedly entered a Work Stoppage Agreement (the "WSA") to end Elite's involvement with the APC project.²² Elite "agreed to list, organize and provide [General Dynamics] with work-in-progress, inventory, and items manufactured by third-party subcontractors. In return [General Dynamics] promised to pay Elite for these goods and services."²³ Elite performed, shipping six 18-wheeler truckloads of goods to General Dynamics, but General Dynamics never paid the final invoice of approximately $3.7 million, as required by the WSA's terms.²⁴ Elite alleges that fraud and breach of contract by General Dynamics forced it into bankruptcy.²⁵

II. Discussion

The arbitration language at issue appears in the "Purchase Order Terms and Conditions" that General Dynamics asserts were on its website and part of the APC Contract.²⁶ General Dynamicsattached a later version of the Purchase Order Terms and Conditions to the Motion to Compel Arbitration.²⁷ General Dynamics attached the terms that were in effect at the time the parties entered the APC Contract to its Reply in Support of Motion to Compel Arbitration and Motion to Dismiss ("Defendant's Reply in Support"), but the arbitration clauses are the same.²⁸ The Declaration of James Boza, a Director of Supply Chain Management for General Dynamics, states that this document provided the terms and conditions for General Dynamics purchase orders from December 2010 to October 2011, and was available online at www.glds.com under "Main Menu/Suppliers."²⁹ Paragraph 30 of the Purchase Order Terms and Conditions states in pertinent part:

ARBITRATION: Any and all claims, disputes or other matters in question arising out of, or relating to, this Contract or the breach thereof shall be decided by arbitration in accordance with the then currentCommercial Arbitration Rules of the American Arbitration Association (the "AAA Rules").³⁰

Elite argues that a valid arbitration agreement may not even exist.³¹ Elite also argues that its claims do not fall within the scope of the arbitration provision and that the claims originally asserted in the adversary proceeding are not arbitrable under Fifth Circuit precedent.³² Finally, Elite argues that General Dynamics waived its right to compel arbitration.³³

A. Enforceability of the Arbitration Agreement

1. Applicable Law

Under the Federal Arbitration Act ("FAA") an arbitration agreement in a contract evidencing a transaction involving interstate commerce is "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2; see also id. § 1. Underlying the FAA is "the fundamental principle that arbitration is a matter of contract." AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1745(2011) (internal quotation marks omitted); see Washington Mutual Finance Group, LLC v. Bailey, 364 F.3d 260, 264 (5th Cir. 2004) ("The purpose of the FAA is to give arbitration agreements the same force and effect as other contracts — no more and no less."). Thus, "courts must place arbitration agreements on an equal footing with other contracts, and enforce them according to their terms." Concepcion, 131 S. Ct. at 1745 (internal citations omitted).

Accordingly, the first task of a court asked to compel arbitration is to determine whether the parties entered into a binding agreement to arbitrate the dispute. JP Morgan Chase & Co. v. Conegie, 492 F.3d 596, 598 (5th Cir. 2007). Making this determination requires the court to consider two issues: (1) validity -- i.e., "whether there is a valid agreement to arbitrate between the parties" -- and (2) scope -- i.e., "whether the dispute in question falls within the scope of that arbitration agreement." Id. Since arbitration agreements are matters of contract, the validity and scope of such an agreement are governed by state contract law. Morrison v. Amway Corp., 517 F.3d 248, 254 (5th Cir. 2008) ("The federal policy favoring arbitration does not apply to the determination of whether there is a valid agreement to arbitrate between the parties. That determination is generally made on the basis of ordinary state-law principles that govern the formation of contracts." (citations and quotations omitted)).

If the parties have entered into a binding agreement to arbitrate the dispute, the court must determine whether any federal statute or policy renders the claims nonarbitrable. Conegie, 492 F.3d at 598. The party seeking to invalidate an arbitration agreement bears the burden of establishing its invalidity. Carter v. Countrywide Credit Indus., Inc., 362 F.3d 294, 297 (5th Cir. 2004). A court must resolve all doubts concerning arbitrability in favor of arbitration. Washington Mutual, 364 F.3d at 263.

2. Analysis

(a) There Is a Valid Agreement to Arbitrate.

General Dynamics argues that the APC Contract is a valid arbitration agreement because it is "a written contract between two commercial parties that contains an explicit and conspicuous arbitration provision."³⁴ Elite argues that "[i]t is questionable whether a valid arbitration agreement exists" because General Dynamics has not provided proof the arbitration clause was part of the APC Contract and because the arbitration clause was not obvious or conspicuous.³⁵ General Dynamics responds that it has provided proof of the "Purchase Order Terms and Conditions" that were readily accessible on its website from December 2010 to October2011, the time period in which the parties entered the APC Contract.³⁶

Elite's arguments that General Dynamics has not provided proof or verification that this is the June 2011 version of the website's terms and that "[t]here is no proof the website's terms contained an arbitration clause in June 2011"³⁷ are countered by the correct Purchase Order Terms and Conditions supported by James Boza's sworn affidavit.³⁸ Elite's response — after General Dynamics provided the correct document accompanied by the Boza Affidavit — only offers the same arguments.³⁹ General Dynamics has provided verification that these terms were on the company website and part of the APC Contract.

Elite also argues that the arbitration clause was "not obvious or conspicuous" in the purchase orders General Dynamics sent Elite, which contained twenty-six requirements and further refer toGeneral Dynamic's website for the full terms and conditions.⁴⁰ The Blanket Purchase Agreement attached to Elite's Response is six pages long. A box at the bottom of each page labeled "Terms and Conditions" says: "Please refer to the General Dynamics Land Systems website at www.gdls.com Main Menu/Suppliers to find all purchase order terms and conditions and detail language for quality...