Johnson Controls, Inc. v. City of Cedar Rapids, Iowa, 82-1412

Decision Date02 August 1983
Docket NumberNo. 82-1412,82-1412
Citation713 F.2d 370
PartiesJOHNSON CONTROLS, INC., Appellees, v. CITY OF CEDAR RAPIDS, IOWA, Appellant.
CourtU.S. Court of Appeals — Eighth Circuit

Simmons, Perrine, Albright & Ellwood, Robert C. Tilden, Roger W. Stone, Cedar Rapids, Iowa, Leonard, Street & Deinard, Lowell J. Noteboom, Michael A. Nekich, Minneapolis, Minn., for appellant.

B.C. Hart, Betty L. Hum, Briggs & Morgan, St. Paul, Minn., Robert E. Konchar, Thomas R. Buresh, Moyer & Bergman, Cedar Rapids, Iowa, for appellee Johnson Controls, Inc.

Before HEANEY, Circuit Judge, FLOYD R. GIBSON, Senior Circuit Judge, and McMILLIAN, Circuit Judge.

McMILLIAN, Circuit Judge.

The City of Cedar Rapids (the City) appeals from a final order entered in the District Court 1 for the Northern District of Iowa compelling the City to arbitrate a claim for cost over-runs submitted by Johnson Controls, Inc. (Johnson) pursuant to Johnson's contract with the City. For reversal the City argues (1) that the district court misconstrued its contract with Johnson by finding that this dispute was subject to the contract's mandatory arbitration clause and (2) that the tenth amendment to the United States Constitution precludes the court from ordering the City to arbitrate this dispute in contravention of Iowa state law. We affirm the order of the district court for the following reasons.

I. Background Facts

The City and Johnson entered into a construction contract in which Johnson agreed to provide the instrumentation and the computer for the City's federally funded Water Pollution Control Facility. During Johnson's phase of the project's construction, a dispute between Johnson and the City arose over the amount of compensation that Johnson was entitled to for "additional" work. On September 4, 1981, Johnson submitted an "equitable adjustment" claim to the City for damages and cost over-runs of about $1.2 million. The original total contract price for Johnson's services was just over $2 million. The City denied Johnson's claim on November 4, 1981. Nine days later Johnson filed a demand for arbitration of the dispute under the terms of the contract's "mandatory" arbitration clause. The "mandatory" arbitration clause provides that if one party demands arbitration of a particular dispute governed by the clause, then the other party must submit to arbitration. The City rejected Johnson's demand for arbitration on December 2, 1981, by claiming that the contract's "voluntary" arbitration clause superseded the mandatory arbitration clause. Under the contract's "voluntary" arbitration clause, a dispute can be arbitrated only if both parties agree to arbitrate that dispute. Thus, because the City did not wish to arbitrate the issue of additional compensation, arbitration could not be had under the terms of the contract. In response, Johnson filed this suit to compel arbitration based upon diversity jurisdiction, 28 U.S.C. § 1332 (1976), and the federal Arbitration Act, 9 U.S.C. § 4 (1976). The district court rejected the City's tenth amendment challenge to forced arbitration and ruled that the mandatory arbitration clause governed this particular dispute. Johnson Controls, Inc. v. City of Cedar Rapids, No. C 81-140, slip op. at 3-6 (N.D.Iowa Mar. 26, 1982). The district court therefore ordered the City to arbitrate the cost over-run. This appeal ensued.

II. Contract Construction Under the Arbitration Act

When a party to an interstate contract invokes the Arbitration Act to enforce a putative arbitration clause within that contract, the court's review is limited to two issues: (1) whether an express written agreement to arbitrate the subject matter of the present dispute exists between the parties, and (2) if so, whether the agreement to arbitrate has been breached. National R.R. Passenger Corp. v. Missouri Pacific R.R., 501 F.2d 423, 427 (8th Cir.1974). In addressing each issue, the court must apply federal substantive law, although applicable non-discriminatory state law may provide a helpful reference in formulating the federal rule of decision. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., --- U.S. ----, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). See United States v. Kimbell Foods, Inc., 440 U.S. 715, 728-29, 99 S.Ct. 1448, 1458-59, 59 L.Ed.2d 711 (1979) (relying on state law to give content to the federal rule of decision). The court must also be guided by "the liberal federal policy favoring arbitration" in contracts governed by the Arbitration Act. Moses H. Cone Memorial Hospital, 103 S.Ct. at 941. Thus, any doubts about the construction or breach of the putative arbitration provision are to be resolved in favor of ordering arbitration. Id.; National R.R. Passenger Corp., 501 F.2d at 428.

The parties stipulated to the facts relevant to the construction of the contract. There is no disagreement that the City is refusing to arbitrate under the contract. Thus, the only pertinent issue in this case is whether the City and Johnson entered into a unilaterally enforceable agreement to arbitrate this particular dispute. To resolve this issue, we need to decide what effect is to be given each of the two seemingly contradictory arbitration clauses.

The actual structure of a written document is often helpful in construing its contents. The present contract is divided into two main parts: the General Conditions, and the Supplemental Conditions. The mandatory arbitration clause is contained in § 30.1 of the General Conditions [hereinafter cited as General § 30.1]. It provides:

30 ARBITRATION

30.1 All claims, disputes and other matters in question arising out of, or relating to, the CONTRACT DOCUMENTS or the breach thereof ... shall be decided by arbitration .... This agreement to arbitrate shall be specifically enforceable under the prevailing arbitration law. The award rendered by the arbitrators shall be final, and judgment may be entered upon it in any court having jurisdiction thereof.

The voluntary arbitration clause is contained in § 7 of the Supplemental Conditions [hereinafter cited as Supplemental § 7]. It provides:

7. Remedies

Except as otherwise provided in this contract, all claims, counterclaims, disputes and other matters in question between the Owner and the Contractor arising out of or relating to this agreement or breach thereof will be decided by arbitration if the parties hereto mutually agree, or in a court of competent jurisdiction within the State in which the Owner is located.

Also of importance is § 1 of the Supplemental Conditions, which states that the provisions contained in the Supplemental Conditions "shall supersede any conflicting provisions of this contract."

The City advances four main arguments relating to the construction of the contract. The City's first argument is that the mandatory arbitration clause and the voluntary arbitration clause are "conflicting" and, therefore, under Supplemental § 1 the voluntary arbitration clause controls because it is contained in the Supplemental Conditions. As a corollary to this argument, the City asserts that the voluntary arbitration clause is more specific than the mandatory arbitration clause and under Iowa law the more specific clause will control a general clause.

This argument has superficial appeal. Yet, an elementary rule of contract interpretation is that a contract should be construed so as to give effect to all the contract's provisions. SCM Corp. v. United States, 675 F.2d 280, 283 (Ct.Cl.1982). 2 Similarly, if two clauses of a contract appear to be in conflict, the preferred interpretation is the one that gives a "harmonious interpretation" to the clauses in order to avoid rendering either one nugatory. Boyajian v. United States, 423 F.2d 1231, 1247, 191 Ct.Cl. 233 (1970). By its own terms, the voluntary arbitration clause removes any conflict between it and the mandatory arbitration clause by providing that the voluntary arbitration clause is available "[e]xcept where otherwise provided in this contract." Supplemental § 7 (emphasis added). The voluntary arbitration clause, therefore, defers to the mandatory arbitration clause in situations where the mandatory arbitration clause applies because those situations are "otherwise provided for" in the contract. Any situation not covered by the mandatory arbitration clause will be subject to the voluntary arbitration clause, for example those disputes which do not arise out of the contract documents themselves. This interpretation is the only one that gives effect to the whole contract; therefore it is the preferred construction. We also fail to see how Supplemental § 7 is in any way more specific than General § 30.1.

The City's second argument is that the Environmental Protection Agency's (EPA) role in funding the project and drafting the project's contracts is relevant to show what the parties intended the contract's language to mean. The EPA was the major source of funds for the City's construction of its water treatment project. The project was constructed in three phases. Johnson's contract was to be performed as part of the second phase. When the first phase started, the EPA required all contracts for the project to contain the General § 30.1 mandatory arbitration clause. But when the City submitted the second phase contracts, including Johnson's contract, to the EPA for the EPA's approval, the EPA reversed its position on mandatory arbitration. According to the City, the EPA discovered that mandatory arbitration created too many problems and had become counter-productive. Thus, starting in February 1977, all contracts for EPA funded projects were required to contain a Supplemental § 7 voluntary arbitration clause. Johnson's second phase contract was drafted before 1977 and, therefore, it contained a General § 30.1 mandatory arbitration clause. But because it was not sent to the EPA for approval until after February 1977, the City also included a Supplemental...

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