Muskegon Cent. Dispatch 911 v. Tiburon, Inc.

• Decision Date: 03 February 2012
• Docket Number: No. 09-2214,09-2214
• Parties: MUSKEGON CENTRAL DISPATCH 911, Plaintiff-Appellee, v. TIBURON, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

MUSKEGON CENTRAL DISPATCH 911, Plaintiff-Appellee, v. TIBURON, INC., Defendant-Appellant.

No. 09-2214

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Date: February 3, 2012

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

File Name: 12a0133n.06

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MICHIGAN

OPINION

BEFORE: CLAY, and STRANCH, Circuit Judges; BARRETT, District Judge.^*

BARRETT, District Judge. Plaintiff-Appellee Muskegon Central Dispatch 911 ("MCD") and Defendant-Appellant Tiburon, Inc. entered into an agreement to implement an integrated public safety computer system. A dispute arose under the agreement, and the parties agreed to privately arbitrate the matter. The arbitrator found that MCD did not properly terminate the contract and awarded Tiburon damages and costs. MCD filed a complaint in state court seeking to vacate the arbitration award. Following removal to federal court based on diversity of citizenship, the district court concluded that the arbitrator exceeded his powers and vacated the award. For the reasons setforth below, we AFFIRM the district court's decision vacating the award, but remand the dispute to a new arbitrator.

STATEMENT OF FACTS

I. Factual Background

MCD represents a consortium of Muskegon County, Michigan police, fire, and emergency medical service agencies that share an emergency response system. Tiburon is a supplier of public safety software systems. On December 30, 2003, MCD and Tiburon entered into a System Implementation Agreement ("SIA") under which Tiburon was to design, implement, and maintain an integrated public safety computer system for MCD. (R. 28, Ex. A.) Under the SIA, contract termination is either for cause or without cause:

13.1. Termination for Default. Subject to completion of the dispute resolution procedures set forth in Section 12.1 hereof, in the event that either party hereto materially defaults in the performance of any of its obligations hereunder, the other party may, at its option, terminate this Agreement by providing the defaulting party thirty (30) days' prior written notice of termination delivered in accordance with Section 34 hereof, which notice shall identify and describe with specificity the basis for such termination. If, prior to the expiration of such notice period, the defaulting party cures such default to the satisfaction of the non-defaulting party (as evidenced by written notice delivered by the non-defaulting party in accordance with Section 34 hereof), termination shall not take place.

13.2. Termination Without Cause. [MCD] may terminate this Agreement without cause by providing Tiburon at least thirty (30) days' prior written notice of termination delivered in accordance with Section 33 hereof.

The dispute resolution procedures ("DRP") referenced in Section 13.1 are explained in Section 12.1 of the SIA as follows:

12. Informal Dispute Resolution12.1. The parties to this Agreement shall exercise their best efforts to negotiate and settle promptly any dispute that may arise with respect to this Agreement in accordance with the provisions set forth in this Section 12.1.

(a) If either party (the "Disputing Party") disputes any provision of this Agreement, or the interpretation thereof, or any conduct by the other party under this Agreement, that party shall bring the matter to the attention of the other party at the earliest possible time in order to resolve such dispute.

(b) If such dispute is not resolved by the employees responsible for the subject matter of the dispute within ten (10) business days, the Disputing Party shall deliver to the first level of representatives below a written statement (a "Dispute Notice") describing the dispute in detail, including any time commitment and any fees or other costs involved.

(c) Receipt by the first level of representatives of a Dispute Notice shall commence a time period within which the respective representatives must exercise their best effort to resolve the dispute. If the respective representatives cannot resolve the dispute within the given time period, the dispute shall be escalated to the next higher level of representatives in the sequence as set forth below.

(d) If the parties are unable to resolve the dispute in accordance with the escalation procedures set forth below, the parties may assert their rights under this Agreement.

+--------------------------------------------------------------+
                ¦Escalation Timetable¦Tiburon           ¦Client                ¦
                ¦                    ¦                  ¦                      ¦
                ¦(Business Days)     ¦Representative    ¦Representative        ¦
                +--------------------+------------------+----------------------¦
                ¦0 to 5th            ¦Project Manager   ¦Project Manager       ¦
                +--------------------+------------------+----------------------¦
                ¦                    ¦                  ¦COPS Coordinating     ¦
                ¦6th to 10th         ¦Operations Manager¦                      ¦
                ¦                    ¦                  ¦Committee Chair1      ¦
                +--------------------+------------------+----------------------¦
                ¦11th to 15th        ¦Executive Officer ¦Chairman of COPS Board¦
                +--------------------------------------------------------------+
                

If a party terminates the SIA "without cause" under Section 13.2, the termination is considered to be for "convenience" under Section 13.3(d). In the event of a termination for convenience by MCD, the SIA provides that Tiburon is entitled to payment for:

all outstanding invoices submitted to [MCD] prior to the effective date of the termination and for all costs and expenses incurred prior to the effective date of the termination to the extent not invoiced prior to the effective date of the termination, based upon Tiburon's then-current labor rates.

In Section 13.5, the SIA also provides that "[t]he termination of this Agreement shall in no way relieve either party from any obligations hereunder nor limit the rights and remedies of the other party in any manner."

MCD alleges that during the implementation of the system, Tiburon caused numerous delays and failed to respond to concerns raised by David McCastle, MCD's Executive Director. On July 19, 2006, McCastle sent an email to Tiburon's Project Manager, Glenn Matsushima, and his immediate supervisor, Darrell Richards. (R. 29, Ex. 25.) McCastle copied Tiburon's President, Gary Bunyard, and its Board Chairman, Brad Wiggins, on the e-mail, along with the COPS Board of Directors. (Id.) In his email, McCastle detailed a number of concerns left unresolved by Tiburon. (Id.) In response, Tiburon replaced Matsushima with Robert Towery, who was the fifth project manager over the course of a two and a half year period.

MCD also alleges that there were problems with the actual functioning of the system. In an internal email, Towery acknowledged as much, stating: "In reviewing the contract, we are clearly in material default however, the client has not yet made this connection." (R. 29, Ex. 32.)

On August 25, 2006, in a letter from counsel, MCD notified Tiburon that it was terminating the SIA for cause, effective thirty days thereafter. (R. 29, Ex. 37.) Following the August 25, 2006 letter, there were a number of meetings and communications between the parties. Despite these efforts, MCD reaffirmed its termination of the contract in a letter to Tiburon's counsel dated December 21, 2006. (R. 29, Ex. 40.)

II. Procedural Background

A. Arbitration Proceedings

On February 28, 2007, Tiburon filed a demand for arbitration with the American Arbitration Association. However, the parties subsequently agreed to privately arbitrate the dispute and entered into an Agreement to Submit to Private Arbitration ("Arbitration Agreement"). (R. 28, Ex. B.)

In the arbitration proceedings, Tiburon filed a statement of claim asserting that MCD terminated the SIA without cause pursuant to Section 13.2 and claiming damages of $456,662.97 pursuant to Section 13.3(d) of the SIA. (R. 1, Ex. B.) MCD denied liability and argued that it had terminated the SIA for cause in the August 25, 2006 letter. MCD counterclaimed for breach of contract in the amount of $516,104.03, plus costs and expenses.² (Id., Ex. C ¶¶ 23, 28.) The Arbitrator denied the parties' cross-motions for summary disposition on MCD's claim, finding the existence of genuine issues of material fact regarding MCD's compliance with the dispute resolution procedures in the SIA. (R. 36, Ex. 45, at 6.)

The parties agreed to bifurcate the proceedings in order to present the liability issues first, which would then be followed by evidence on damages. The hearing on liability consisted of twelve days of testimony and presentation of evidence.

In his written opinion at the close of the liability phase, the arbitrator found that "[t]he language of the SIA leaves no doubt that this dispute resolution process [in Section 12.1] wasintended as a condition precedent to the termination of the contract for cause." (R. 1, Ex. D, at 3.) The arbitrator found that the language of Section 12.1 was "generally clear and unambiguous," but did not "specifically identify which party has the responsibility to initiate the escalation procedures contained in Section 12.1(d)." (Id. at 4.) The arbitrator reasoned that:

Section 12.1(a) requires that the Disputing Party "shall bring the matter to the attention of the other party." Thus, the Disputing Partly clearly has the obligation to initiate the dispute resolution process. I conclude from a reading of Section 12.1 of the SIA in context that the intent of the parties was to place the responsibility on the Disputing Party not only to initiate the process, but to complete the process and bring it to conclusion. That includes the initiation and conclusion of the escalation procedures in Section 12.1(d).

(Id.) The arbitrator identified MCD as the Disputing Party. (Id.) The arbitrator found that the July 19, 2006 email sent by McCastle on behalf of MCD constituted a Dispute Notice under Section 12.1. (Id. at 7.) After a...