WorldSource Coil Coating, Inc. v. McGraw Const. Co., Inc.

• Decision Date: 16 October 1991
• Docket Number: No. 91-5250,91-5250
• Citation: 946 F.2d 473
• Parties: WORLDSOURCE COIL COATING, INC.; General Electric Capital Corporation, Plaintiffs-Appellees, Hancock County, Commonwealth of Kentucky, Intervening Plaintiff-Appellee, v. McGRAW CONSTRUCTION COMPANY, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 473

946 F.2d 473

WORLDSOURCE COIL COATING, INC.; General Electric Capital Corporation, Plaintiffs-Appellees Hancock County, Commonwealth of Kentucky, Intervening Plaintiff-Appellee, v. McGRAW CONSTRUCTION COMPANY, INC., Defendant-Appellant.

No. 91-5250.

United States Court of Appeals Sixth Circuit.

Argued July 15, 1991.

Decided Oct. 16, 1991.

Robert F. Mullen (argued), Cravath, Swaine & Moore, New York City, Paul Madden, Hawesville, Ky., Robert I. Cusick, Jr. (briefed), Frank F. Chuppe (briefed), Frank F. Schuppe, Wyatt, Tarrant & Combs, Louisville, Ky., Peter Petrakis, Katten, Muchin & Zavis, Chicago, Ill., for plaintiffs-appellees.

David Meister, Katten, Muchin & Zavis, Chicago, Ill., Harold Wayne Newton (briefed), Hawesville, Ky., for intervenor-appellee.

Philip W. Tone (argued), Jerold S. Solovy (briefed), Richard T. Franch, Jenner & Block, Chicago, Ill., Ronald L. Sullivan, Holbrook, Wible, Sullivan & Helmers, Owensboro, Ky., for defendant-appellant.

Before KEITH, Circuit Judge, BROWN, Senior Circuit Judge, and GADOLA, United States District Judge. ^*

BAILEY BROWN, Senior Circuit Judge.

McGraw Construction Company, Inc. ("McGraw"), appeals from the district court's refusal to compel arbitration of a dispute that it has with the plaintiffs WorldSource Coil Coating, Inc. ("WorldSource"), and General Electric Capital Corporation ("G.E."). The dispute arises in connection with McGraw's contract to build a manufacturing plant for WorldSource that G.E. would finance. This construction contract included a mandatory arbitration clause for all disputes. The district court held that McGraw waived the right to compel arbitration by bringing a suit against WorldSource and G.E. in Kentucky State Court for preliminary and permanent injunctive relief and for compensatory and punitive damages. Because we find that a waiver did occur, we AFFIRM.

I.

On September 26, 1988, McGraw entered into a $16.25 million contract with WorldSource to build a factory and office complex in Hancock County, Kentucky. ¹ McGraw was the general contractor for the construction, WorldSource was the developer and operator of the factory, and G.E. financed the construction of the project with the assistance of industrial revenue bonds issued by Hancock County.

The contract dealt in specific detail with each party's obligations under the contract. McGraw agreed to construct the building for a fixed price, and the contract provided that any changes in the scope of the construction would be approved in advance by WorldSource and G.E. McGraw agreed to provide G.E. with an irrevocable letter of credit of $16.25 million as security for completion of the factory. G.E. could draw on the letter of credit if McGraw failed to perform in accordance with the construction contract.

On May 19, 1988, McGraw stopped work on the project. McGraw maintains that the facility was completed and that WorldSource owed McGraw an additional $11 million for "extra" work. Although WorldSource is occupying and using the facility, WorldSource alleges that McGraw merely abandoned the incompleted project.

On June 5, 1990, counsel for McGraw informed WorldSource and G.E. that it would invoke the arbitration clause. McGraw, however, did not immediately request arbitration. ² Instead, McGraw filed an action against WorldSource and G.E. in the Circuit Court of Hancock County, Kentucky requesting that a preliminary and permanent injunction be issued to reduce the letter of credit from $15.15 million to $2 million and that it be awarded compensatory and punitive damages. The complaint alleged that G.E. and WorldSource breached their obligations under the construction contract by refusing to make the final payment to McGraw, refusing to release the letter of credit, inappropriately drawing on the letter of credit, refusing to pay for "extras" performed by McGraw, and incorrectly claiming that McGraw's work was defective. In the complaint, however, McGraw reiterated its intention to proceed with arbitration, stating that:

McGraw ... [requires] emergency relief which cannot await ... arbitration. The arbitration rules permit McGraw ... to petition the Court for such emergency relief notwithstanding the parties' agreement to arbitrate. Hence, the existence of McGraw's ... demand for arbitration is no bar to this Court's authority to grant the emergency relief herein.

The contract stated that arbitration was governed by the International Chamber of Commerce Rules of Arbitration ("ICC arbitration rules"). Under the ICC arbitration rules,

[b]efore the file is transmitted to the arbitrator, and in exceptional circumstances even thereafter, the parties shall be at liberty to apply to any competent judicial authority for interim or conservatory measures, and they shall not by so doing be held to infringe the agreement to arbitrate or to affect the relevant power of the arbitrator. (Emphasis added).

On June 13, 1990, a hearing was held in state trial court on the motion for a preliminary injunction. The state court refused to grant the injunction for two reasons. First, an injunction would have changed the status quo and the ICC arbitration rules did not authorize such a change. Second, the state trial court held that McGraw had not shown that equity was on its side. Although such relief was denied, the case remained pending in state court.

On July 31, 1990, WorldSource moved for leave of court to file counterclaims against McGraw. At a hearing on this motion, McGraw moved to dismiss the original complaint without prejudice, which the state court granted. Thus the counterclaim was not filed. On August 7, 1990, McGraw submitted a request for arbitration to the ICC asking that both WorldSource and G.E. be required to arbitrate. In its letter applying for arbitration, McGraw requested the following relief:

(1) awarding McGraw $10 million for the cost of extras provided by McGraw to WorldSource; (2) awarding McGraw its reasonable profit on the extra work of $1 million; (3) awarding McGraw $2.16 million held by WorldSource; (4) awarding McGraw $2.7 million held by respondents which was drawn from the McGraw letter of credit; (5) ordering GECC to surrender McGraw's letter of credit; ....

On September 19, 1990, G.E. and WorldSource filed suit against McGraw in Hancock County Circuit Court for breach of contract and requested a stay of the arbitration. The request for a stay alleged that McGraw had waived the right to compel arbitration by bringing the prior state court action. McGraw removed the action to federal district court for the Western District of Kentucky based on diversity jurisdiction.

On October 4, 1990, McGraw filed in federal district court a motion to compel arbitration. After a hearing on the issue, the district court ruled that McGraw's state court lawsuit was inconsistent with the arbitration agreement and that McGraw, therefore, waived the right to compel arbitration. ³ McGraw appeals from this order denying its motion to compel arbitration. ⁴

II.

As will be seen, under Illinois law, a party waives its right to compel arbitration where its action in enforcing its claim is so inconsistent with arbitration as to indicate an abandonment of that right. If a party's action so demonstrates abandonment, it may not retain the right to compel arbitration by simply stating such an intent. It is not what you say you are doing, it is what you actually do that controls. ⁵ Furthermore, under Illinois law, waiver of arbitration can be controlled by the contract between the parties or by the rules of the arbitration agency that the parties by contract have designated to be applicable. We conclude that McGraw's action in state court seeking a preliminary and permanent injunction and compensatory and punitive damages indicates an abandonment of the right to compel arbitration and that McGraw's right to arbitrate is not saved by the terms of the contract or by the rules of the arbitration agency. Moreover, under Illinois law, it is not necessary for WorldSource or G.E. to show prejudice but, in any event, prejudice has been shown in this case.

A.

Under Illinois law, the right to compel arbitration is waived "when a party's conduct is so inconsistent with the arbitration clause as to demonstrate abandonment of that right." TDE Ltd. v. Israel, 185 Ill.App.3d 1059, 133 Ill.Dec. 843, 848, 541 N.E.2d 1281, 1286 (1989). The key factor in determining whether a right to compel arbitration has been waived is the type of issues submitted to the court. Id. "A party's conduct amounts to a waiver when the party submits arbitrable issues to a court for decision." Cencula v. Keller, 152 Ill.App.3d 754, 105 Ill.Dec. 712, 714, 504 N.E.2d 997, 999 (1987). In Cencula, the court held that waiver had occurred because the "[d]efendant, by his answer alleging additional credits offsetting his liability, and by his bill of particulars listing items associated with the [subject matter of the contract] for which he incurred expense, put into issue many facts which appear to fall within the ambit of the arbitration clause." Id. 105 Ill.Dec. at 714-15, 504 N.E.2d at 999-1000. ⁶

Clearly, McGraw submitted arbitrable issues to the state court. Although McGraw stated that it ultimately intended to submit the dispute to arbitration, it did not request arbitration of the ICC until after its state court action was dismissed. McGraw requested several types of relief in its state court complaint:

Wherefore, Plaintiffs respectfully request that the court enter judgment as follows;

1. A preliminary and permanent injunction compelling defendants to reduce the letter of credit to $2 million.

2. An award of compensatory damages to be proved at trial.

3. An award of punitive damages three times the amount of plaintiffs' compensatory damages award.

4. Such other relief as this court deems just.

A prayer for a permanent injunction and for compensatory and punitive damages raises "arbitrable issues" under...