Opinion ID: 772374
Heading Depth: 1
Heading Rank: 2

Heading: Is National Entitled to a Mandatory Stay?

Text: 7 Section 3 of the Federal Arbitration Act provides that the district court shall stay the trial of an action brought upon any issue referable to arbitration under an agreement in writing for such arbitration. 9 U.S.C. § 3. However, arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit. AT & T Techs., Inc. v. Communications Workers, 475 U.S. 643, 648 (1986) (quotation omitted). We apply ordinary state law contract principles to decide whether parties have agreed to arbitrate a particular matter, giving healthy regard for the federal policy favoring arbitration. Keymer v. Management Recruiters Int'l, Inc., 169 F.3d 501, 504 (8th Cir. 1999) (quotation omitted). The question of arbitrability is for the court, not the arbitrator. See McLaughlin Gormley King Co. v. Terminix Int'l Co., 105 F.3d 1192, 1193-94 (8th Cir. 1997). 8 The issue is whether AgGrow and National agreed to arbitrate AgGrow's claim on the performance bond. That issue turns on the meaning of the provision in the bond incorporating by reference the Construction Contract between AgGrow and TEI. Applying North Dakota law, the first question is whether the incorporation provision is ambiguous, a question of law we must decide from the four corners of the written agreement. See Burk v. Nance Petroleum Corp., 10 F.3d 539, 542 (8th Cir. 1993). As a general matter of contract law, an incorporation clause is effective only when the provision to which reference is made has a reasonably clear and ascertainable meaning. J.S. & H. Constr. Co. v. Richmond County Hosp. Auth., 473 F.2d 212, 215 (5th Cir. 1973). Without question, incorporation of the Construction Contract clarified the performance obligations of TEI that National as surety undertook to guarantee. See Hollerman Mfg. Co. v. Standard Accident Ins. Co., 239 N.W. 741, 744-45 (N.D. 1931) (unpaid supplier may sue on bond issued in favor of owner and incorporating builder's contractual obligation to pay suppliers); accord Home Indem. Co. v. F.H. Donovan Painting Co., 325 F.2d 870, 874 (8th Cir. 1963). However, it is less clear that the incorporation clause reflected an intent by AgGrow and National to arbitrate their disputes under the bond -- that intent is not clearly expressed, and it seems to be negated by the bond provision referring to the judicial resolution of disputes and by the provision in the Construction Contract that it not be construed to create a contractual relationship of any kind . . . between any persons or entities other than [AgGrow and TEI]. We conclude the incorporation clause is ambiguous on the issue of arbitrability, that is, rational arguments can be made in support of contrary positions as to the meaning of the language in question. Johnson v. Mineral Estate, Inc., 343 N.W.2d 778, 780 (N.D. 1984). 9 When a contract is ambiguous, extrinsic evidence may be considered to determine the parties' intent. See Case Int'l Co. v. T.L. James & Co., 907 F.2d 65, 67 (8th Cir. 1990) (testimony of drafter considered in finding that prime contract's arbitration clause was not incorporated by reference into a subcontract). In this case, we have no extrinsic evidence regarding the parties' intent on the arbitrability question. An ambiguous contract may also be explained by reference to the circumstances under which it was made and the matter to which it relates. N.D. CENT. CODE § 9-07-12. In general, a performance bond provides recourse to an obligee (AgGrow) against a secondary obligor (National, the surety) in the event the principal obligor (TEI) fails to perform the underlying obligation. See RESTATEMENT (THIRD) OF SURETYSHIP AND GUARANTY § 1 (1996). In defending a claim on the bond, the surety may raise nearly all defenses available to the principal obligor, plus defenses unique to the surety, such as actions by the obligee that impair the surety's position or release the principal obligor. Id. §§ 34, 37-47. When the surety has performed the underlying obligation or has discharged the principal obligor by settling with the obligee, the surety usually has a right to be reimbursed by the principal obligor. Id. §§ 22-24. 10 National argues that, as surety, it steps into the shoes of TEI and may compel AgGrow to arbitrate its claim on the bond under the arbitration provision in the Construction Contract. In support of its position, National marshals an impressive array of cases from other jurisdictions in which a bond provision incorporating the underlying contract was held to include the contract's arbitration provision and to justify a stay of litigation on the bond. Some of these cases are not quite on point, either because the surety was not seeking the stay, or because the stay was granted pending arbitration between the parties to the underlying contract, not between the bonding company and the obligee. 3 Whether a lawsuit on the bond should be stayed while the obligee and the principal obligor arbitrate the underlying performance dispute is a different question than whether the obligee and the surety have separately agreed to arbitrate any disputes under the bond. See United States v. Bregman Constr. Corp., 256 F.2d 851, 854 (7th Cir. 1958). 11 Some of the cases cited by National have expressly held that an incorporation clause in the bond gave either the surety, or the obligee making a claim on the bond, the right to arbitrate the bond claim, as well as to stay the pending court action. 4 To the same effect, another case held that an incorporation clause gave the surety a right to participate in pending arbitration between the principal obligor and the obligee. See Firemen's Ins. Co. v. Edgewater Beach Owner's Ass'n, 1996 WL 509720, at  (N.D. Fla. June 25, 1996). But these cases do not discuss the significance of construing the incorporation clause as an express agreement to arbitrate between the obligee and the bonding company. The impact of such an agreement can be far-reaching. For example, it would permit the surety to compel arbitration of a claim on the bond when the principal obligor is bankrupt or out of business, even though no party to the underlying contract wished to arbitrate performance issues. It would also permit the obligee to compel an unwilling surety to arbitrate its unique defenses, such as whether the obligee had impaired the surety's position or released the principal obligor. Mindful of the fundamental principle that [a]rbitration under the [Federal Arbitration] Act is a matter of consent, not coercion, Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57 (1995), we are unwilling to construe an incorporation clause whose obvious purpose was to clarify the extent of the surety's secondary obligation as also reflecting a mutual intent to compel arbitration of all disputes between the surety and the obligee under the bond. Like the district court, we conclude there was no such agreement to arbitrate. Therefore, National is not entitled to a mandatory stay under section 3 of the Act. Accord Hartford Accident & Indem. Co. v. Scarlett Harbor Assocs. Ltd. P'ship, 695 A.2d 153, 156-57 (Md. 1997); In re Fidelity & Deposit Co. of Md. v. Parsons & Whittemore Contractors Corp., 397 N.E.2d 380, 381-83 (N.Y. 1979). 12