Opinion ID: 1436064
Heading Depth: 1
Heading Rank: 21

Heading: Incorporation by Reference for a Limited Purpose

Text: In an argument related to its claim that restrictively worded arbitration clauses referring to the immediate parties, when incorporated into another agreement, generally cannot support arbitration of disputes between parties not identified in the clause, Century also argues that the parties may intend general incorporation clauses to have a limited purpose. Here, Century contends that the parties intended the retrocessional agreements' incorporation language only to clarify the scope of Lloyd's's substantive obligations under the reinsurance treatiesthat is, its liabilityand not to incorporate other obligations that Century characterizes as procedural, such as the agreement to arbitrate. In illustration, Century cites AgGrow Oils, 242 F.3d at 779. In AgGrow Oils, a surety case, the Court of Appeals for the Eighth Circuit considered a dispute between the owner of a processing facility and the surety to a contractor hired by the owner to build the facility. AgGrow Oils, the plant owner, entered into a construction contract with a construction company for it to build the processing facility. The construction contract contained an arbitration clause stating that any controversy or Claim arising out of or related to the Contract, or the breach thereof, shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. Id. at 780 n. 1. The construction company guaranteed that the completed facility would reach a certain level of performance. Id. at 779. The construction contract also stated that it should not be construed to create a contractual relationship of any kind ... between any persons or entities other than [the plant owner and the construction company]. Id. at 781. In related contractual dealings, the construction company purchased processing equipment from a manufacturer and obtained engineering services from the construction company's own subsidiary. In addition, the construction company's surety issued a performance bond to the plant owner guaranteeing the construction company's performance by binding the surety to the [Plant] Owner for the performance of [the construction company's obligations under] the Construction Contract, which is incorporated herein by reference. Id. at 779. After construction was completed, the facility failed to meet the construction company's performance guarantees, and a variety of disputes ensued that later were consolidated into a single action. The surety then moved to stay the plant owner's suit and to compel the plant owner to arbitrate its claim against the surety under the performance bond, based on the construction contract's arbitration clause that the surety claimed was incorporated into the bond. Applying North Dakota law, the court of appeals held that the incorporation clause was ambiguous on the issue of arbitrability. Id. at 781. The court found that the incorporation clause's main purpose was to clarify the construction company's performance obligations that the construction company's surety undertook to guarantee. But the court found that the clause did not clearly reflect the owner's and the surety's intent to provide for arbitration of their disputes under the bond, particularly in light of the performance bond's provision referring to judicial settlement of disputes and the construction contract's provision stating that the contract not create contractual relations between any other parties. Id. The court further considered the purpose of surety bonds generally: to provide recourse to an obligee against a secondary obligor in the event of the principal obligor's failure to perform the underlying obligation. Id. The court acknowledged that there were several decisions concluding that performance bonds incorporating the terms of underlying contracts also incorporated those contracts' arbitration agreements. Id. at 781-82. Nevertheless, the court concluded that, in the circumstances it confronted, the owner and the surety had not reached an agreement to arbitrate disputes under the performance bond because the purpose of the bond's incorporation clause was to define the scope of the surety's liability, not to apply the entirety of the construction contract to the bond: Mindful of the fundamental principle that arbitration under the [Federal Arbitration] Act is a matter of consent, not coercion, 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. ... [W]e conclude there was no such agreement to arbitrate. Id. at 782 (internal citation and quotation marks omitted) (first alteration in original). Thus, even if an incorporated arbitration clause is not restricted to the immediate parties in the original agreement, courts may refuse to compel arbitration where the parties do not intend to incorporate the agreement to arbitrate. Century cites this decision to show that parties may incorporate a separate contract into their agreement for certain purposes and not others, and argues that the parties intended here for the retrocessional agreements to incorporate the reinsurance treaties only to clarify the extent of the obligations that Lloyd's assumed under the retrocessional agreements.