Court Opinion

ID: 6347780
Source: CourtListenerOpinion
Date Created: 2022-06-07 22:08:38.695953+00
Date Added: 2024-06-11T14:56:58.856917
License: Public Domain

138 Nev., Advance Opinion 14 I
                        IN THE SUPREME COURT OF THE STATE OF NEVADA

                 SR CONSTRUCTION, INC., A NEVADA                       No. 82786
                 DOMESTIC CORPORATION,
                 Appellant,
                 vs.                                                   FILE 011
                 PEEK BROTHERS CONSTRUCTION,
                 INC., A NEVADA DOMESTIC                               JUN 0 2022
                 CORPORATION,                                        ELI
                 Respondent.                                      CLERK
                                                                  BY
                                                                           DEPUTY CLERK

                            Appeal from a district court order denying a motion to compel
                 arbitration. Second judicial District Court, Washoe County; Barry L.
                 Breslow, Judge.
                            Reversed and remanded.

                 Allison Law Firm Chtd. and Noah G. Allison and Heather Caliguire
                 Fleming, Henderson,
                 for Appellant.

                 Viloria, Oliphant, Oster & Aman LLP and Nathan J. Aman and Ernilee N.
                 Hammond, Reno,
                 for Respondent.

                 BEFORE THE SUPREME COURT, SILVER, CADISH, AND PICKERING,
                 JJ.

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                                                    OPINION

                   By the Court, PICKERING, J.:

                               This is an appeal from an order denying a motion to compel
                   arbitration. Appellant SR Construction, Inc., argues that the district court
                   erroneously denied its motion to compel because its master subcontract

                   agreement (MSA) with respondent Peek Brothers Construction, Inc.,
                   includes a valid arbitration provision that applies to the parties underlying
                   dispute. Peek contends the district court properly held that the underlying
                   dispute falls outside the bounds of the parties' arbitration agreement. The
                   parties do not contest the validity of the MSA or its arbitration provision,
                   thus posing a single question to this court in this appeal: Does the parties'

                   dispute fit within the scope of the arbitration provision contained in the
                   MSA?

                                                         I.
                               SR (a general contractor) and Peek (a subcontractor) executed
                   the MSA to establish the general terms and conditions of their future work
                   together. The MSA includes an arbitration provision:

                               (a) Contractor and Subcontractor shall not be
                                   obligated to resolve disputes arising under this
                                   Subcontract by arbitration, unless:
                                   (i)   the prime contract has an arbitration
                                         requirement; and
                                   (ii) a particular dispute between Contractor
                                        and Subcontractor involves issues of fact
                                        or law which the Contractor is required to
                                        arbitrate under the terms of the prime
                                        contract.
                   (emphasis added). S.R later executed an agreement (the prime contract)
                   with Sparks Family Medical Center, Inc., an affiliate of United Health

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                     Services of Delaware (UHS, the project owner), to construct a major medical
                     center in Reno (the project). The prime contract consists of two
                     documents—American Institute of Architects (AIA) Document A133-2009
                     and AIA Document A201-2017—each of which incorporates the other by
                     reference. The prime contract is a "cost-plus" agreement with a guaranteed
                     maximum price (GMP), meaning that UHS as the project owner bears all
                     project costs up to the GMP. Cost-Plus Contract, Black's Law Dictionary
                     (11th ed. 2019) ([A] contract in which payment is based on a fixed fee or a
                     percentage added to the actual cost incurred; esp., a construction contract
                     in which the owner pays to the builder the actual costs of material and labor
                     plus a fixed percentage over that amount."). The parties may seek to
                     increase the GMP and recover additional "necessarily incurred" costs using
                     written change orders. If costs exceed the GMP as modified by any
                     approved change orders, then SR is responsible for the excess costs.
                                 The prime contract also includes an arbitration provision,
                     which states as follows:
                                 Arbitration shall be utilized as the method for
                                 binding dispute resolution in the Agreement[.]
                                 [A]ny Claim subject to, but not resolved by,
                                 mediation shall be subject to arbitration which,
                                 unless the parties mutually agree otherwise, shall
                                 be administered by the American Arbitration
                                 Association in accordance with its Construction
                                 industry Arbitration Rules in effect on the date of
                                 the Agreement.
                     (emphasis added). A "claim" under the contract is "a demand or assertion
                     by one of the parties seeking, as a matter of right, payment of money, a
                     change in the Contract Time, or other relief with respect to the terms of the
                     Contract . . . [and] other disputes and matters in question between the

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                                                                        •
Owner and Contractor arising out of or relating to the Contract." (emphasis
added). The prime contract further permits SR to include subcontractors in
arbitration of a claim:
            Arbitration, at the Contractor's election, may
            include Subcontractors to Contractor that
            Contractor deems relevant to the matter in dispute
            and upon Contractor's request, the Arbitrator shall
            decide all or a particular portion of a dispute
            between the Contractor and a Subcontractor and,
            as Contractor may request, the Arbitrator shall
            speak to the extent to which the Arbitrator's
            decisions regarding a dispute between Contractor
            and Owner and the dispute between Contractor
            and Subcontractor are inter-related.
After executing the prime contract with UHS, SR executed a work order
with Peek to complete the core and shell civil work for the project, which
included bringing the building pad to the proper subgrade elevation. SR
agreed to pay Peek $3,062,000 for its work, and the work order expressly
incorporated the MSA's terms and obligations by reference.
            The dispute underlying SR's motion to compel arbitration arose
when—for reasons the parties contest—Peek deviated from the means and
methods it used to bid the project in elevating the building pad. Peek states
that it bid the project assuming it would mass-grade the building pad to a
few feet below the required elevation, dig the building footings and
plumbing trenches, and then use the "spoils" from excavating the footings
and trenches to backfill and grade the pad to the proper subgrade elevation.
Instead, Peek imported approximately 150,000 square feet of additional
material to raise the pad to the proper subgrade elevation before digging the
footings and trenches. Peek alleges that it deviated from its bid-based plans
when an SR employee directed it to obtain extra material to raise the pad

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                earlier because SR did not want to wait for Peek to excavate the footings
                and trenches. SR alleges that Peek did not know the pad's elevation from
                the start and thus imported additional material under the incorrect
                assumption that it needed it.
                            The above-described changes added $140,000 to Peek's costs,
                which it sought to recover from SR after the fact in two written change
                orders. SR relayed the change orders to UHS, who deemed the changes
                unnecessary, rejected the change orders, and directed SR to initiate dispute
                resolution with Peek. Before SR could do so, Peek sued SR in district court,
                alleging breach of contract, unjust enrichment, and violation of NRS
                Chapter 624 and seeking over $140,000 in damages and attorney fees. SR
                filed a demand for arbitration with the American Arbitration Association
                (AAA), in which it named UHS and Peek as defendants, and in tandem with
                its demand, SR moved to compel arbitration in district court. The district
                court denied SR's motion. It held that the prime contract required
                arbitration only of disputes between UHS and SR, so Peek's dispute with
                SR was not arbitrable under the MSA because it did not involve UHS and,
                therefore, could not involve common issues of fact or law that SR must
                arbitrate under the prime contract. SR appeals, and we reverse.1
                                                    11.
                            On appeal, SR argues that Peek's dispute involves issues of fact
                and law about the reasonableness of its additional costs that SR must
                arbitrate with UHS under the prime contract, so this dispute is therefore

                     'This court stayed litigation below pending resolution of this appeal,
                which order we now vacate.

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                arbitrable as between SR and Peek under the MSA provision. SR further
                argues that the district court ignored the presumption of arbitrability when
                it denied the motion to compel and that Peek cannot artfully plead its way
                out of arbitration by omitting UHS as a defendant. Peek argues that this
                dispute does not involve UHS because SR is solely responsible for its
                additional costs, and the district court therefore correctly concluded that
                this dispute is not arbitrable under the MSA provision because the prime
                contract only mandates arbitration of disputes between UHS and SR. Peek
                further argues that SR's interpretation of the MSA provision would create
                the absurd result of forcing SR and Peek to arbitrate all disputes.
                            To compel arbitration, a moving party must establish that there
                is an enforceable agreement to arbitrate and that the dispute fits within the
                scope of the arbitration agreement. 4 Am. Jur. 2d Alternative Dispute
                Resolution § 100 (2018); see al.so Phillips v. Parker, 106 Nev. 415, 417, 794
                P.2d 716. 718 (1990). Here, the parties agree that the MSA includes a valid
                and enforceable arbitration provision, so we address the narrow issue of
                whether this particular dispute fits within the provision's scope. The
                arbitrability of a dispute presents a question of contract construction that
                this court reviews de novo. Masto v. Second Judicial Dist. Court, 125 Nev.
                37, 44, 199 P.3d 828, 832 (2009). That review only addresses arbitrability,
                not the merits of the underlying dispute. Clark Cty. Pub. Emps. Ass'n v.
                Pearson, 106 Nev. 587, 591, 798 P.2d 136, 138 (1990).
                                                     A.
                            There is a strong -presumption in favor of arbitrating a dispute
                where a valid and enforceable arbitration agreement exists between the
                parties. AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 650

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                (1986); Int? Ass'n of Firefighters, Local No. 1285 v. City of Las Vegas, 112

                Nev. 1319, 1323, 929 P.2d 954, 957 (1996) (Nevada courts resolve all doubts
                concerning the arbitrability of the subject matter of a dispute in favor of
                arbitration.") (internal quotation marks omitted); cf. Gore v. Alltel
                Cornrnc'ns, LLC, 666 F.3d 1027, 1032 (7th Cir. 2012) (holding that no

                presumption of arbitrability arises when the court is determining whether
                an arbitration agreement exists in the first place). This presumption
                applies differently based on the scope of the arbitration agreement. 1
                Thomas H. Oehmke & Joan M. Bovins,                  Commercial Arbitration
                § 6:9 (3d ed. 2021) (noting that the scope of the clause indicates the parties'
                intent to arbitrate a particular dispute); 7 Philip L. Bruner & Patrick J.
                O'Connor, Jr., Bruner & O'Connor on Construction Law § 21:122 (2014)
                (explaining that the presumption of arbitrability applies differently under
                broad versus narrow arbitration clauses). Under a broad arbitration
                provision—i.e., one that encompasses all disputes related to or arising out
                of an agreement—a presumption of arbitrability applies and "only the most
                forceful evidence of a purpose to exclude the claim from arbitration can
                prevail." Clark Cty. Pub. Ernps. Assn, 106 Nev. at 591, 798 P.2d at 138
                (quoting AT&T Techs., Inc., 475 U.S. at 650 (holding that only the strongest

                evidence against arbitration will remove a dispute from the purview of a
                broad arbitration clause)). Even matters tangential to the subject
                agreement will be arbitrable under a broad provision. 1 Oehmke, supra,
                § 6:10 (Supp. 2021) ([W]hen the language of the arbitration provision is
                broad, a claim will proceed to arbitration if the underlying allegations
                simply touch upon any rnatters covered by the provision.").

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                                Given that a strong presumption of arbitrability applies if the
                   MSA provision is deemed broad, Peek argues it is narrow—a plausible
                   position at first blush—because the clause states that a dispute is not
                   arbitrable "unless" two prerequisites are satisfied. Cf. Louis Dreyfus Negoce
                   S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 226 (2d Cir. 2001)
                   (reasoning that words and phrases alone do not dictate whether a clause is
                   broad or narrow, although words of limitation typically indicate a narrower
                   clause). But unlike other narrowly phrased arbitration agreements, the

                   MSA provision does not limit arbitration to specific issues, subject matter,
                   or dollar amounts. Instead, it incorporates the prirne contract's terms by
                   looking to (1) whether the prime contract includes an arbitration
                   requirement, and (2) whether the dispute "involves issues of fact or law
                   which [SR] is required to arbitrate under the terms of the prime contract."
                   See Clark Cty. Pub. Emps. Ass'n, 106 Nev. at 591, 798 P.2d at 138 (holding
                   that an issue was arbitrable where not expressly excluded from the
                   arbitration provision); cf. Papalote Creek II, LLC v. Lower Colo. River Auth.,
                   918 F.3d 450, 455-56 (5th Cir. 2019) (noting that a narrow arbitration clause
                   limits arbitration to a specific category of disputes at the exclusion of
                   others); 1 Oehmke, supra, § 6:11 (Supp. 2021) (A narrow clause limits the
                   arbitrator's scope of authority by either including specific disputes or
                   excluding other identified issues.").
                               Accordingly, where a prime contract includes a broad
                   arbitration provision, the MSA provision's purported limits are nearly
                   illusory. The prime contract applicable here includes an expansive
                   arbitration provision that covers all disputes between SR and UHS,
                   including "matters in question . . . arising out of or relating to the contract."

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                See 2 Oehinke, supra. § 25:17 (stating that the standard AIA Document
                A201 contract includes a broad arbitration clause). The MSA provision is
                therefore likewise broad because it requires SR and Peek to arbitrate a
                "dispute . . . involv[ing] issues of fact or law [that SR] is required to
                arbitrate under the terms of the prime contract," which in turn includes any
                dispute or "matted ] in question" arising under the agreement. Further,
                because the MSA provision does not limit its application to disputes
                involving issues of fact or law that both the contractor and subcontractor
                must arbitrate under the prime contract, it is irrelevant to determining the
                MSA provision s scope that UHS is not a defendant to the underlying action
                and that Peek is not a party to the prime contract's arbitration agreement.
                See Clark Cty. Pub. Ernps. Assin, 106 Nev. at 591, 798 P.2d at 138. Rather,
                under the MSA provision's plain language, if SR would have to"arbitrate an
                issue of fact or law under the prime contract with UHS, then in turn, SR
                and Peek must arbitrate that same issue.
                           In sum, as applied here, the MSA provision is broad and an
                attendant presumption of arbitrability applies. Meanwhile, Peek provides
                no evidence to rebut this presumption and show that the parties intended
                to exclude this dispute from arbitration. See Clark Cty. Pub. Ernps. Ass'n,
                106 Nev. at 591, 798 P.2d at 138 ([I]n the absence of any express provision
                excluding a particular grievance from arbitration, we think only the most
                forceful evidence of a purpose to exclude the claim from arbitration can
                prevail.") (emphasis and internal quotation marks omitted). Lacking
                forceful evidence of the parties intent to exclude this dispute from
                arbitration, Peek's dispute is presumptively arbitrable under the parties'
                agreement. This interpretation does not create what Peek characterizes as

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                  the absurd result of mandating arbitration of all disputes between Peek and
                  SR; it mandates arbitration of only those disputes including common issues
                  of fact or law that SR rnust arbitrate with UHS under the prime contract,
                  which the parties freely agreed to do. See Holcomb Condo. Homeowners'
                  Ass'n v. Stewart Venture, LLC, 129 Nev. 181, 187, 300 P.3d 124, 128 (2013)
                  (recognizing Nevada's interest in protecting persons freedom to contract).

                                                          B.

                               Even crediting Peek's argument that the MSA provision is
                  narrow, this dispute is arbitrable because it fits within the provision's
                  terms.   Clark Cty. Pub. Ernps. Assn, 106 Nev. at 591, 798 P.2d at 138
                  (holding that where no express provision excluded arbitration the court
                  could not say with "positive assurance that the issue was not arbitrable
                  (emphasis omitted)); 1 Oehmke, supra, § 6:9 (noting that under a narrow
                  clause "the sole issue for the arbiter is a dispute that, on its face, falls within
                  the purview of the clause"). A narrow provision limits arbitration to specific
                  issues or circumstances; unlike under broad provisions, collateral issues to
                  the subject agreement are not arbitrable under narrow provisions.
                  Cummings v. FedEx Ground Package Sys., Inc., 404 F.3d 1258, 1261-62
                  (10th Cir. 2005); 1 Oehmke, supra, § 6:11. In further contrast to a broad
                  provision, "a narrow clause indicates a weak presumption of arbitrability."
                  1 Oehmke, supra, § 6:11 (Supp. 2021). I3ut even under a narrow provision,
                  the court "should order arbitration of particular grievances 'unless it may
                  be said with positive assurance that the arbitration clause is not susceptible
                  of an interpretation that covers the asserted dispute."'           Int'l Assn of
                  Firefighters, Local No. 1285, 112 Nev. at 1324, 929 P.2d at 957 (quoting

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AT&T Techs., Inc., 475 U.S. at 650); Clark Cty. Pub. Ernps. Assn, 106 Nev.
at 591, 798 P.2d at 138.
            Fairly read, consistent with even a weak presumption of

arbitrability, the MSA provision covers Peek's dispute because it raises
issues of fact and law regarding the reasonableness of Peek's change orders
that SR must arbitrate with UHS under the prime contract. UHS must

compensate SR—and Peek—only for "costs necessarily incurred by [SR] in
the proper performance of the Work." (emphasis added).         See W . Henry

Parkman, Cost-Plus Contracting Without a GMP—Contractor's Risks,
Owner's Rights?, 29 No. 11 ConstruCtion Litig. Rep. 1, 3-4 (2008) (explaining
that a project owner is responsible only for reasonably incurred costs under
a cost-plus contract with a GMP). Costs incurred due to a contractor's fault
or mismanagement are unnecessary and unreasonable, and therefore, a
contractor and owner rnay dispute whether those costs are reimbursable
under the contract. Id.; see also Kerner v. Gilt, 296 So. 2d 428, 431 (La. Ct.
App. 1974) (In any cost-plus contract there is an implicit understanding
between the parties that the cost must be reasonable and proper."). Peek
alleges that SR's mismanagement caused its additional costs—i.e.,
unnecessarily directing Peek to import 150,000 square feet of additional
material to elevate the building pad's subgrade. Peek's allegation amounts
to a "claim" about whether its costs were reasonably incurred, which
involves issues of fact and law that SR would have to arbitrate with UHS
when seeking reimbursement for those costs under the prime contract, at
least until the GMP is exceeded. The GMP was not exceeded when this
claim was filed, and Peek must therefore arbitrate this dispute with SR
because SR must arbitrate the dispute with UHS.

                                     11
                                                            C.
                                 Other provisions in the prime contract and MSA confirm the
                     arbitrability of this dispute. See Eversole v. Sunrise Villas VIII Homeowners
                     Ass'n, 112 Nev. 1255, 1260, 925 P.2d 505, 509 (1996) ("Contractual
                     provisions should be harmonized whenever possible . . . .”). This court may
                     order consolidation of arbitration to avoid potentially conflicting awards
                     and the additional time and expense involved with separate proceedings if
                     mutual consolidation agreements exist.      Compare Exber, Inc. v. Sletten
                     Constr. Co., 92 Nev. 724, 725-27, 732, 558 P.2d 517, 519-20, 524 (1976)
                     (ordering consolidated arbitration where common issues of law existed and
                     all parties agreed to consolidation), with Pueblo of Laguna v. Cillessen &
                     Son, inc., 682 P.2d 197, 200 (N.M. 1984) (holding that consolidation of
                     arbitration was improper because consolidation was not provided for in any
                     of the contract documents). This court's decision in Exber, Inc. v. Sletten
                     Construction Co. is illustrative: There, as here, the project owner and
                     general contractor entered an AIA Document A201 agreement that included
                     a broad arbitration provision. 92 Nev. at 724, 558 P.2d at 518. The general
                     contractor then entered several subcontracts, which each extended the
                     contractor's right to arbitrate disputes under the prime contract to the
                     subcontractors. Id. at 724-25, 558 P.2d at 519. The owner later rejected the
                     contractor's claim seeking to recover its subcontractors additional costs; the
                     subcontractors accordingly made a demand on the contractor to submit the
                     claim to arbitration, who in turn made an arbitration demand on the owner.
                     Id. at 725, 558 P.2d at 519. The owner challenged joint arbitration because
                     it did not have a contractual duty to arbitrate with the subcontractors. Id.
                     at 727, 558 P.2d at 520. This court ordered consolidation of the arbitration

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                    proceedings because the owner/contractor dispute involved the same
                    evidence, witnesses, and legal issues as those involved in the
                    contractor/subcontractors dispute. Id. at 732, 558 P.2d at 524.

                                The prime contract includes a consolidation-of-arbitration
                    provision in matters involving common legal and factual issues:

                                [E]ither party may consolidate an arbitration
                                conducted under this Agreement with any other
                                arbitration to which it is a party provided that
                                (1) the arbitration agreement governing the other
                                arbitration permits consolidation, (2)            the
                                arbitrations to be consolidated substantially involve
                                common questions of law or fact, and (3) the
                                arbitrations employ materially similar procedural
                                rules and methods for selecting arbitrator(s).
                    (emphasis added). Section 15.4.4 of the prime contract further provides that
                    SR may include subcontractors in arbitration under the agreement if SR
                    "deems [the subcontractor] relevant to the matter in dispute." The MSA
                    also includes a consolidation clause, which provides that "the same
                    arbitrator(s) utilized to resolve the dispute between any Owner and
                    Contractor shall be utilized to resolve the dispute under [the MSA]
                    provision." See 2 Oehmke, supra, § 25:54 (labeling a provision like that used
                    in the MSA as a consolidation clause). And like the intertwined disputes in
                    Exber, common questions of law and fact permeate the disputes between
                    Peek/SR and SR/UHS—for example, who is at fault for importing the
                    additional material? Did UHS direct SR to work faster, thus prompting
                    SR's alleged request of Peek? Was importing additional material
                    reasonable in view of the larger project timeline? Did Peek and S R comply
                    with the proper change-order procedures? More than likely, the Peek/SR
                    dispute will require the same witnesses and evidence to answer these same

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                questions in the SIVUHS dispute. This court therefore has the power to
                order arbitration because mutual consolidation-of-arbitration provisions
                exist, and common questions of fact and law drive these disputes.

                            To the extent Peek argues that this dispute is not arbitrable
                because it does not (and will not) involve UHS, we disagree. UHS has
                ultimate authority to approve or reject change-order requests up to the
                GMP, as increased (or not) by earlier change orders. UHS—not SR—

                rejected Peek's change orders, and UHS cautioned SR against issuing
                payment to Peek without its approval. Potential outcomes of the Peek/SR
                dispute implicate UHS's financial interests—e.g., if the finder of fact
                concludes that Peek's additional costs were reasonable, and SR may seek

                reimbursement from UHS. Indeed, UHS already raised Peek's dispute as a
                matter in question between itself and SR under the prime contract, thus
                permitting consolidation of these common disputes under Section 15.4.4 of
                the prime contract. It is simply too early to tell if UHS will bear financial
                responsibility for Peek's costs, and absent necessary facts in this pre-
                discovery moment, Peek cannot avoid arbitration by strategically omitting
                UHS from its complaint. Phillips, 106 Nev. at 417, 794 P.2d at 718 (holding
                that a party may not use artful pleading to avoid arbitration); see also Seal
                & Co. v. A.S. McGaughan Co., 907 1?.2d 450, 453-55 (4th Cir. 1990) (holding
                that subcontractor must comply with alternative dispute resolution
                provision of the prime contract where the subject dispute involved
                interpretation of the prime contract's terms); Frohberg Elec. Co. v.
                Grossenburg Implement, Inc., 900 N.W.2d 32, 38 (Neb. 2017) (holding that

                issue was arbitrable between subcontractor and contractor even though

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                arbitration clause only referenced disputes between the contractor and
                owner).

                             In sum, the MSA provision incorporates the prime contract
                provision, which is broad, so the presumption of arbitrability applies, which
                Peek fails to rebut. The dispute is therefore arbitrable. And even
                construing the MSA provision narrowly, this dispute is arbitrable because
                it fits within the face of the arbitration provision: SR rnust arbitrate
                whether costs included in a change order are reasonable and reimbursable
                under the prime contract's arbitration agreement. Further, the prime
                contract and the MSA both include consolidation-of-arbitration provisions,

                and UHS is involved in this dispute because it has a potential financial
                interest in it, thus permitting consolidation of the Peek/SR and SR/UHS
                disputes. We therefore reverse the district court's order denying SR,'s
                motion to compel and remand with instructions to the district court to order
                that this matter proceed to arbitration.

                                                              jekti                J.
                                                    Pickering°

                We concur:

                                               J.
                Silver

                Cadish
                         co:iff•J              J.

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                    :                                                  ;7.