Court Opinion

ID: 812732
Source: CourtListenerOpinion
Date Created: 2012-11-28 19:50:06+00
Date Added: 2024-06-11T18:00:45.747384
License: Public Domain

UNPUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                            No. 12-1014

GREAT AMERICAN INSURANCE COMPANY,

                Plaintiff - Appellee,

           v.

HINKLE   CONTRACTING  CORPORATION,      now   known     as   Hinkle
Contracting Company, LLC,

                Defendant - Appellant.

Appeal from the United States District Court for the Southern
District of West Virginia, at Charleston.  Joseph R. Goodwin,
Chief District Judge. (2:11-cv-00396)

Argued:   October 4, 2012                 Decided:    November 28, 2012

Before KING, KEENAN, and THACKER, Circuit Judges.

Vacated and remanded by unpublished opinion. Judge Keenan wrote
the opinion, in which Judge King and Judge Thacker joined.

ARGUED: Buckner Hinkle, Jr., STITES & HARBISON, PLLC, Lexington,
Kentucky, for Appellant.    Timothy Dale Martin, WARD, HOCKER &
THORNTON, Louisville, Kentucky, for Appellee.   ON BRIEF: Steven
M. Henderson, STITES & HARBISON, PLLC, Louisville, Kentucky;
Stephen Lee Thompson, BARTH-THOMPSON, Charleston, West Virginia,
for Appellant.    Harold F. Salsbery, FROST BROWN TODD, LLC,
Charleston, West Virginia, for Appellee.

Unpublished opinions are not binding precedent in this circuit.
BARBARA MILANO KEENAN, Circuit Judge:

      This appeal concerns the scope of an arbitration clause

contained in a written agreement between a general contractor

and   subcontractor         (the       subcontract),         which    was     incorporated

without      limitation     in     a    performance        bond    issued    by    a    surety

guaranteeing         the    subcontractor’s               obligations.         After       the

subcontractor         defaulted,          the        surety        filed    the        present

declaratory         judgment     action        against       the    general       contractor

seeking to avoid the surety’s obligations under the performance

bond.        The general contractor responded by seeking a dismissal

or    stay     of     the     declaratory           judgment       proceedings         pending

arbitration of the parties’ dispute.

      The district court determined that the surety’s claims were

not arbitrable, holding that the parties intended to exclude

claims brought by the surety under the terms of the performance

bond.         The    district          court    therefore          denied    the       general

contractor’s motion for stay or dismissal of the proceedings

pending arbitration.             We reverse the district court’s decision

based   on     the    broad      scope    of        the   arbitration       clause,     which

manifested the parties’ intent that all claims “arising from or

relating to” the subcontract be subject to arbitration.

                                                2
                                                I.

     In     November          2009,       the       West     Virginia       Department        of

Transportation (WVDOT) hired Hinkle Contracting Corporation, LLC

(Hinkle) as the general contractor for construction of a portion

of a highway in Mingo County.                   Hinkle entered into a subcontract

with Chapman-Martin Excavation and Grading, Inc. (CME or the

subcontractor) to perform the grading and drain work for the

highway project.

     As     required      by       the    subcontract,            CME     obtained    both    a

performance bond and a payment bond.                          Great American Insurance

Company    (Great      American          or   the     surety)      issued     those    bonds,

naming CME as principal and Hinkle as obligee.                              The performance

bond, the only bond at issue in the present case, stated that

Hinkle and CME had entered into the subcontract, and that the

“subcontract      is      by       reference         made     a    part    hereof.”          The

performance      bond     also       stated      that       if    CME   defaulted     on     its

obligations under the subcontract, Great American was required

to remedy CME’s default either by providing for completion of

CME’s     work   or      by    compensating           Hinkle       financially       for     the

reasonable       costs        of    completing         that       work.       Finally,       the

performance bond stated that “[a]ny suit under this bond must be

instituted” within two years from the due date of the final

payment under the subcontract.

                                                3
     After obtaining the required bonds, CME began its work on

the highway project.            In September 2010, Hinkle notified CME

that it was in default for failing to complete certain work.

Hinkle and CME entered into negotiations to cure the default and

ultimately executed a “change order” to the subcontract, which

modified     CME’s     contractual           obligations.        The     change       order

established new deadlines for the completion of various phases

of   CME’s     work,    and    included           provisions     for     an     award   of

liquidated damages to Hinkle in the event that CME defaulted on

its obligations under the change order.

     Several months later, Hinkle again declared CME in default,

citing CME’s failure to complete its work as required by the

subcontract      and   the     change        order.      In     March    2011,       Hinkle

notified Great American that CME was in default and demanded

payment from Great American under the terms of the performance

bond.

     Great     American      filed       a   complaint     in   the     district      court

against      Hinkle    seeking       a       declaratory      judgment        that   Great

American was not liable under the performance bond, primarily

because    the    change      order      materially      altered       “the     financial

obligations under the [s]ubcontract in the event of default by

CME.”     Great American alleged that the terms in the change order

were not “within the reasonable contemplation of Great American”

when it issued the performance bond.

                                              4
       In     an    amended       complaint,        Great    American        raised    an

additional claim.           In that claim, Great American alleged that

Hinkle breached the terms of its contract with WVDOT, which was

incorporated into the subcontract, by failing to pay CME for

work     performed        under      the    subcontract.             Great     American

accordingly        sought    an    order   requiring        Hinkle    to    provide    an

accounting of payments received from WVDOT and to deposit with

the district court funds owed to CME.

       Hinkle filed a motion to dismiss or stay the proceedings

pending arbitration, pursuant to Hinkle’s notice and demand for

arbitration issued in July 2011.                   Hinkle asserted that because

the     performance       bond     incorporated       the     subcontract       in    its

entirety, including the provisions granting Hinkle an exclusive

right    to    demand     arbitration,        Great    American      was    obliged    to

submit its claims to arbitration.

       The language at issue in the subcontract is contained in

Section 16, which is entitled “Dispute Resolution.”                        Included in

this    section      is     a     provision       stating    that    “[a]ll     claims,

disputes,      controversies        and    matters     in   question       (hereinafter

‘Claims’) arising out of, or relating to, this [subcontract] or

the breach thereof . . . shall be resolved by mediation followed

by arbitration or litigation at [Hinkle’s] sole option.”

       The district court denied Hinkle’s motion to dismiss or

stay the proceedings pending arbitration.                     The court concluded

                                              5
that although the arbitration clause states that it applies to

all claims arising out of or relating to the subcontract, other

language in the subcontract demonstrates the parties’ intent to

limit   the   scope   of   arbitrable       disputes.      In   support   of   its

conclusion, the court relied on Section 16.2(e), which details

dispute   resolution       procedures.         That     provision   states,     in

relevant part:

     If   a   disputed    Claim   remains   unresolved    after
     negotiation and mediation, [Hinkle] shall have the
     exclusive option either to have the dispute decided by
     a court or by arbitration . . . . [Hinkle],
     Subcontractor and Subcontractor’s surety agree that
     the   disputed   Claim    shall   be  resolved    in   the
     appropriate forum selected by [Hinkle] at its sole
     discretion.    If Subcontractor or its surety first
     commences a court action with respect to a dispute
     which [Hinkle] desires to have determined by an
     arbitration proceeding, or if Subcontractor or its
     surety first commences an arbitration proceeding which
     [Hinkle] desires to have determined by a court,
     [Hinkle] shall commence the arbitration proceeding or
     court action . . . within thirty (30) calendar days
     after receiving service of Subcontractor’s complaint
     or arbitration demand. If, at any time . . . [Hinkle]
     becomes involved in litigation or arbitration with
     another party or parties involving questions of fact
     or law common to the dispute between [Hinkle] and
     Subcontractor     to    the    extent    that   (a)     in
     Subcontractor’s absence, complete relief cannot be
     accorded   among    those   already   parties,    or   (b)
     disposition of such other action may as a practical
     matter, impair or impede [Hinkle’s] or Subcontractor’s
     ability to fully prevent its incurring multiple or
     otherwise inconsistent obligations, then Subcontractor
     and its surety may be joined by [Hinkle] in such other
     litigation or arbitration proceedings for complete
     resolution of all disputes and controversies arising
     under this [subcontract] and that upon such joinder,
     any pending action between [Hinkle] and Subcontractor
     shall be dismissed. (Emphasis added.)

                                        6
The    court       also   cited       Section       16.2(f),       which      addresses       the

procedure for appointing arbitrators and states, “Subcontractor

and [Hinkle] shall each appoint one member of the [arbitration]

panel,”      and    those      two    members       together      will    appoint       a   third

member of the arbitration panel.                    (Emphasis added.)

       The    district      court      observed          that    the    language    in      these

provisions         included     references          to    the    subcontractor        and     the

surety in some instances, but in other instances referenced only

the subcontractor.              Based on these inconsistencies, the court

determined that claims brought by Great American as surety are

subject to arbitration only when they deal with the rights and

obligations         of    the        subcontractor.             Concluding       that       Great

American’s present claims are not related to CME’s obligations

under the subcontract, but constitute “unique surety claims” or

“surety defenses” arising from obligations under the performance

bond, the court held that Great American’s present claims are

not subject to arbitration.                 Hinkle timely filed in this Court

an appeal challenging the denial of its motion to dismiss or to

compel arbitration.

                                             II.

       Our standard of review in this case is well established.

We    review       de   novo    the    district          court’s       holding   that       Great

American’s      claims      are      not   arbitrable           under   the   terms      of   the

                                                7
subcontract incorporated in the performance bond.                        See Peabody

Holding Co., LLC v. United Mine Workers of Am., Int’l. Union,

665 F.3d 96, 101 (4th Cir. 2011).

       Hinkle      argues     that       because    the        dispute        resolution

provisions      of    Section      16    (the    arbitration      clause)        broadly

encompassed     all       claims   “arising      under    or    relating       to”     the

subcontract, the district court erred in concluding that this

language was limited by other terms of that clause.                            According

to Hinkle, the district court should have examined the scope of

the arbitration clause under the “significant relationship” test

used by this Court in American Recovery Corp. v. Computerized

Thermal Imaging, Inc., 96 F.3d 88, 93 (4th Cir. 1996).                              Hinkle

contends that Great American’s claims are subject to arbitration

under    this      test    because       those   claims    bear     a     significant

relationship         to     the     subcontract,         irrespective          of      the

“suretyship” label that Great American seeks to attach to them.

       In response, Great American argues that it did not agree to

arbitrate disputes concerning the terms of the performance bond

simply by incorporating the subcontract into the bond.                               Great

American asserts that its defenses originate solely under the

performance bond and, thus, constitute “unique” surety defenses

that are not subject to arbitration.               As further support for its

argument, Great American maintains that the word “[c]laims” is

used    in   the     subcontract        solely   with    reference       to    disputes

                                            8
between    CME    and      Hinkle,      or    disputes        between     CME    and     WVDOT.

Thus, according to Great American, only claims involving those

entities    are    subject        to    arbitration           under   the    terms      of   the

subcontract.       Finally, Great American contends that because the

arbitration       clause      allows         only       CME    and    Hinkle     to      choose

arbitrators and only describes disputes arising between them,

the parties did not manifest an intent that Great American be

subject to arbitration of its performance bond obligations.                                  We

disagree with Great American’s arguments.

                                              A.

     We    begin      by    reviewing        the    principles        guiding      a    court’s

determination whether a particular dispute is arbitrable.                                 Under

the Federal Arbitration Act (the FAA), 9 U.S.C. §§ 1-16, a court

is   required      to      stay    an    action         or    proceeding        pending      the

arbitration      of     claims     covered         by   the    terms    of   the       parties’

written agreement.           Adkins v. Labor Ready, Inc., 303 F.3d 496,

500 (4th Cir. 2002) (citing 9 U.S.C. § 3).                            Because the FAA in

essence guarantees the enforcement of a private contract, courts

first must consider the contract’s terms in ascertaining the

scope of an arbitration agreement contained therein.                                   E.E.O.C.

v. Waffle House, Inc., 534 U.S. 279, 294 (2002).

     A     party      may     compel         arbitration          under      the       FAA    by

demonstrating: (1) a dispute between the parties; (2) a written

agreement containing an arbitration provision that could be read

                                               9
as covering the dispute; (3) the relationship of the transaction

to    interstate        or    foreign     commerce,          as     evidenced       by    the

agreement;      and    (4)    the    failure,        neglect,       or    refusal    of   the

defendant to submit the dispute to arbitration.                           See Adkins, 303

F.3d at 500-01.             The issue in the present case relates to the

second        requirement,         raising         the      question        of      contract

interpretation         as     to    whether        Great    American’s          claims    are

arbitrable.      See Am. Recovery, 96 F.3d at 92.

      A party will not be required to arbitrate a dispute that

the   party     has    not    agreed     to   submit       to     arbitration.        United

Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S.

574, 582 (1960).            However, under decisions interpreting the FAA,

courts    must        resolve      any    doubts         concerning       the    scope     of

arbitrable issues in favor of arbitration.                         Moses H. Cone Mem’l

Hosp.    v.    Mercury       Constr.     Corp.,      460    U.S.     1,    24-25     (1983);

Wachovia Bank Nat’l Ass’n v. Schmidt, 445 F.3d 762, 767 (4th

Cir. 2006) (citation omitted).

      An issue will be classified as being outside the scope of

an arbitration provision only when the parties have manifested

such an intent in their written agreement.                         Peabody, 665 F.3d at

104 (citing First Options of Chi., Inc. v. Kaplan, 514 U.S. 938,

944-45 (1995)).          Because sophisticated parties negotiate their

written contracts with an understanding of this policy favoring

arbitration,      courts        require       this       degree     of    clarity     before

                                              10
determining      that    a     particular       claim    is    not     subject      to    an

arbitration provision.            Id. (citing First Options, 514 U.S. at

945).     Thus, when the scope of an arbitration clause remains

“open    to   question”      regarding      the    inclusion         of     a   particular

issue,    a   court     must     declare    that      the     issue    is       subject   to

arbitration.      Peoples Sec. Life Ins. Co. v. Monumental Life Ins.

Co., 867 F.2d 809, 812 (4th Cir. 1989).

                                           B.

      Informed by these principles, we turn to consider whether

the   district     court       properly    concluded        that      the       arbitration

clause excluded Great American’s claims.                      In relevant part, the

arbitration clause states that all claims “arising out of, or

relating to the subcontract or breach thereof . . . shall be

resolved by mediation followed by arbitration or litigation,” at

Hinkle’s sole option.            Courts ordinarily construe such clauses,

which contain the phrase “arising out of or relating to” or

similar language, as having an “expansive reach.”                         Am. Recovery,

96 F.3d at 93 (citing Prima Paint Corp. v. Flood & Conklin Mfg.

Co., 388 U.S. 395, 398 (1967)).

      In partial limitation of this broad language in Section 16,

the   arbitration       clause    contains      one     express      exclusion,       which

appears in Section 16.2(g) of the subcontract.                              This express

exclusion     states     that     “[t]he    provisions         of    this       Section   16

[addressing Dispute Resolution] do not preclude litigation for

                                           11
injunctive relief.”             (J.A. 94.)       No other types of claims are

expressly excluded from arbitration in the arbitration clause.

      The   district       court       nonetheless      determined      that   certain

language     in    Section      16.2(e)     relating      to    dispute    resolution

procedures,       including      three     references      to     the   subcontractor

without accompanying references to the surety, demonstrated the

parties’ intent to exclude from arbitration claims unique to the

surety.     We disagree that the absence of such references to the

surety    manifests    a     clear      intent   to     exclude    Great   American’s

present claims from arbitration, particularly when the surety’s

participation in arbitration proceedings is referenced numerous

times throughout Section 16.2(e).                  See United Steelworkers of

Am., 363 U.S. at 584-85 (in the absence of an express provision

excluding claims, “only the most forceful evidence” of an intent

to exclude can prevail, particularly when the arbitration clause

is broad).

      Most notably, the first part of Section 16.2(e) states that

Hinkle, the subcontractor, and the surety “agree” that after

attempting to negotiate a disputed claim, Hinkle “shall have the

exclusive option either to have the dispute decided by a court

or by arbitration.”             That section also anticipates that either

the   subcontractor        or    its    surety    may    commence       litigation   or

arbitration proceedings.

                                           12
     In addition, contrary to Great American’s contention, the

subcontract      does    not   employ       the    term   “claims”      solely    with

reference to disputes between CME and Hinkle, or those between

CME and WVDOT.        The express language of Section 16 provides that

the term “[c]laims” includes, with exceptions not relevant here,

“[a]ll claims, disputes, controversies and matters in question.”

And, as stated above, the arbitration clause provides that such

claims “arising out of, or relating to, this [subcontract] or

the breach thereof . . . shall be resolved by mediation followed

by arbitration or litigation at Hinkle’s sole option.”

     When read in this context, the references relied on by the

district court demonstrate, at best, an uncertainty concerning

the scope of arbitrable claims asserted by the surety.                           Under

federal   policy,       this   type    of    ambiguity    generally      triggers    a

presumption that such claims are subject to arbitration under

the parties’ agreement.          See Moses H. Cone Mem’l Hosp., 460 U.S.

at 24-25.        Thus, we turn to consider whether Great American’s

claims    against     Hinkle    fall    within      the    broad   scope     of   the

arbitration clause, as claims “aris[ing] under or relat[ing] to”

the subcontract.

     Great    American     asserts      that      its   claims   bear    a   general,

rather    than    a   significant,      relationship       to    the    subcontract,

because those claims are “surety defenses” arising under the

                                            13
bond.      We disagree with this attempt to shield the claims from

the broad reach of the arbitration clause.

      In    American      Recovery,    we    explained      that   in   contrast     to

narrow arbitration clauses, which only encompass claims “arising

under” a contract, broad arbitration clauses like the present

one     embrace    “every     dispute       between     the   parties      having     a

significant       relationship”    to   the      contract,    regardless     of     the

label that a party chooses to assign to a particular claim.                         96

F.3d at 93 (citing J.J. Ryan & Sons v. Rhone Poulenc Textile,

S.A., 863 F.2d 315, 321 (4th Cir. 1988)); see also Wachovia, 445

F.3d at 767; Long v. Silver, 248 F.3d 309, 316-17 (4th Cir.

2001).      In determining whether such a significant relationship

exists, a court must review the factual allegations underlying

the particular claim and evaluate the connection between those

allegations and the contract containing the arbitration clause.

Am. Recovery, 96 F.3d at 93.

      Great    American      alleged    in       its   primary     claim   that     its

obligations       under    the   performance       bond   were     void,   based     on

Hinkle’s material alteration of the subcontract by effecting the

change order.       In support of this claim of material alteration,

Great American asserted that: (1) the change order included a

liquidated        damages     provision,         contrary     to     the    original

provisions of the subcontract prohibiting such damages; and (2)

the change order included new deadlines for CME’s completion of

                                            14
work that were not contained in the original subcontract.                      We

conclude that the allegations contained in this claim bear a

significant relationship to the subcontract, because they are

premised on the differences between the terms of the subcontract

and the terms of the change order.

      Great American also alleged in its amended complaint that

Hinkle    breached    the   terms    of    the   subcontract,       which   fully

incorporated Hinkle’s contract with WVDOT, when Hinkle failed to

pay CME for completed work upon Hinkle’s receipt of payment for

that work from WVDOT.         Because this claim on its face requires

an   examination     of   Hinkle’s   obligations     under    the    subcontract

regarding payment to CME, we conclude that this claim also bears

a significant relationship to the subcontract.                Accordingly, we

conclude   that    Great    American’s     present   claims    against      Hinkle

bear a significant relationship to the subcontract, regardless

of the particular label that Great American assigns to them.

See Am. Recovery, 96 F.3d at 93 (citing J.J. Ryan & Sons, 863

F.3d at 321).        Given this significant relationship between the

claims asserted and the subcontract, we hold that those claims

fall within the scope of the arbitration clause. *

      *
       We are not persuaded by Great American’s argument that                 the
performance bond incorporated the subcontract only for                        the
purpose of defining Great American’s secondary obligations,                   and
did not bind Great American to the arbitration clause.                        The
incorporation of the subcontract into the performance bond                    was
(Continued)
                                      15
                                    III.

     For these reasons, we hold that the district court erred in

denying    Hinkle’s   motion     seeking    dismissal      or    stay   of   the

proceedings    pending   arbitration.         We   therefore       vacate     the

district   court’s    judgment    and     remand   the    case    for   further

proceedings   consistent   with    the     principles     expressed     in   this

opinion.

                                                         VACATED AND REMANDED

not qualified or limited in any manner, and the performance bond
lacks any language reflecting an intent by the parties to
resolve disputes in a manner inconsistent with the terms of the
subcontract.   Additionally, Great American’s reliance on AgGrow
Oils, LLC v. National Fire Ins. Co. of Pittsburgh, PA, 242 F.3d
777 (8th Cir. 2001), is unpersuasive, based on the dissimilar
language in the performance bond in that case regarding
litigation of disputes.

                                     16