Opinion
FSTCV176033023S
07-10-2019
330 RAILROAD AVENUE, LLC v. JCS CONSTRUCTION GROUP, INC. et al.
UNPUBLISHED OPINION
Editor’s Note: Additions are indicated by Text and deletions by Text.
OPINION
Hon. A. William Mottolese, Judge Trial Referee
This is an action for damages, both compensatory and punitive, arising out of a subcontract between the defendant JCS Construction Group, Inc. (JCS) and New England Masonry and Roofing Company (New England) for the reconstruction of an office building in which the substituted plaintiff is New England’s assignee. The complaint also contains similar claims against Justin Shaw (Shaw), individually, the principal of JCS. The subcontract in question contains the following arbitration clause: "Any controversy, claim or dispute arising out of or relating to this Subcontract and the Contract Documents, or the breach hereof, shall be settled and resolved by arbitration pursuant to the Construction Industry Rules of the American Arbitration Association which are in effect on the date of this Agreement. The arbitration shall not be heard and administered by the American Arbitration Association, but shall be heard by Arbitrator, as determined by the Contractor, who will be appointed to hear and administer all arbitrations initiated pursuant to this Subcontract. The Subcontractor and Contractor hereby consent and agree to the appointment of the Arbitrator as selected by the Contractor, to hear all arbitrations. A demand for arbitration shall be made in writing, delivered to the other party to this Subcontract, and filed with Mark C. Durkin, Esq., 328 Selleck St., Stamford, CT 06902 (203) 388-2313. The party filing a demand for arbitration must assert in the demand all claims then known to that party on which arbitration is being demanded. The Subcontractor shall pay all the fees, costs and expenses of the Arbitration, the Contractor may pay them on behalf of the Subcontractor and the Contractor shall be entitled to a credit for such expenditures in the Arbitration Award."
On the basis of this clause JCS has filed a motion to dismiss or in the alternative, a motion to stay this suit in favor of arbitration. JCS has provided no authority for the proposition that the existence of an arbitration clause deprives the court of subject matter jurisdiction to proceed with the litigation at this point in time. In Catrini v. Erickson, 113 Conn.App. 195, 196-97 (2009) our Appellate Court rejected an identical claim in the following language. "Subject matter jurisdiction involves the authority of the court to adjudicate the type of controversy presented by the action before it ... [A] court lacks discretion to consider the merits of a case over which it is without jurisdiction ..." (Internal quotation marks omitted.) Bloomfield v. United Electrical, Radio & Machine Workers of America, Connecticut Independent Police Union, Local 14, 285 Conn. 278, 286 (2008).
"The fact that General Statutes § 52-409 allows a court to enter a stay in a matter involving an arbitration agreement belies the defendants’ claim, and the trial court’s implicit ruling, that an agreement to arbitrate ousts the court of its subject matter jurisdiction. If the existence of an arbitration agreement in a contract implicated the court’s jurisdiction to hear an action, then a court would, accordingly, not have jurisdiction to stay such a matter because, in the absence of jurisdiction, the court may only dismiss a matter. In short, because the power to order a stay implies that the court has jurisdiction over a matter, the legislature could not have empowered the court to enter a stay in such a matter unless the court has jurisdiction over it." (Alternate citations omitted.) Accordingly, the motion to dismiss is denied.
The court now turns to the request for alternative relief under G.S. § 52-409 which provides as follows. "If any action for legal or equitable relief or other proceeding is brought by any party to a written agreement to arbitrate, the court in which the action or proceeding is pending, upon being satisfied that any issue involved in the action or proceeding is referable to arbitration under the agreement, shall, on motion of any party to the arbitration agreement, stay the action or proceeding until an arbitration has been had in compliance with the agreement, provided the person making application for the stay shall be ready and willing to proceed with the arbitration." (Emphasis added.)
At the outset, JCS has provided no authority to support the assertion that Shaw, as nonsignatory to the arbitration agreement, as opposed to JCS, is entitled to arbitrate under this agreement. As a matter of law, the contrary is true. A party who is not a party to a written agreement to arbitrate who voluntarily participates in the arbitration renders the arbitration award invalid as to him because only a signatory to a written agreement is eligible to participate. Pinard v. Dandy Lions, LLC, 119 Conn.App. 368 (2010).
The plaintiff resists arbitration on the following grounds: (a) JCS has waived any right it might have to arbitrate by its conduct; (b) the arbitration clause is unenforceable due to mutual mistake; (c) by its terms the arbitration clause is impossible to perform; and (d) the arbitration clause violates public policy. Each will be considered in turn.
Waiver
"Waiver is the intentional relinquishment or abandonment of a known right or privilege ... Waiver does not have to be express, but may consist of acts or conduct from which waiver may be implied." (Citations omitted; internal quotation marks omitted.) AFSCME, Council 4, Local 704 v. Dept. of Public Health, supra, 272 Conn. 623. "[U]njustifiable delay in seeking arbitration may warrant a finding of waiver ... The same result follows from going to trial without insisting upon the arbitration condition." (Citation omitted.) Batter Building Materials Co. v. Kirschner, supra, 142 Conn. 11. Indeed, our courts have found waiver when a party engages in substantial litigation without asserting its right to arbitrate. See e.g., Waterbury Teachers Assn. v. Waterbury, supra, 164 Conn. 435 (party waived right to arbitrate by proceeding to trial on identical issues as those claimed for arbitration); Mattie & O’Brien Contracting Co. v. Rizzo Construction Pool Co., 128 Conn.App. 537, 542-43 (party waived right to arbitrate by participating in two years of pretrial activities before filing motion to stay), cert. denied, 302 Conn. 906 (2011); Grey v. Connecticut, Indemnity Services, Inc., 112 Conn.App. 811, 814-16 (2009) (party waived right to arbitrate by engaging in three years of litigation before filing motion to compel arbitration on eve of trial." (alternative citations omitted) (emphasis added). MSO, LLC v. Desimone, 313 Conn. 54, 64 (2014).
In addition to a waiver assessment of the conduct of the party seeking arbitration, "a party seeking to assert the defense of waiver must show that he was substantially prejudiced which can be either procedural or substantive to the party opposing the arbitration." MSO, LLC v. DeSimone, 313 Conn. at 67-68. On the basis of the record accumulated so far, the court cannot find either type of prejudice. In the interest of judicial economy the court incorporates by reference the factual summary set forth in its June 5, 2019 Memorandum of Decision on the plaintiff’s application for prejudgment remedy (#158).
In support of its waiver claim the plaintiff charges JCS with dilatory conduct in failing to demand arbitration at the inception of the lawsuit brought against it by New England in August 2017. That suit was brought in three counts: the first seeking foreclosure of a mechanic’s lien; the second, breach of contract against JCS; third, a claim of violation of G.S. § 42-158j. On September 26, 2017 JCS was defaulted for failure to appear but subsequently filed an appearance before a judgment of default could enter. See P.B. § 17-20(d). In February 2018 the plaintiff and New England entered into a settlement agreement pursuant to which New England assigned all of its rights to the plaintiff which it acquired under its subcontract with JCS. On April 6, 2018 the plaintiff became the substitute plaintiff in place of New England and on June 7, 2018 JCS filed the current motion to dismiss/stay and has sought arbitration ever since.
The lapse of time between the commencement of litigation to the demand for arbitration is but one of several factors which the court must consider when evaluating procedural prejudice. In the present case, the delay was eight months in which JCS did nothing to advance or retard the proceeding. There are two reasons why it would be improper to infer waiver from JCS’s inaction. First, New England brought the action against the plaintiff as the primary defendant seeking as its principal remedy, a foreclosure against the plaintiff’s building. Not only was the foreclosure not subject to arbitration, it was not strategically unreasonable for JCS to await the outcome of the foreclosure and any negotiations between the two parties which may have concluded before becoming actively involved. In fact, up to the time that JCS appeared in the action, the only activity that occurred in the case related strictly to the foreclosure and not the remaining counts of the complaint. Second, the plaintiff did not become the substitute plaintiff until April 6, 2018, twenty days prior to the demand for arbitration which is embodied in the current motion. Thus, although JCS could have demanded arbitration against New England it could not have demanded arbitration against the plaintiff until at the very earliest, February 2018, the date of the settlement agreement, because prior to that time JCS would have had no right of arbitration against the plaintiff pursuant to New England’s contract with JCS since the plaintiff had not become a party to the arbitration agreement by assignment until then.
By no means can JCS be said to have been involved in "substantial litigation" as required in the DeSimone case for a finding of waiver, Hartford v. McKeever, 139 Conn.App. 277, 285 (2012) (the assignor’s right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance). In DeSimone at footnote 14, the court catalogued a "nonexhaustive list" of relevant factors which our courts have considered in deciding arbitration waiver. Each and every one of the specified factors involve activities which were far more extensive than those in which JCS has engaged in the present case. Most persuasive of these examples is found in Rush v. Oppenheimer & Co., 779 F.2d 885 (2d Cir. 1985), cited with approval in Advest, Inc. v. Wachtell, 235 Conn. 559, 569 (1995), wherein the court concluded that the defendant’s extensive involvement over the course of eight months in the litigation, including taking rather extensive discovery, bringing a motion to dismiss, filing an answer with thirteen affirmative defenses to the amended complaint, and incurring expenses, all without raising the right to arbitration, did not constitute prejudice to his opponent and a waiver of the right to arbitrate, stating that "because on this record none of the factors cited by the district court, whether viewed individually or in combination, warrants a finding of waiver of arbitration." Id. at 887.
The plaintiff makes two discreet claims of prejudice, viz: attorneys fees incurred during the delay and the need to litigate against Justin Shaw while "simultaneously arbitrating claims against JCS." The docket reveals that from the time the plaintiff became the substituted plaintiff to the time of this dispute the plaintiff has made two filings: (1) a motion to cite in Justin Shaw, and (2) a memorandum in opposition to the current motion. All prior filings were related directly to the foreclosure proceeding and were directed at New England and not JCS. The plaintiff has offered no legal authority for its implicit claim that time devoted to the foreclosure should be tacked on to the time devoted to this dispute. As for attorneys fees, the plaintiff has not quantified the amount claimed in affidavit form or otherwise. Nevertheless, it can hardly be said that the limited time devoted to these filings constitutes substantial prejudice. Likewise, the plaintiff has failed to demonstrate how a separate proceeding against Shaw whether "simultaneous" or not would cause material harm, bearing in mind the high improbability that the two proceedings would be conducted simultaneously.
Mutual Mistake/Impossibility of Performance
These two grounds will be considered together because by the court’s analysis neither applies to the facts of this case. The plaintiff’s contentions concerning both doctrines derive from the particular language employed by the parties in drafting the arbitration clause. The difficulty arises from the textual requirements that the arbitration be conducted pursuant to the Construction Industry Rules of the American Arbitration Association (the Rules) while at the same time requiring that the American Arbitration Association (AAA) not administer the arbitration.
The plaintiff points out that the Rules (1) expressly require that the AAA administer any arbitration whenever the parties agree to proceed to arbitration under the AAA Construction Rules; and (2) expressly prohibit use of the rules if the arbitration is not administered by the AAA or its authorized designee. JCS does not dispute either assertion. Thus, the plaintiff argues that the parties were mistaken when they entered into such an agreement and because of that the arbitration agreement is subject to the doctrine of impossibility of performance.
The Court will first consider the principle of mutual mistake. An arbitration provision in an agreement is, in effect, a separate and distinct agreement. Nussbaum v. Kimberly Timbers, Ltd., 271 Conn. 66, 72 (2004). The factual predicate for finding a mutual mistake is that both parties relied on the same mistake and information in entering into the contract. BRJM, LLC v. Output Systems, Inc., 100 Conn.App. 143, 148 (2007). A mutual mistake requires a mutual misunderstanding between the parties as to a material fact. Id. As defined in Ballentine’s Law Dictionary, 3rd Ed. at 782, a material mistake is one which defeats the very object of the transaction. In Connecticut, a material fact is defined as "a fact which will make a difference in the result of the case." Hammer v. Lumberman’s Mutual Casualty Co., 214 Conn. 573, 578 (1990). Thus, the claimed mistake of the parties concerning the usability of the rules must have been material to their agreement to arbitrate. Parenthetically, while the plaintiff seeks a ruling that the claimed mistake renders the arbitration agreement unenforceable, "[R]eformation is appropriate in cases of mutual mistake- that is where, in reducing to writing an agreement made or transaction entered into as intended by the parties thereto, through mistake, common to both parties, the written instrument fails to express the real agreement or transaction. 5 Pomeroy, Equity Jurisprudence (2d Ed.) § 2096; 53 C.J. p. 941; Amer. Law Institute Restatement, Contracts, Vol. 2, § § 504, 505 ... [R]eformation is also available in equity when the instrument does not express the true intent of the parties owing to mistake of one party coupled with fraud, actual or constructive, or inequitable conduct on the part of the other. 5 Pomeroy, Equity Jurisprudence (2d Ed.) § 2097; 53 C.J. p. 949 ..." (Citations omitted.) Home Owners’ Loan Corporation v. Stevens, 120 Conn. 6, 9-10 (1935). "Here, there was neither a claim nor proof of a mutual mistake, fraud or inequitable conduct on the part of either party." (alternative citation omitted) Harlach v. Metropolitan Property & Liability Ins. Co., 221 Conn. 185, 191 (1992). It is curious that the plaintiff does not seek the remedy of reformation but rather seeks to have the arbitration provision declared unenforceable. For the reason that follows in the present case reformation would be a particularly suitable remedy to facilitate the unmistakable desire of the parties to arbitrate their disputes.
Related to the concept on mutual mistake in the present case is the principle of impossibility of performance. As a general rule, "Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary." West Haven Sound Development Corporation v. West Haven, 201 Conn. 305, 313 (1986). In the present case the event in question is the inability to utilize the procedural arbitration rules which existed at the time the agreement was entered and subsequent thereto. In Roy v. Stephen Pontiac-Cadillac, Inc., 15 Conn.App. 101 (1988) the court applied the doctrine to an existing impossibility and not to a supervening impossibility. As the plaintiff has informed in its brief, Connecticut has adopted the Restatement Second, Contracts, Section 266, which for application of the doctrine, requires that the fact involved constitute a "basic assumption on which the contract is made." In other words, in the present case, the assumption of fact must be basic or material to the arbitration provision.
Materiality
It is well established that "parties are free to contract for whatever terms on which they may agree." Holly Hill Holdings v. Lowman, 226 Conn. 748, 755 (1993). "Parties do not ordinarily insert meaningless provisions in their agreements and, therefore, if it is reasonably possible to do so, every provision must be given effect." Mack Financial Corporation v. Crossley, 209 Conn. 163, 168-69 (1988); Hatcho Corporation v. Della Pietra, 195 Conn. 18, 23 (1985); Roby v. Connecticut General Life Ins. Co., 166 Conn. 395, 402-03 (1974); Connecticut Co. v. Division 425, 147 Conn. 608, 617 (1960). We are reluctant to conclude that a contractual provision "constitutes a meaningless gesture by the parties." Mack Financial Corporation v. Crossley, supra, 169. The rules of construction "dictate giving effect to all the provisions of a contract, construing it as a whole and reconciling its clauses (alternate citations omitted). Dainty Rubbish Service, Inc. v. Beacon Hill Assn., Inc., 32 Conn.App. 530, 534 (1993).
In view of this case law, the dispositive issue for the court is whether the provision in the arbitration clause which requires use of the Rules is material to the arbitration agreement and whether it is severable from the remainder of the arbitration clause. JCS argues that this dispute makes the provision fall within the gray area of arbitrability and therefore the "positive assurance test" ought to be applied. The court disagrees. The gray area test applies only to a dispute over the scope of coverage of the dispute. White v. Campner, 229 Conn. 465, 473 (1994). The parties here do not disagree on the scope of coverage. Rather, the dispute focuses on whether, as a matter of law, the parties have frustrated their intent to arbitrate by incorporating an arbitral procedure which would violate the Rules. Whether such a provision is material to the arbitration clause has not been addressed by our courts. The only relevant decision which has been brought to the court’s attention is Tozier v. Ward Electric Co., 2005 Conn.Super LEXIS 1278. In that case the court deemed a similar provision to be "an exercise in futility" and therefore concluded that the arbitration was impossible to perform, relying on the four-part test set forth in Sink v. Meadow Wood Country Estates, 18 Conn.App. 565, 575-76 (1989).
Approaching the issue from a different perspective, our Supreme Court has declared that G.S. § 52-408 (Connecticut Arbitration Statute) is similar to Section 2 of the Federal Arbitration Statute, Nussbaum v. Kimberly Timbers, Ltd., 271 Conn. at 73, n.6, supra, and specifically the decisions of the United States Court of Appeals for the Second Circuit, Dayner v. Archdiocese of Hartford, 301 Conn. 759, 783-84 (2001). The only Connecticut case which could be found which involved contractual selection of arbitration rules is Carabetta Builders, Inc. v. Hotz Corporation, 30 Conn.App. 157, 160 (1993). That court relied on the United States Supreme Court’s analysis of federal arbitration law. In doing so our Appellate Court recognized that "Arbitration under the [FAA] is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate ... so too may they specify by contract the rules under which that arbitration will be conducted." In Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 476 (1989) the court emphasized that "there is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure enforceability ... of private agreements to arbitrate." Moreover, a series of United States District Court decisions within the Second Circuit instruct that "courts within this circuit have routinely rejected the argument that the procedural rules governing arbitration constitute essential terms," Hudson Specialty Insurance Co. v. New Jersey Transit Corp., 2015 WL 354258 (S.D.N.Y. 2015) citing Hojnowski v. Buffalo Bills, Inc., 995 F.Supp.2d 232, 237 (W.D.N.Y. 2014). See also, Wework Companies, Inc. v. Zoumer, 2016 WL 1337280 (S.D.N.Y.).
The plaintiff seeks to distinguish these cases from the present case by arguing that in the Second Circuit cases the parties to the arbitration agreement did not identify the particular rules that would govern the arbitration whereas the current parties have designated a set of rules which cannot be used. A similar argument was made in Meskill v. GGNSC Still-water Greeley, LLC, 862 F.Supp.2d 966 (DC.Minn. 2012). There, the arbitration agreement required that binding arbitration "be conducted ... in accordance with the National Arbitration Forum (NAF) Code of Procedure which is hereby incorporated into this agreement." In the present case, the arbitration clause does not incorporate the Rules into the agreement by reference but like the present case, the Meskill court concluded that "on its face this provision does not mandate that the NAF actually conduct the arbitration, it requires only that the NAF Code be applied by the arbitrator," id. at 972. In the present case the arbitration clause expressly negates administration by the AAA. In rejecting Meskill ’s contention that the unavailability of the NAF Code of rules dooms the arbitration agreement the court responded with the following analysis which is applicable here. "When an arbitration clause selects an arbitral forum’s rules but does not expressly designate that forum to hear the matter, arbitration may be compelled notwithstanding the forum’s unavailability. See e.g., Reddam v. KPMG LLP, 457 F.3d 1054, 1059-61 (9th Cir. 2006), abrogated on other grounds by Atl. Nat’l Trust LLC v. Mt. Hawley Ins. Co., 621 F.3d 931 (9th Cir. 2010)." Significantly, as do the Rules, the NAF Code limits use of its Rules and procedures to arbitrations "administered only by the NAF or any entity or individual providing administrative services by agreement with NAF." The Meskill court adopted the following rationale which it borrowed from Wright v. GGNSC Holdings, LLC, 808 N.W.2d 114 (S.D. 2011). "We acknowledge that the NAF rules did provide that only the NAF could administer its Code of Procedure. But we find that point of little significance. A review of the NAF Code reflects that NAF administration involved what is commonly provided by many arbitration services available today. More importantly, Wright has not identified any unique NAF administrative provision that would have substantively affected the outcome of this arbitration. The NAF Code did not require the application of any particular substantive law. It required that the arbitrator apply the "applicable substantive law."
Procedurally, the NAF’s responsibility to administer its Code is of even less significance ... [B]oth Wright ’s and GGNSC ’s [cited] authorities recognize that although a substitute arbitrator may not administer the NAF Code, a competent substitute arbitrator can apply the NAF’s rules of procedure that public codes cover.
We conclude that designation of the NAF Code of Procedure did not require an "NAF arbitrator"; a substitute arbitrator could apply common procedural rules like those found in the NAF Code of Procedure and public domain; and a substitute arbitrator would be required to apply the same substantive law. Therefore, the parties’ contractual expectations regarding both the substantive and procedural aspects of arbitration would not be frustrated by [requiring arbitration]. Wright, 808 N.W.2d at 120-21 (citations omitted); accord, e.g., Levy v. Cain, Watters & Assocs., P.L.L.C., No. 2:09-cv-723, 2010 WL 271300, at *6 (S.D.Ohio Jan. 15, 2010) (finding "no apparent reasons why the NAF rules cannot be applied by a substitute arbitrator"); Adler v. Dell, Inc., No. 08-cv-13170, 2009 WL 4580739, at *3 (E.D.Mich. Dec. 3, 2009) (same); Zechman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 742 F.Supp. 1359, 1362-65 (N.D.III. 1990). This Court agrees and rejects Meskill ’s argument that "agreeing to use the [NAF] Code is the same as agreeing to arbitrate before [the] NAF." Id. at 973-74.
The essential predicate to any agreement to arbitrate is the intent of the parties to the agreement as manifested by the language they use. "The intention to have arbitrability determined by an arbitrator can be manifested by an express provision or through the use of broad terms to describe the scope of arbitration, such as "all questions in dispute and all claims arising out of the contract or "any dispute that cannot be adjudicated." (Citation omitted.) Welch Group, Inc. v. Creative Drywall, Inc., 215 Conn. 464, 467 (1990). (Alternate citation omitted.) Since the text of the arbitration agreement in the present case is equally broad as that found in the Welch Group case there is no doubt that the parties had an overarching intention to arbitrate all of their disputes and that intent overrides the inability to utilize the Rules. "As with any other contract, the parties’ intentions control, but those intentions are generously construed as to issues of arbitrability." Mitsubishi Motors Comp. v. Soler Chrysler Plymouth, Inc., 473 U.S. 614, 626 (1985).
As a remedy for the frustration of the parties’ inability to use the NAF Code the Meskill court fell back on Section 5 of the Federal Arbitration Act which provides as follows: "If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any other reason there shall be a lapse in the naming of an arbitrator or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein." (Emphasis added.) Id. at 974. Not surprisingly, Connecticut’s counterpart to this provision is similar. G.S. § 52-411(b) provides in pertinent part as follows: "If no method is provided therein, or if a method is provided and any party thereto fails to use the method, or if for any other reason there is a failure in the naming of an arbitrator or arbitrators or an umpire, or if any arbitrator or umpire dies or is unable or refuses to serve, upon application by a party to the arbitration agreement, the superior court for the judicial district in which one of the parties resides ... shall appoint an arbitrator or arbitrators or an umpire, as the case may require. A person so appointed an arbitrator or umpire shall act under any arbitration agreement with the same force and effect as if he had been specifically named or referred to therein." (emphasis added). JCS characterizes the remedy of supplying a substitute set of rules as "gap filling." As the court pointed out in Meskill, the particular rules which govern the arbitration are not integral or material to the agreement to arbitrate. Thus, in the words of both the federal and Connecticut statutes, if for any reason the "method" fails, the parties may apply to the court for relief. This court believes that it is significant that G.S. § 52-411(b) goes even further in its scope than the federal statute because unlike the federal statute the Connecticut statute makes specific reference to the failure of a party (here the plaintiff) "to use the method prescribed in the arbitration agreement." 2 This court agrees with the District Court that should the rules provision be deleted from the agreement, § 52-411(b) provides a statutory remedy which would "fill the gap" left by the deletion.3 With this analysis the court concludes that because the overarching intent of the parties was to arbitrate, (a) the Rules are not a material part of the arbitration agreement; (b) the parties may proceed to arbitration under any appropriate set of rules; (c) if the parties cannot agree on a set of rules resort may be had to the court pursuant to G.S. § 52-411(b).
Severability
As further support for its claim that the rules provision, if unworkable, should not defeat the clear intent of the parties to arbitrate, JCS argues that the provision is severable from the remainder of the agreement, relying on paragraph 29 the agreement which provides as follows: "The invalidity or unenforceability of any one or more of the provisions of this Subcontract and the Contract Documents shall not render any other provision invalid or unenforceable. Any provision found to be invalid or unenforceable shall be deleted therefrom."" ‘[I]t is the general rule that a severable contract is one in its nature and purpose susceptible of division and apportionment.’ Pacific Timber Co. v. Iowa Windmill & Pump Co., 135 Iowa, 308, 310 [1907]. The determinative test is in ascertaining from the language used, read in the light of the surrounding circumstances, what was the intention of the parties. Loud v. Pomona Land & Water Co., 153 U.S. 564 (1894)]. Hartford-Connecticut Trust Co. v. Cambell, 95 Conn. 399, 405 (1920). In determining the severability of the contract, the court looks to whether the contract’s ‘parts and its consideration are common to each other’ or independent of one another. Id.; see also Timely Products, Inc. v. Costanzo, 465 F.Supp. 91, 97 n.6 (D.Conn. 1979) ("singleness or apportionability of the consideration rendered is a principal test in judging severability"). (alternate citations omitted). Venture Partners, Ltd. v. Synapse Technologies, Inc., 42 Conn.App. 109, 118 (1996). The court must therefore determine whether that portion of the arbitration clause which conflicts with the Rules can be severed from the contract in such a way that the parties’ overarching intent to arbitrate may be given effect.
As noted above, the parties agree that the AAA explicitly prohibits use of the Rules if the arbitration is not administered by it and expressly requires that whenever the rules are used, the arbitration be conducted by the AAA. JCS has suggested that the following provision of the arbitration clause be deleted (severed) from the arbitration clause without affecting the remainder of the agreement because the gap filling procedure referred to above may be utilized to provide a substitute set of arbitration rules and for the selection of an arbitrator. The arbitration shall not be heard and administered by the American Arbitration Association, but shall be heard by Arbitrator as determined by the Contractor, who will be appointed to hear and administer all arbitrations initiated pursuant to this Subcontract. The Subcontractor and Contractor hereby consent and agree to the appointment of the Arbitrator as selected by the Contractor, to hear all arbitrations. A demand for arbitration shall be made in writing, delivered to the other party to this Subcontract, and filed with Mark C. Durkin, Esq., 328 Selleck St., Stamford CT 06902 (203) 388 2313. (Deletions identified by lineout.) While Connecticut case law recognizes the severability of invalid or unenforceable contract provisions, Deming v. Nationwide Insurance Company, 279 Conn. 769, n.21 (2006), so far as this court could find, it has not yet done so in the context of arbitration. Accordingly, pursuant to Connecticut’s practice of resorting to federal arbitration jurisprudence in the absence local precedent, the court turns to that body of law for guidance, see e.g. Magnan v. Anaconda Industries, 193 Conn. 558, 567 (1984), Aetna Casualty & Surety Co. v. Murphy, 206 Conn. 409, 413 (1988); Hoskins v. Titan Value Equities Group, Inc., 252 Conn. 789, 793 (2000).
The leading federal case on the issue of severability in the context of arbitration is Parilla v. IAP Worldwide Servs. VI, Inc., 368 F.3d 269 (3rd Cir. 2004). This case involved a provision in an arbitration agreement that was claimed to be unconscionable and therefore unenforceable. In remanding the case to the District Court for further consideration of this issue, the court determined that the applicable rule with respect to severability was reflected in Section 603 of the Restatement (First) of Contracts and Section 184 of the Restatement (Second) of Contracts. The former provides as follows: "A bargain that is illegal only because of a promise or a provision for a condition, disregard of which will not defeat the primary purpose of the bargain, can be enforced with the omission of the illegal portion by a party to the bargain who is not guilty of serious moral turpitude unless this result is prohibited by statute. Recovery is more readily allowed where there has been part performance of the legal portion of the bargain." Restatement (First) of Contracts § 603 (1932) ... Section 184 of the Restatement (Second) of Contracts similarly provides: "(1) If less than all of an agreement is unenforceable under the rule stated in § 178 [governing unenforceability on the grounds of public policy], a court may nevertheless enforce the rest of the agreement in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange. (2) A court may treat only part of a term as unenforceable under the rule stated in Subsection (1) if the party who seeks to enforce the term obtained it in good faith and in accordance with reasonable standards of fair dealing."
"Applying these severability principles, we concluded in Spinetti as follows: In light of the proarbitration federal policy and Pennsylvania contract law, we believe that the ... task before us is to decide whether the stricken portion of the employment arbitration agreement constitutes ‘an essential part of the agreed exchange’ of "The essence of the [disputed] contract ... is an agreement to settle ... employment disputes through binding arbitration." Gannon v. Circuit City Stores, Inc., 262 F.3d 677, 681 (8th Cir. 2001). Accordingly, we agree with the district court that "[t]he provisions regarding payment of arbitration costs and attorneys fees represent only a part ‘of [the] agreement and can be severed without disturbing the primary intent of the parties to arbitrate their disputes.’" Spinetti v. Serv. Corp. Int’l, 240 F.Supp.2d 350 (W.D.Pa. 2001) (opinion and order of court) [hereinafter D.Op.] (quoting Gannon, 262 F.3d at 681). You don’t cut down the trunk of a tree because some of its branches are sickly." Id. at 286-87.
Because the court found a putatively unconscionable arbitration provision severable, its reasoning applies with even greater force to one that has been determined to be nonessential and therefore nonmaterial to the agreement to arbitrate. So, pursuant to Venture Partners Ltd. v. Synapse Technologies, Inc., supra, this court concludes that the provision under examination is susceptible of division and apportionment and that the provision is independent of the remainder of the arbitration clause. Moreover, the court finds that it satisfies the test set forth in the Restatement of Contracts, supra, because there is no evidence that either party to the agreement engaged in "serious misconduct" at the time the agreement was entered into. Additionally, the severance which JCS proposes includes abandonment of its exclusive right to select the arbitrator, thereby obviating the need for this court to assess whether the named arbitrator, Mark C. Durkin, should be disqualified pursuant to the court’s equitable power, see Metropolitan District Commission v. Conn. Resources Recovery Authority, 130 Conn.App. 132, 144 (2011).
"[W]here it is clear from the language of an agreement that the parties intended to be bound and there exists an objective method for supplying a missing term, the court should endeavor to hold the parties to their bargain." Wework Companies, Inc. v. Zoumer, 2016 WL 137280 at 34, supra .
Public Policy
The plaintiff contends that the arbitration provision is unenforceable because it violates public policy in that it requires it "to unconditionally pay for all the costs of any arbitration regardless of who initiates it and regardless of who prevails." The plaintiff equates this provision to one which requires indemnification of a party for his own negligence. In support of this claim the plaintiff analogizes to G.S. § 52-572k which, in pertinent part, provides as follows: "(a) Any covenant, promise, agreement or understanding entered into in connection with or collateral to a contract or agreement relative to the construction, alteration, repair or maintenance of any building, structure or appurtenances thereto including moving, demolition and excavating connected therewith, that purports to indemnify or hold harmless the promisee against liability for damage arising out of bodily injury to persons or damage to property caused by or resulting from the negligence of such promisee, such promisee’s agents or employees, is against public policy and void, provided this section shall not affect the validity of any insurance contract, workers’ compensation agreement or other agreement issued by a licensed insurer." In addition, the plaintiff cites two lines of cases in which (a) liquidated damages clauses have been held to be penalty clauses and (b) those which relieve a party of liability for his own negligence, arguing that both provisions have been held to be against public policy. For whatever reason, JCS has offered no separate analysis of this claim except to state that the parties intended to submit to the arbitrator all claims and disputes relating to the subcontract. Therefore, this court will infer that JCS believes that this issue likewise should be included for resolution by the arbitrator. This necessitates an inquiry by this court as to whether the public policy issue identified should be submitted to the arbitrator or whether the court should address it in the first instance.
Generally the court will give effect to a severability clause when the clause being severed is not a necessary part of the contract. The absence of a severability clause tends to indicate that a contract is entire and not severable. 17A Am.Jur .2d, Contracts, § 395.
To be sure, our courts have reviewed arbitral awards for public policy violations on numerous occasions. In Nussbaum v. Kimberly Timbers, Ltd., 271 Conn. at 75, n.7, supra, our Supreme Court made the following observation. "We note that courts routinely consider public policy claims after they have been decided by arbitrators. See, e.g., State v. New England Health Care Employees Union, District 1199, AFL-CIO, 265 Conn. 771, 782-83 (2003) (issue of whether arbitration award violates public policy reviewed de novo by court); Groton v. United Steelworkers of America, 254 Conn. 35, 45 (2000) (same); Schoonmaker v. Cummings & Lockwood of Connecticut, P.C., 252 Conn. 416, 429 (2000) (same)." (alternate citations omitted) (emphasis added). The court in Schoonmaker made it clear that a reviewing court is better suited to evaluate whether certain facts as found by the arbitrator comport with the specific public policy at issue. Id., 430. Thus, it is the policy of this jurisdiction that a reviewing court adjudicate public policy issues after the award has been rendered, not before because "often the question of whether the award does so will not arise until after the award has been rendered." Id. (emphasis added). This issue is therefore reserved for the arbitrator.
For the foregoing reasons this action is stayed pending arbitration.