Foodbrands Supply Chain Services, Inc.
v.
Terracon, Inc.

This case is not covered by Casetext's citator
United States District Court, D. KansasDec 8, 2003
CIVIL ACTION No. 02-2504-CM (D. Kan. Dec. 8, 2003)

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  • finding a contract dispute to be governed by an arbitration clause in a separate contract incorporated by the first contract when the clause stated "[a]ny controversy or Claim arising out of or related to the Contract, or the breach thereof, shall be settled by arbitration"

    Summary of this case from Irsik & Doll Feed Servs., Inc. v. Roberts Enters. Invs., Inc.

CIVIL ACTION No. 02-2504-CM

December 8, 2003


MEMORANDUM AND ORDER


This action arises out of a construction project performed on plaintiff Foodbrands Supply Chain Services Inc.'s (Foodbrands) property in Olathe, Kansas. As a result of Foodbrands' dissatisfaction with the construction project, Foodbrands brought this action on September 30, 2002, against defendant Terracon Inc. (Terracon) alleging breach of contract, breach of express warranty, negligence, and negligent misrepresentation. Foodbrands filed a third amended complaint on May 14, 2003, adding as defendants George J. Shaw Construction Company, Inc. (Shaw) and Harris Construction Company, Inc. (Harris) and claiming that Shaw and Harris each breached the respective contracts they had with Foodbrands. This matter comes before the court on Shaw's Motion to Dismiss or in the Alternative to Stay this Action and Compel Arbitration (Doc. 53) and Harris' Motion to Compel Arbitration and Stay Action (Doc. 67).

I. Background

On July 29, 1999, Terracon and Foodbrands entered into a written contract pursuant to which Terracon agreed to perform geotechnical testing and services for a new facility Foodbrands proposed to construct at its Olathe, Kansas site (the Project). Terracon performed geotechnical testing and services pursuant to the contract. Specifically, on or about January 31, 2000, Terracon submitted a written proposal to Foodbrands with respect to its performance of testing and observation services in connection with the Project. During the period of February 2000 through April 2001, Terracon performed construction testing, inspection, and observation services at the Project to assure that the work at the Project was properly performed, to verify that the conditions at the Project were consistent with the design, and to evaluate changed conditions as necessary. Terracon issued written reports to Foodbrands and invoiced Foodbrands for such services.

On March 3, 2000, Foodbrands and Shaw entered into two separate construction contracts. The first contract obligated Shaw to, among other things, furnish all labor, material, tools, equipment, and services required to perform all exterior concrete paving on the Project. Under the second contract, Shaw agreed to perform all services required for the excavation and grading work on the Project. Shaw performed work on the Project including, but not limited to, subgrade preparation, surface grading, and concrete placement and finishing. Terracon was not a party to either of the contracts between Foodbrands and Shaw.

Then, on May 1, 2000, Foodbrands and Harris entered into a contract under which Harris agreed to perform construction services on the Project. Pursuant to its contract with Foodbrands, Harris performed concrete paving and subgrade preparation work on the Project and served as the Project Coordinator. As the Project Coordinator, Harris was responsible for, among other things, coordinating construction and operations of the work performed under each contract; coordinating sequencing and scheduling of the work on the Project, providing quality-assurance and quality-control services, and coordinating the schedule of tests and inspections. Terracon was not a party to the contract between Foodbrands and Harris.

Both contracts between Foodbrands and Shaw and the contract between Foodbrands and Harris incorporate American Institute of Architects Document A201/CMa, General Conditions of the Contract for Construction (1992 ed.), which requires arbitration of any disputes between the parties. AIA Document A201/CMa General Conditions states in relevant part:

4.9 ARBITRATION

4.9.1 Controversies and Claims Subject to Arbitration. Any controversy or Claim arising out of or related to the Contract, or the breach thereof, shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. . . .
4.9.7 Judgment on Final Award. The award rendered by the arbitrator or arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof, (emphasis added).

Foodbrands, Shaw and Harris all agree that the arbitration clause is part of their respective contracts.

On November 27, 2002, Foodbrands filed its amended complaint against Terracon, alleging breach of contract, breach of express warranty, negligence, and negligent misrepresentation. Foodbrands alleged that, because of Terracon's actions and misrepresentations regarding the Project, Foodbrands incurred physical injury and property damage to the concrete parking areas that were constructed by contractors other than Terracon. Foodbrands claimed that it might incur partial or complete loss of use of the concrete parking areas unless such parking areas were repaired.

On December 6, 2002, Terracon filed its answer to Foodbrands' amended complaint. As part of its affirmative defenses, Terracon asserted that any damages Foodbrands had sustained were caused by or contributed to by the acts and omissions of other parties. Terracon also contended that Foodbrands and others engaged in the design and construction of the Project were negligent, barring any claim against Terracon. Terracon alternatively pled that its negligence should be compared with the negligence of others pursuant to Kan. Stat. Ann. § 60-258(a). Terracon did not specify Harris and Shaw as other parties at fault. Terracon also has not moved to add Harris and Shaw as parties pursuant to § 60-258(a).

On May 14, 2003, Foodbrands filed a third amended complaint, adding Harris and Shaw as defendants. In addition to its original claims against Terracon, Foodbrands added claims against Harris for breach of contract, breach of warranty, and indemnification, and claims against Shaw for breach of contract and breach of warranty, claiming that Foodbrands incurred physical injury and property damage to the new concrete driving and parking areas constructed as part of the Project — under the oversight of both Harris and Shaw. Foodbrands also contends that, because of Harris and Shaw's work on the Project, it may lose use of those concrete parking and driving areas until and unless they are repaired. Foodbrands has requested only economic damages against Harris and Shaw.

Harris and Shaw have filed similar motions requesting that the court stay this case and compel Foodbrands to participate in arbitration of the dispute pursuant to the terms of their respective contracts with Foodbrands. Foodbrands opposes the motions and claims that, under Kansas' comparative fault and one trial rule, it is entitled to address its claims against Terracon, Harris and Shaw in one legal proceeding.

II. Standard for Enforcement of Arbitration Clause

Harris and Shaw urge this court to compel arbitration of Foodbrands' claims against them under the Federal Arbitration Act, 9 U.S.C. § 1 et seq (FAA). The FAA ensures that written arbitration agreements in maritime transactions and transactions involving interstate commerce are "valid, irrevocable, and enforceable." 9 U.S.C. § 2. Federal policy favors arbitration agreements and requires that the court "rigorously enforce" them. Shearson/Am. Exp., Inc., v. McMahon, 482 U.S. 220, 226 (1987) (quoting Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985)); see Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001). "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Mem'l. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983).

Section 3 of the FAA states:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.
9 U.S.C. § 3.

The question of whether the parties agreed to arbitrate a dispute is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise. ATT Techs., Inc. v. Communication Workers of Am., 475 U.S. 643, 649 (1986). Arbitration is a matter of contract between the parties. A party can only be made to submit to arbitration those disputes that they have agreed to submit to arbitration. Id. at 648; see also Avedon Eng'g., Inc. v. Seatex, 126 F.3d 1279, 1283 (10th Cir. 1997).

When a contract contains an arbitration provision, there is a presumption of arbitrability. See ATT, 475 U.S. at 650. A request to arbitrate a dispute should not be denied unless the arbitration clause does not cover the dispute at issue. Any doubts should be resolved in favor of coverage under the arbitration clause. Id. (citing United Steelworkers of Am. v. Warrior Gulf Nav. Co., 363 U.S. 574, 582-83 (1960)); see also Denhardt v. Trailways, Inc., 767 F.2d 687, 689 (10th Cir. 1985). Moreover, when a contract contains a broad arbitration clause, with no express provision excluding a particular issue from arbitration, there is a strong presumption in favor of issues being subject to arbitration. Id.; see also Brown v. Coleman Co., Inc., 220 F.3d 1180, 1184 (10th Cir. 2000). A party can overcome this presumption by showing the agreement to arbitrate is not part of a contract involving interstate commerce or is revocable on grounds that exist at law or equity for revocation of any contract. See 9 U.S.C. § 2; see also Avedon Eng'g., 126 F.3d at 1286.

Although Foodbrands agrees that its contracts with Harris and Shaw contain an arbitration clause, Foodbrands opposes Harris and Shaw's motions to compel arbitration, claiming that (1) its contracts with Harris and Shaw are governed by Kansas law and not federal arbitration law, (2) Kansas comparative fault principles preclude arbitration of its claims against Harris and Shaw, (3) Kansas arbitration law does not favor arbitration of tort claims, and (4) compelling arbitration of its claims against Harris and Shaw may result in inconsistent results and increase the delay, complexity and cost of resolving its disputes with Harris, Shaw and Terracon.

III. Analysis

A. Choice of Law

Foodbrands contends that the choice of law provisions in its two contracts with Shaw and its one contract with Harris dictate that Kansas law governs the enforcement of the contracts, including any issue over enforcement of the arbitration clause. Thus, Foodbrands asks the court to examine Kansas' arbitration law instead of federal arbitration law to determine whether Foodbrands should be compelled to arbitrate its claims against Shaw and Harris.

The "Federal Arbitration Act, 9 U.S.C. §§ 1-16, which applies to all arbitration agreements "involving commerce," "create[s] a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act." Moses H. Cone Mem'l. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). Kansas courts have determined that the FAA preempts state laws that conflict with the FAA and exempt enforcement of arbitration agreements that involve interstate commerce, In re: Arbitration Between Ins. Intermediaries, Inc. and Harbor Underwriters, Inc., No. 02-2156-JWL, 2002 WL 1602417, at *2, n. 1 (D. Kan. July 17, 2002); Biomat, Inc. v. Sampson, 28 Kan. App. 2d 242, 244, 15 P.3d 846 (2000); Skewes v. Shearson Lehman Bros., 250 Kan. 574, Syl. ¶ 1, 829 P.2d 874 (1992), unless the parties clearly agree to exclude certain claims from the scope of their arbitration agreement or to follow state rules of arbitration. Housh v. Dinovo Invs., Inc., No. Civ. A. 02-2562-KHV, 2003 WL 1119526, at *6 (D. Kan. Mar. 7, 2003); see also Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 59(1995).

The issue of whether the parties' contracts involved commerce under the FAA is governed by federal substantive law. Biomat, Inc., 28 Kan. App. at 245, 15 P.3d 846. The test is whether the transaction in fact involved interstate commerce. Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 281 (1995); see also Biomat, Inc., 28 Kan. App. 2d at 245, 15 P.3d 846. In making this determination, the court looks at relevant factors in addition to the parties' diversity of citizenship, including the nature of the parties' businesses. Biomat, Inc., 28 Kan. App. 2d at 246-248, 15 P.3d 846; see also Allied-Bruce, 513 U.S. at 282; Baer v. Terminix Intern. Co., LTD. P'ship., 975 F. Supp. 1272, 1278 (D. Kan. 1997).

Foodbrands does not claim that its contracts with Harris and Shaw do not involve interstate commerce.

In this case, Foodbrands is a Delaware corporation with its principal place of business in Oklahoma City, Oklahoma. Shaw is a Missouri corporation with its principal place of business in Kansas City, Missouri. Harris is a Kansas corporation with its principal place of business in Lawrence, Kansas. The contracts between Foodbrands and Shaw, and Foodbrands and Harris, were formed regarding the Project on Foodbrands' property in Olathe, Kansas. Because of the complete diversity of citizenship of the parties, the interstate character of Foodbrands, and the parties' engagement in a business venture in Olathe, Kansas, this court finds that the Project and the parties' contracts involved interstate commerce. See Biomat, Inc., 28 Kan. App. 2d at 246-248, 15 P.3d 846; see also Allied-Bruce, 513 U.S. at 282; Baer, 975 F. Supp. at 1278.

Foodbrands entered into contracts with Shaw and Harris that incorporate a broad arbitration clause stating that parties will resolve by arbitration any controversy or claim arising out of or related to the contracts, or the breach of the contracts. The contracts do not specify that the Kansas Uniform Arbitration Act (KUAA) will govern the arbitration clause. Rather, the parties agreed to settle disputes through arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. The contracts also do not contain any provision exempting certain types of claims from the arbitration clause. Absent a provision that specifically provides that the KUAA will govern the issues subject to arbitration, or that the parties did not intend to include the claims at issue in the arbitration provision, the court finds that the FAA controls. See Housh, 2003 WL 1119526 at *8-9. Therefore, the court finds that the contracts between Foodbrands and Shaw, as well as the contract between Foodbrands and Harris, involve interstate commerce and are subject to the federal law of arbitrability.

B. Comparative Fault

Foodbrands wants to avoid arbitration of its claims against both Shaw and Harris, claiming that its negligence claim against Terracon and Terracon's stated defense to the negligence claim create comparative fault issues that make Shaw and Harris necessary parties to this litigation. Foodbrands argues that Kansas' comparative fault law dictates that Foodbrands have one trial against all parties who may be at fault.

Foodbrands has not alleged a negligence claim against Shaw or against Harris. In fact, the only tort claims Foodbrands asserts in its third amended complaint are against Terracon. In response to Foodbrands' negligence claims, Terracon asserted comparative negligence defenses but did not specify Harris and Shaw as other parties at fault.

Section 60-258a(c) states:

On motion of any party against whom a claim is asserted for negligence resulting in death, personal injury, property damage or economic loss, any other person whose causal negligence is claimed to have contributed to such death, personal injury, property damage or economic loss, shall be joined as an additional party to the action.

Kan. Stat. Ann. § 60-258a. While Terracon stated that its negligence should be compared to the negligence of others, including Foodbrands, Terracon did not move to add other parties as defendants in the lawsuit under § 60-258a. Instead, Foodbrands, on its own motion, amended its complaint to add Shaw and Harris as defendants, but alleged only claims arising out of its contractual relationships with Shaw and Harris and requested only economic damages. Foodbrands failed to allege any tort claims against Shaw and Harris. Because Terracon has not added Shaw and Harris as parties for the purpose of comparing negligence under § 60-25 8a, and Foodbrands has alleged only contractual claims against Shaw and Harris, the negligence claims in this lawsuit are against Terracon alone.

Kansas courts interpreting § 60-258a have found that, where multiple parties could be at fault for tort claims and a plaintiff chooses to proceed against only one party, that party will be responsible only for its proportionate share of damages. Haysville U.S.D. No. 261 v. GAF Corp., et al., 233 Kan. 635, 640-41, 666 P.2d 192 (1983) (citing Ellis v. Union Pacific R.R. Co., 231 Kan. 182, 643 P.2d 158 (1982)). Thus, while Foodbrands is entitled to pursue its negligence claim(s) against Terracon, Terracon will be held responsible only for its proportionate share of any damages.

To the extent Foodbrands claims that it has brought negligence claims against Harris and Shaw (although not specifically pled in its third amended complaint), Foodbrands cannot avoid arbitration by calling its cause of action something that sounds in tort, when in reality the cause of action is based on the parties' contracts. Beeson v. Erickson, 22 Kan. App. 2d 452, 455-56, 917 P.2d 901 (1996). Rather, a tort action must have some independent basis for damages beyond those caused by the alleged breach of contract. Heller v. Martin, 14 Kan. App. 2d 48, 54-55, 782 P.2d 1241 (1989). Kansas courts and the Tenth Circuit have consistently refused to allow tort claims to co-exist with breach of contract claims when the two are grounded in the same facts. See Isler v. Texas Oil Gas Corp., 749 F.2d 22 (10th Cir. 1984); Ritchie Enter. v. Honeywell Bull, Inc., 730 F. Supp. 1041 (D. Kan. 1990); L.R. Foy Constr. Co., Inc. v. Prof'l Mech. Contractors, 13 Kan. App. 2d 188, 194, 766 P.2d 196 (1988); Ford Motor Credit Co. v. Suburban Ford, 237 Kan. 195, 699 P.2d 992 (1985). Doing so would permit plaintiffs to proceed on claims in tort and contract, thereby allowing the potential for double recovery.

In this case, Foodbrands' relationships to both Harris and Shaw are purely contractual. The causes of action Foodbrands has brought against Harris and Shaw are based on the parties' contracts, and Foodbrands requests only economic damages arising out of the alleged breaches by Harris and Shaw. While Foodbrands may contend, which it is entitled to do, that Harris and Shaw acted negligently in performing their contractual duties, such claims arise out of the parties' contractual relationships and are part of Foodbrands' breach of contract claims, not separate tort claims.

Moreover, to the extent Foodbrands claims that Kansas' comparative negligence statute applies to Foodbrands' breach of contract claims against Terracon, Harris or Shaw, this court disagrees. Kansas courts have held that comparative or contributory negligence principles do not apply to breach of contract cases where a plaintiff has requested only economic damages as a remedy. See Haysville, 233 Kan. at 643-645, 666 P.2d 192; Broce-O'Dell Concrete Prods., Inc. v. Mel Jarvis Constr. Co., 6 Kan. App. 2d 757, 634 P.2d 1142 (1981).

As a result, Foodbrands' argument that it should be allowed to pursue its claims against Terracon, Harris and Shaw in one action is unpersuasive. While Foodbrands' claims against Terracon, Harris and Shaw all arose out of the Project, Foodbrands had separate contracts with each defendant, which created separate duties and rights for each of the parties. Foodbrands has alleged breach of contract and tort claims against Terracon, but only breach of contract claims against Harris and Shaw. Foodbrands' contracts with Harris and Shaw include a broad arbitration clause that applies to any controversy or claim arising out of or related to the contracts. Under the FAA, and in light of the all-encompassing language of the arbitration clause, this court will enforce the arbitration clause. See Brown, 220 F.3d at 1180.

C. Arbitration of Tort Claims

Foodbrands argues that the policy of Kansas arbitration law is to not enforce arbitration of tort claims. The KUAA states that tort claims are not subject to arbitration. Kan. Stat. Ann. § 5-401(c). However, as the court noted above, Foodbrands has no pending tort claims against either Harris or Shaw. Moreover, even if Foodbrands had alleged negligence or some other tort claim against Shaw or Harris, Foodbrands could not avoid arbitration of the tort claim(s) since the FAA, and not the KUAA, governs the arbitration of Foodbrands' claims against Shaw and Harris. The FAA contains no exception for tort claims. R. J. Palmer Constr. Co. v. Wichita Band Instrument Co., 7 Kan. App. 2d 363, 365, 642 P.2d 127 (1982); see also Biomat, Inc., 28 Kan. App. 2d at 248, 115 P.3d 846.

D. Public Policy Regarding Arbitration

Foodbrands also argues that compelling arbitration of its claims against Harris and Shaw may result in inconsistent results and increase the delay, complexity and cost of resolving this dispute. This court finds Foodbrand's public policy arguments against arbitration unpersuasive. Foodbrands entered into separate, individual contracts with Harris, Shaw and Terracon regarding their respective roles in the Project. Foodbrands' contracts with Harris and Shaw incorporate a broad arbitration clause that is clear and unambiguous: it applies to any controversy or claim arising out of or related to the contracts. Foodbrands does not deny the arbitration clause is part of its contracts with Harris and Shaw.

Public policy favors enforcing contracts as they are written. See D.R. Lauck Oil Co., Inc. v. Breitenbach, 20 Kan. App. 2d 877, 879, 893 P.2d 286 (1995) (holding that when a contract is not ambiguous, the court's function is to enforce the contract as it is written). Moreover, when a contract contains a broad arbitration clause, such as the one at issue in this case, there is a strong presumption in favor of arbitration. See Brown, 220 F.3d at 1184; 9 U.S.C. § 2. Because Foodbrands has not shown the agreement to arbitrate is ambiguous, and has not overcome the presumption in favor of arbitration, this court will enforce the arbitration clause as it is written.

IT IS THEREFORE ORDERED that Shaw's Motion to Dismiss or in the Alternative to Stay this Action and Compel Arbitration (Doc. 53) is granted in part and denied in part. The court finds that Foodbrands' claims against Shaw are subject to arbitration and are hereby stayed pending arbitration. Shaw's Motion to Dismiss is therefore denied.

IT IS FURTHER ORDERED that Harris' Motion to Compel Arbitration and Stay Action (Doc. 67) is granted. The court finds that Foodbrands' claims against Harris are subject to arbitration and are hereby stayed pending arbitration.

IT IS FURTHER ORDERED that the parties shall proceed to arbitration in accordance with the provisions of the arbitration clause.

IT IS FURTHER ORDERED that this court shall retain jurisdiction to review, modify, or vacate any arbitration awards, should any party choose to seek such action as permitted by the FAA.