Contracting Northwest, Inc. v. City of Fredericksburg
Opinion of the Court
The City of Fredericksburg, Iowa, (the City) appeals from a final order entered in the District Court
In 1980 the City awarded Northwest a general contract to build a water treatment facility for the City. Northwest subcontracted the excavation work for the project to Richmond. The soil from the excavations was to be used to build the embankments for three of the project’s waste water ponds. Problems concerning the excavation developed during the winter of 1980-81. In January, 1981, Northwest wrote to the City's Engineer stating that Northwest had excavated almost all of the soil specified in its contract with the City (254,000 cubic yards), but that there was much more soil on the site that needed to be excavated in order to complete the project. Northwest informed the Engineer that it would be willing to move an additional 40,-000 cubic yards of soil at the original bid
Northwest and the Engineer met to discuss the excavation problem, but in a letter dated April 15, 1981, the Engineer refused to grant Northwest a change order for Richmond’s “additional” excavation work. The Engineer’s letter also informed Northwest that the Engineer had prepared a supplemental drawing outlining remedial measures needed to correct what the Engineer felt were construction deficiencies on the part of Richmond. Northwest did not object to the denial of the change order and it did not demand arbitration of the denial at that time. Northwest contends, however, that it continued discussions with the Engineer until November of 1981 in the hopes of negotiating a change order for the excavation work. Richmond, on the other hand, immediately wrote to Northwest upon learning of the Engineer’s refusal to grant a change order and demanded that Northwest invoke the arbitration provision of Northwest’s contract with the City. Northwest told Richmond that it would not demand arbitration and that Richmond had to continue the excavation or face termination of the subcontract. Richmond complied with Northwest’s demand by continuing the excavation, but Richmond also threatened to sue Northwest over the “extra work.”
In December, 1981, Northwest and Richmond came to an agreement concerning their dispute. The City characterizes this agreement as a “secret” assignment of Richmond’s claims against the City to Northwest, and a release by Richmond of its claims against Northwest. In return, the City claims that Northwest promised to prosecute Richmond’s claims against the City through arbitration and to share with Richmond any possible arbitration award that Northwest might receive. Northwest and Richmond, however, assert that the agreement merely reflects the parties’ understanding that Richmond will delay litigation against Northwest until after Northwest resolves Northwest’s claims against the City.
In January, 1982, Northwest wrote to the Engineer claiming $2 million in costs for extra work already performed. The original contract price for the excavation work was $350,000 and the original contract price for the entire project was only about $1.5 million. The Engineer, through his attorney, responded to Northwest’s claim by requesting full documentation for the claim and directing Northwest to send further correspondence to the Engineer’s attorney. Northwest refused to give the additional documentation and treated the attorney’s letter as a denial by the Engineer of Northwest’s claim for the costs of the extra excavation work. Then, on February 10, 1982, Northwest formally demanded arbitration under its contract with the City. The City resisted arbitration and filed lawsuits against Northwest, Richmond and American for breach of contract in improperly constructing the project’s embankments. Northwest and Richmond both moved to stay the City’s lawsuit pending arbitration of Northwest’s claims against the City under the federal Arbitration Act, 9 U.S.C. §§ 3, 4 (1976). The district court consolidated the City’s lawsuits, issued an order compelling the City to arbitrate with Northwest, and granted a stay of the City’s lawsuit against Northwest, Richmond, and American pending the arbitration between the City and Northwest. The City now appeals.
Because this cause has been brought pursuant to the Arbitration Act, our inquiry is limited to two issues: “(1) whether an express written agreement to arbitrate the subject matter of the present dispute exists between the parties, and (2) if so, whether the agreement to arbitrate
The contract between the City and Northwest actually contains two separate arbitration clauses. The first clause is a “mandatory” arbitration clause. It provides that if one party demands arbitration of a particular dispute governed by the clause, then the other party must submit to arbitration. The mandatory arbitration clause is limited to disputes “about matters involving the decision of the Engineer” and requires that the demand for arbitration must be delivered to the other party within ten days of the Engineer’s decision. The second clause is a “voluntary” arbitration clause. It provides that a dispute governed by the clause can be arbitrated only if both parties consent to the arbitration. The voluntary arbitration clause applies to any dispute between the City and the contractor arising out of the contract that is not covered by the mandatory arbitration clause. The parties agree that if all the conditions precedent to the mandatory arbitration clause are met, the mandatory arbitration clause supersedes the voluntary arbitration clause in governing this dispute. See also Johnson Controls, Inc., at 376-382 (holding, under the facts similar to this case, that the mandatory arbitration clause prevails over the voluntary arbitration clause). The City, however, argues that Northwest has failed to comply with several conditions precedent to the mandatory arbitration clause including (1) the failure to deliver a demand within ten days of the Engineer’s decision; (2) the failure to either certify or document its claim for extra work as required by EPA regulations that were incorporated into the contract; and (3) the failure to comply with the contract’s requirements for properly submitting a claim for an “equitable adjustment” of the contract price. The City also argues that the present dispute is nonarbitrable insofar as Northwest is asserting Richmond’s claims against the City. The City points out that it does not have an arbitration agreement with Richmond, and the City has not agreed to arbitrate the claims of a subcontractor when arbitrating disputes of the prime contractor. The City also asserts that Northwest is barred from pressing Richmond’s claims in arbitration under the Severin doctrine. See Severin v. United States, 99 Ct.Cl. 435 (1943), cert. denied, 322 U.S. 733, 64 S.Ct. 1045, 88 L.Ed. 1568 (1944).
1. Arbitrability
We must first note our agreement with the district court that the present dispute between Northwest and the City “revolves around a ‘decision of the Engineer.’ ” It was the Engineer who refused to issue a change order or accept Northwest’s equitable adjustment claim, and it was the Engineer who issued orders to Northwest and Richmond to remedy deficiencies in the excavation and construction of the embankments. See Contracting Northwest, Inc. v.
This court had a recent occasion to review the difference between “procedural” and substantive objections to arbitration. In Town & Country Ford, Inc., 709 F.2d at 512, 514, we held that notice requirements with stated time limits are procedural objections which will be left to the arbitrator. Hence, the City’s objection that Northwest failed to deliver a demand within ten days of the Engineer’s decision will not be entertained by this court. Similarly, we leave it to the arbitrator to decide the issues of whether Northwest’s claim properly complies with EPA and the contract’s requirements for certification and documentation. These are procedural requirements that go to the merits of the dispute. They do not alter the parties’ contractual obligation to arbitrate any dispute involving an Engineer’s decision. The same is true of the City’s contention that the Severin doctrine renders the present dispute nonarbitrable. Although the substance of the City’s Severin argument appears to be wholly without merit, see note 2 infra, we need not decide the question because it directly bears on the final disposition of Northwest’s claim for additional compensation. It is enough to invoke arbitration that Northwest simply allege that it has been actually harmed by the Engineer’s decisions. The truth or falsity of the allegation will determine whether Northwest will receive compensation from the City. It does not change the fact that the parties have a dispute over the Engineer’s decision. We therefore hold that the City and Northwest have agreed to arbitrate the subject matter of this dispute and that the City has breached the arbitration agreement. The district court’s order compelling the City to arbitration with Northwest is affirmed.
2. The Stay Pending Arbitration
In consolidating Northwest’s lawsuit against the City with the City’s lawsuit against Northwest, Richmond and American, the district court held that both cases involved common questions of law and fact. The district court also found that both cases would require the same witnesses and evidence and that no benefit would be gained by allowing each case to pursue a separate course. Further, the district court found that the issues necessary to the resolution of the City’s cause of action against Richmond and American fell within the scope of the City and Northwest’s arbitration agreement. Thus, having stayed litigation between Northwest and the City pending their arbitration, the district court also stayed the City’s litigation against Richmond and American. The City argues that the stay of its lawsuit against Richmond and American was error because the City had no arbitration agreement with Richmond or American. It is the City’s position that absent an enforceable arbitration agreement between the parties, a stay may not be imposed under the Arbitration Act, 9 U.S.C. § 3. We disagree.
In American Home Assurance Co. v. Vecco Concrete Construction Co., 629 F.2d 961 (4th Cir. 1980), the Fourth Circuit was presented with this precise issue. In American Home Assurance, a general contractor on a waste water treatment plant construction project had subcontracted some of the work. The subcontractor was bonded. When the subcontractor defaulted, each party sued the other. In the end the general contractor was being sued by both
3. The Tenth Amendment
The City raises the same tenth amendment arguments against enforcement of the Arbitration Act as were raised by the City of Cedar Rapids in Johnson Controls, Inc. v. City of Cedar Rapids, 713 F.2d 370, 376-382 (8th Cir. 1983). In Johnson Controls, Inc. we held that the tenth amendment does not bar enforcement of the Arbitration Act against an Iowa municipality. That holding is equally applicable to this case. Accordingly, we affirm the district court’s orders.
. The Honorable Edward J. McManus, Chief Judge, United States District Court for the Northern District of Iowa.
. The Severin doctrine is based on the federal government’s limited waiver of its sovereign immunity for breach of contract and on a federal statute prohibiting assignments of contract claims against the federal government, 31 U.S.C. § 203 (1940). See 41 U.S.C. § 15 (1976). The doctrine holds that a prime contractor may sue the federal government for damages incurred by its subcontractor through the fault of the government, only when the prime contractor has suffered actual damages itself, either because it has reimbursed the subcontractor or remains liable to the subcontractor for those damages. 99 Ct.Cl. at 442-44.
Reference
- Full Case Name
- CONTRACTING NORTHWEST, INC. v. CITY OF FREDERICKSBURG, IOWA, Appellant CITY OF FREDERICKSBURG, IOWA v. CONTRACTING NORTHWEST, INC., American Insurance Company, Inc., and Richmond Excavating Company, Inc.
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