Terry Harrington v. City of Council Bluffs

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 11-2749
___________
M.A. Mortenson Company, *
a Minnesota corporation, *
*
Plaintiff/Appellee, *
* Appeal from the United States
v. * District Court for the
* District of Minnesota.
Saunders Concrete Company, Inc., *
a New York corporation, *
*
Defendant/Appellant, *
*
Hartford Fire Insurance Company, *
a Connecticut corporation, *
*
Defendant. *
___________
Submitted: March 13, 2012
Filed: April 30, 2012
___________
Before MURPHY and GRUENDER, Circuit Judges, and ROSS, District Judge.1
___________
MURPHY, Circuit Judge.
The Honorable John A. Ross, United States District Judge for the Eastern1
District of Missouri, sitting by designation.

-- 1 of 7 --

M.A. Mortenson Company brought this action to compel arbitration with
Saunders Concrete Company, Inc. concerning a dispute arising out of a wind turbine
project. The district court granted the motion to compel, and Saunders appeals. We2
affirm.
Mortenson was the general contractor on a wind turbine project in Herkimer
County, New York. It hired Saunders, a ready mix concrete company, as a
subcontractor to supply concrete for the project, and the two parties entered into a
subcontract agreement. Saunders' performance under the subcontract was guaranteed
by a performance bond provided by Hartford Fire Insurance Company. According
to Mortenson, test results revealed in the fall of 2010 that the concrete Saunders had
supplied was defective, causing Mortenson to incur over $4.5 million in repair costs.
Mortenson declared Saunders to be in default of the subcontract and called upon
Hartford to perform under its performance bond. Hartford did not reimburse
Mortenson.
This appeal concerns Article 21 of the subcontract, entitled "Disputes," which
contains four separate paragraphs designated as sections 21.1 through 21.4. Each
paragraph describes how a particular type of dispute should be handled. Section 21.1
provides that if arbitration is provided for in the "Contract Documents," Mortenson
"in its sole discretion" may demand arbitration of any dispute under the subcontract.
The third paragraph, § 21.3, directs that if the "Contract Documents provide
administrative procedures for resolution of disputes," the subcontractor will comply
with those procedures and refrain from "legal or other proceedings" against
Mortenson until the administrative procedures have been exhausted.
The Honorable Donovan W. Frank, United States District Judge for the2
District of Minnesota.
-2-

-- 2 of 7 --

Section 21.2, the second paragraph, is the significant one for this case. It
directs that "if Mortenson, in its sole discretion, elects to demand arbitration with
Subcontractor," then "any dispute arising between Mortenson and Subcontractor
under the Agreement . . . shall be decided by arbitration in accordance with [the rules
of the American Arbitration Association]" and proceedings "shall be held in
Minneapolis, Minnesota." Section 21.2 applies where, as here, "the Contract
Documents do not provide for arbitration."
The fourth paragraph, § 21.4, governs situations where the subcontractor
asserts claims against the owner or architect. It provides that "Subcontractor agrees
not to institute (and to stay) legal or other remedies against Mortenson until all legal
proceedings against Owner with respect to such claim are final and complete."
Further, the subcontractor's right of recovery arising from the owner or architect's
conduct is limited to what is “recovered from Owner and Mortenson shall not be
liable to Subcontractor for any monies or other relief except those paid to Mortenson
by Owner for the benefit of Subcontractor." Section 21.4 concludes, "Subcontractor
. . . agrees to make no claim to further payment beyond the Subcontract Price arising
out of the acts, errors, or omissions of Owner or Architect, . . . other than to the extent
that Mortenson may receive funds from Owner on behalf of Subcontractor. . . ."
On March 31, 2011, Mortenson filed a demand for arbitration with the
American Arbitration Association (AAA), naming subcontractor Saunders and
Hartford as respondents and asserting claims of negligence and breach of contract.
Mortenson's demand stated that the subcontract contained an arbitration agreement
"which provides for arbitration under the Arbitration Rules of the [AAA]." Saunders
did not respond to the demand but instead filed suit in New York state court, alleging
various claims against Mortenson and three other defendants. It also moved for a stay
of arbitration.
-3-

-- 3 of 7 --

Before the New York court ruled on Saunders' stay motion, Mortenson brought
this action in the federal district court in Minnesota, seeking an order compelling
arbitration under § 4 of the Federal Arbitration Act (FAA). After the New York court
ordered the arbitration proceedings to be temporarily stayed, Mortenson removed the
state court case to federal court in the Northern District of New York. That court
denied Saunders' motion to stay the arbitration proceedings and issued a stay in the
case brought by Saunders, noting that its claims were likely to be resolved "in
connection with the proceedings in the District of Minnesota or in arbitration."
In its arguments opposing Mortenson's motion pending in the District of
Minnesota to compel arbitration, Saunders contended that § 21.4 of the subcontract
contained a "pay-if-paid" provision which violated New York lien law, see N.Y. Lien
Law § 34, and that therefore the entire Disputes article was unenforceable. It also
argued that the arbitration agreement was unconscionable.
The Minnesota district court granted Mortenson's motion to compel arbitration
with Saunders. It determined that it did not need to resolve the issue of whether §3
21.4 violates New York law. That was because § 21.2, the arbitration provision
Mortenson sought to enforce, was a "separate provision containing a specific
agreement to arbitrate." The court also concluded that the arbitration agreement was
not unconscionable. Saunders appeals. On its appeal it renews its arguments that the
entire Disputes article in the subcontract, §§ 21.1–21.4, is one unified agreement to
arbitrate, that § 21.4 contains a "pay-if-paid" provision which violates New York law,
that Article 21 is therefore unenforceable, and that the arbitration agreement is
unconscionable.
The motion to compel arbitration with Hartford was denied by the district3
court; that order has not been appealed.
-4-

-- 4 of 7 --

We review de novo a district court's grant of a motion to compel arbitration
under § 4 of the FAA. 3M Co. v. Amtex Sec., Inc., 542 F.3d 1193, 1198 (8th Cir.
2008). The FAA "establishes a liberal federal policy favoring arbitration
agreements." Lenz v. Yellow Transp., Inc., 431 F.3d 348, 351 (8th Cir. 2005)
(citation omitted). A motion to compel arbitration must be granted "if a valid
arbitration clause exists which encompasses the dispute between the parties." 542
F.3d at 1198; see 9 U.S.C. §§ 2, 4. Saunders does not contest that the arbitration
clause would encompass the dispute. Instead, it argues that the arbitration agreement
is void under New York law. We look to state contract law to determine "whether an
enforceable arbitration agreement exists," Donaldson Co., Inc. v. Burroughs Diesel,
Inc., 581 F.3d 726, 731 (8th Cir. 2009), and the parties agree that New York law
governs the interpretation of the subcontract.
The district court relied on the Supreme Court's decision in Rent-A-Center,
West, Inc. v. Jackson, 130 S. Ct. 2772, 2778 (2010), to resolve the dispute. It
determined that Saunders' reliance on § 21.4 was irrelevant to its decision. That was
because § 21.2 of the subcontract was a "separate provision containing a specific
agreement to arbitrate" and was thus severable from the other sections. Saunders
argues that the four paragraphs of the Disputes article function together as the
"specific agreement to arbitrate" and that § 21.2 cannot be severed since it is merely
one clause in an integrated arbitration agreement. It contends that § 21.4 is invalid
under New York law, making the entire Article 21 unenforceable.
In Rent-A-Center, the Supreme Court held that a court must enforce a "specific
agreement to arbitrate" despite a litigant's challenges to the contract as a whole or to
another provision of the contract. 130 S. Ct. at 2778. The Court refused to consider
the plaintiff's challenge to the agreement as a whole, holding that "[a]s a matter of
substantive federal arbitration law, an arbitration provision is severable from the
remainder of the contract." Id. (citing Buckeye Check Cashing, Inc. v. Cardegna, 546
U.S. 440, 445 (2006)). Thus, a challenging party in arbitration disputes must attack
-5-

-- 5 of 7 --

the validity of the specific arbitration provision sought to be enforced. 130 S. Ct. at
2778–79.
We conclude that § 21.2 of the subcontract between Mortenson and Saunders
is a separate provision containing a specific agreement to arbitrate. We therefore
need not consider Saunders' attack on the legality of § 21.4. See Rent-A-Center, 130
S. Ct. at 2778. Each of the four paragraphs in the Disputes article governs a different
type of dispute. Only § 21.1 and § 21.2 mention arbitration, but they cannot be part
of one "specific agreement to arbitrate" since they are mutually exclusive. Only §
21.2 applies to the current dispute which is one where the contract documents do not
provide for arbitration. Arbitration is therefore governed by the AAA rules. In
contrast, § 21.1 applies in a situation where the contract documents themselves call
for arbitration. The third paragraph, § 21.3, is not an arbitration clause. Instead, §
21.3 governs situations in which the contract documents call for administrative
procedures for dispute resolution, a situation not applicable in this case. Nor does §
21.4 make any mention of arbitration. Section 21.4 details how a subcontractor can
pursue claims against the owner as opposed to claims against a contractor.
The cases cited by Saunders, which treated multiple paragraphs as a single
agreement to arbitrate, are factually distinct. Unlike cases involving one multi
paragraph arbitration provision outlining a unified arbitration process, e.g., Bridge
Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1006 (9th Cir. 2010),
the separate paragraphs in the Disputes article in the subcontract here detail distinct
and in part mutually exclusive processes for resolving different types of disputes.
Since § 21.2 is the specific agreement to arbitrate which Mortenson sought to
enforce in this case, only challenges to the validity of that provision could render the
arbitration agreement unenforceable. Rent-A-Center, 130 S. Ct. at 2779. The district
court thus correctly concluded that Saunders' challenge to § 21.4 based on New York
-6-

-- 6 of 7 --

lien law is irrelevant. Any challenge to the validity of the contract as a whole "should
. . . be considered by an arbitrator, not a court." Buckeye, 546 U.S. at 446.
The only remaining issue is Saunders' argument that the arbitration agreement
is unconscionable. Saunders argues that the agreement is procedurally
unconscionable because it had no ability to negotiate it, and further that the provision
is substantively unconscionable because it gives Mortenson "sole discretion" to
choose whether to arbitrate and unduly burdens Saunders by requiring it to travel to
Minnesota to arbitrate.
We conclude that § 21.2 is not unconscionable. The mere fact that a party had
no opportunity to negotiate a form contract is "not sufficient under New York law to
render the provision procedurally unconscionable." Nayal v. HIP Network Servs.
IPA, Inc., 620 F. Supp. 2d 566, 571 (S.D.N.Y. 2009). Courts have similarly rejected
Saunders' argument that an arbitration agreement is substantively unconscionable
because it gives one party the sole discretion to choose arbitration, see Sablosky v.
Gordon Co., 73 N.Y.2d 133, 138–39 (N.Y. 1989), and Saunders offers no authority
indicating that a forum selection clause agreed to by two sophisticated business
entities could be substantively unconscionable.
Accordingly, we affirm the order of the district court.
______________________
-7-

-- 7 of 7 --