by James R. Keller
This article appeared in St. Louis Construction News & Review, p. 14, September-October, 2003.
The Supreme Court of Missouri recently decided that Lafarge Corporation, a lessee, and Dunn Industrial Group, Inc. (DIG), a contractor, must settle their claims against each other in arbitration rather than a Missouri courtroom. This includes their mechanic's lien claims that involve other parties who did not agree to arbitration.
The court decided that a broadly worded arbitration provision requiring that all claims against each other be resolved in arbitration meant exactly that. The case isDunn Industrial Group, Inc. v. City of Sugar Creek, Missouri and Lafarge Corporation, Case No. SC85024 (Mo. 2003), decided August 26.
The arbitration provision provided that "any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association." This is a common, much-used clause in construction contracts.
The project was the design and construction of a new cement plant, known as the Sugar Creek II Cement Plant. DIG sued Lafarge and the owner, the City of Sugar Creek, seeking additional money and the enforcement of its mechanic's lien. Kansas City Electrical Supply Company filed a similar lawsuit against Lafarge and the City seeking to enforce its own mechanic's lien on the property for alleged unpaid work it performed. Kansas City Electrical Supply was not bound by an arbitration provision.
Construction disputes inevitably include mechanic's liens. Since mechanic's liens involve many parties, some of whom did not agree to arbitration, this decision provides significant direction on where and how disputes involving mechanic's liens of multiple parties will be decided.
In Missouri, when more than one contractor/subcontractor seeks enforcement of their mechanic's liens, the lawsuits must be combined into one case, called an equitable mechanic's lien action. This action then becomes, as the court noted, the "exclusive method of litigating liens and other claims pertaining to particular property."
One of the key questions in Dunn was what happens when this equitable mechanic's lien action involves parties who agreed to arbitrate their claims. Must they proceed in a traditional court even though they agreed that arbitration would be the exclusive forum to resolve their disputes?
The Missouri Supreme Court concluded that parties who are bound by arbitration must use arbitration to resolve their disputes even when mechanic's liens are involved. For those who did not agree to arbitration, their lawsuits may proceed in court.
After arbitration is concluded, those parties who were in arbitration can return to court to determine how to enforce their mechanic's liens. At that point the court typically will reconcile their claims with those not bound by arbitration and make an order covering all the mechanic's liens.
The Missouri Supreme Court also decided that a change order did not alter the contract's requirement of arbitration, because the change order did not expressly state that arbitration was not still applicable. The change order had provided that Lafarge and DIG could pursue their "remedies as provided at law." According to DIG, this meant that DIG could proceed in court, since court action clearly was a remedy at law.
The court determined otherwise, finding that the change order did not "clearly, positively, unequivocally, or decisively state that the right and the obligation to arbitrate was modified, limited, or rescinded." While this may seem to be a high standard, it is entirely consistent with the strong support from Missouri's appellate courts for arbitration as shown in court opinions over the past few years.
Lafarge's other challenge was that DIG's parent company, Dunn Industries, Inc. (Dunn), signed a guaranty that guaranteed DIG's performance of its obligations under the contract with Lafarge. Lafarge sued Dunn to honor this guaranty.
The problem was that the written guaranty named Lafarge Canada, Inc., a wholly controlled subsidiary of Lafarge, and not Lafarge itself, as the company entitled to the benefits of the guaranty. Also, the guaranty, while referencing the contract between Lafarge and DIG, did not expressly incorporate by reference its provision requiring arbitration.
The court concluded that the parties intended the guaranty to benefit Lafarge, in part because nothing in the guaranty excluded Lafarge as a party. Thus, Lafarge could sue under the guaranty.
As to arbitration, however, the court determined that since the guaranty did not expressly incorporate by reference the underlying contract that contained the arbitration provision, the guaranty was not subject to arbitration. "Mere reference to the construction contract in the guaranty is insufficient." Thus, the guaranty dispute would have to be decided in court rather than in arbitration.
James R. Keller is a partner at Herzog, Crebs & McGhee, LLP, St. Louis, MO, where he concentrates on construction law, complex business litigation and ADR. He also is a neutral/arbitrator with the American Arbitration Association and a mediator in lawsuits in federal and state court.