United States District Court, Northern District of California
November 19, 2004
FUJIAN PACIFIC ELECTRIC COMPANY LIMITED, PLAINTIFF,
BECHTEL POWER CORPORATION, DEFENDANT.
The opinion of the court was delivered by: Patel, J.
MEMORANDUM AND ORDER
Motion to Dismiss
Plaintiff Fujian Pacific Electric Company Limited ("Fujian") brought this diversity action against defendant Bechtel Power Corporation ("Bechtel") seeking payment of damages pursuant to a written guaranty. Fujian also seeks specific performance of the terms of the guaranty that allegedly afford it access to records and documents in Bechtel's possession. Now before the court is Bechtel's motion to dismiss the complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), or alternatively, to stay this action pending arbitration of a related dispute. Having considered the arguments presented, and for the reasons set forth below, the court rules as follows.
This action arises out of a series of agreements relating to the construction of two coal-fired electric power generating units located in Fujian Province, People's Republic of China ("the Project"). Pl.'s Compl. ¶ 5. Fujian, a corporation formed to develop and operate the Project, entered into two contracts with wholly-owned subsidiaries of Bechtel in which the Bechtel entities agreed to provide various construction-related services. Id. ¶¶ 6- 7. In the first of these contacts, the "Engineering Contract," Bechtel Overseas Corporation ("BOC") agreed to furnish certain engineering, design, procurement, construction, and supervision services for the Project. Id. ¶ 7. Under the second contract, the Construction Agreement, another Bechtel subsidiary, Bechtel China, Inc. ("BCHI"), agreed to provide similar construction-related services. Id.
In addition, Fujian, Bechtel, BOC, and BCHI entered into a "Coordination Agreement" in which the Bechtel entities collectively agreed to carry out the project on a fixed-price, "turnkey" basis. Id. ¶ 8. As a condition of the Coordination Agreement, Bechtel was required to execute and deliver a "Corporate Guaranty" providing Fujian with assurances of performance. Lindsay Decl., Exh. 2, Coordination Agreement at 12 § 3. Pursuant to the Corporate Guaranty, Bechtel agreed to "absolutely, irrevocably, and unconditionally" guarantee:
(i) the full and prompt payment when due, whether by indemnification or otherwise, of all the payment obligations of the Companies under the Guaranteed Documents [i.e., the Engineering Contract, the Construction Agreement and the Coordination Agreement], together with all renewals, modifications, consolidations, extensions thereof, and (ii) the full and prompt payment and/or performance, as the case may be, when due of all warranties, indemnity obligations, liquidated damages, covenants and agreements, both monetary and non-monetary, of [BOC and BCHI] under the Guaranteed Documents.
Id., Corporate Guaranty at 2 § 2(a). The guaranty further provides that Bechtel's liability "shall be direct and immediate and not conditional or contingent upon the pursuit of any remedy against [BOC, BCHI,] or any other Person." Id. at 7 § 5.
Fujian now alleges that BOC and BCHI breached the Construction Agreement and Engineering Contract by failing to meet the January 15, 2001 and June 1, 2001 deadlines for substantially completing construction of the first and second power generating units, respectively. Pl.'s Compl. ¶¶ 16, 19. In addition, Fujian asserts that the BOC and BCHI failed to fulfill various duties of performance under the contracts and refused to complete their remaining duties under the Guaranteed Documents after leaving the Project site in June 2001. Id. ¶¶ 23-24. Fujian also seeks equitable relief, alleging that Bechtel has a contractual duty to produce certain documents relating to the transaction. Id. ¶¶ 44-53.
In addition to proceedings in this court, BOC and BCHI have filed a demand for arbitration of their disputes with Fujian, seeking payment of the more than $41 million for services rendered under the Construction Agreement and Engineering Contract. Lindsay Decl. ¶ 10 & Ex. 1. In their demand, BOC and BCHI rely on the "Dispute Resolution" clauses contained in the two contracts, which provide for the arbitration of all disputes involving an amount in excess of $1 million. Lindsay Decl., Ex. 1, Construction Agreement, art. XVI, § 16.2 & Engineering Contract, art. XVI, § 16.2. Bechtel now moves to dismiss this action, or alternatively, to stay proceedings in this court pending arbitration of the dispute between Fujian, BOC, and BCHI.
I. Motion to Dismiss
A motion to dismiss for failure to state a claim will be denied unless it appears beyond doubt that the plaintiff can prove no set of facts which would entitle him or her to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir.1995). All material allegations in the complaint will be taken as true and construed in the light most favorable to the plaintiff. NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir.1986). Although the court is generally confined to considering the allegations in the pleadings, any documents attached to the complaint are deemed part of the pleadings and may be considered in determining whether dismissal is proper without transforming the motion to one for summary judgment. Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir.), cert. denied, 484 U.S. 944, 108 S.Ct. 330, 98 L.Ed.2d 358 (1997). In addition, the court may rely upon "documents crucial to the plaintiff's claims, but not explicitly incorporated in his complaint." Parrino v. FHP, Inc., 146 F.3d 699, 705-06 (9th Cir.), cert. denied, 525 U.S. 1001, 119 S.Ct. 510, 142 L.Ed.2d 423 (1998).
II. Motion to Stay Action Pending Arbitration
The Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16, requires federal courts to enforce arbitration agreements and to stay any litigation that contravenes such agreements. Arbitration is a matter of contact, and the court cannot require a party to arbitrate a dispute unless the party has agreed to do so. United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960). Accordingly, the court's role under the Act is limited to (1) determining whether a valid agreement to arbitrate exists and, if it does, (2) deciding whether the agreement encompasses the dispute at issue. 9 U.S.C. § 4; Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 719-20 (9th. Cir.1999). On the other hand, a district court retains the inherent power to stay litigation "to control the disposition of the cases on its docket with economy of time and effort for itself, for counsel, and for the litigants." Landis v. North Am. Co., 299 U.S. 248, 254, 57 S.Ct. 163, 81 L.Ed. 153 (1936). In exercising this power, the court must balance the hardship and inequity of allowing the action to proceed with "the ossification of rights which attends inordinate delay." Yong v. INS, 208 F.3d 1116, 1119 (9th Cir.2000) (internal quotation marks omitted).
I. Choice of Law
Before addressing the merits of parties' arguments, the court must determine whether federal or state law applies to the adjudication of Bechtel's motion. The Coordination Agreement and Corporate Guaranty contain substantially identical choice of law provisions, which state: "This [contract] shall be governed and construed in accordance with the laws of the State of California applicable to contracts made and to be performed entirely within such state." Lindsay Decl., Ex. 2, Coordination Agreement at 14 § 5 & Corporate Guaranty at 7 § 13. Although the parties have failed to introduce the relevant portions of the Construction Agreement and the Engineering Contract, the court assumes for the purposes of deciding this motion that California law applies to the interpretation of these agreements.*fn1
Under the FAA, parties may agree to state law rules for arbitration even if such rules are inconsistent with those established by federal law. Sovak v. Chugai Pharm. Co., 280 F.3d 1266, 1269 (9th Cir.) (citing Volt Info. Scis., Inc. v. Board of Trs., 489 U.S. 468, 479, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989)), cert. denied, 537 U.S. 825 (2002). However, because there is a strong presumption that the FAA applies, the parties must "evidence a 'clear intent' to incorporate state law rules." Id. (quoting Roadway Package Sys. v. Kayser, 257 F.3d 287, 293 (3d Cir.2001)). Consistent with this clear statement rule, the Ninth Circuit has held that a general choice of law clause provision in a contract cannot overcome the presumption that the FAA supplies the "rules for arbitration." Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205, 1213 (9th Cir.1998); see also id. at 1270. Thus, even though the general choice of law clause incorporated into the contracts at issue here requires the court to apply state substantive law in all other respects, the FAA provides the "rules for arbitration" in the instant case.
In defining what constitutes a "rule for arbitration" governed by federal law, the Ninth Circuit has focused on the distinction between rules of law that determine the "substantive rights and obligations" of the parties, which are determined by state law, and those that affect the "allocation of power between alternative tribunals." Wolsey, 144 F.3d at 1212 (quoting Mastrobruno v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 63-64, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995)). It is the latter that are defined by the FAA and federal common law. See id. For example, in Wolsey, the court reviewed the district court's application of a California procedural rule that allows a court to stay an arbitration proceeding pending resolution of related litigation involving a nonsignatory to the arbitration agreement. Id. at 1210. The panel held that the district court erred in applying the state law rule of decision, concluding that the order granting a stay affects the "allocation of power" between courts and arbitration panels. Id. at 1212.
While Wolsey involved a party to a contract seeking to stay enforcement of an agreement to arbitrate, Bechtel's motion raises the issue of a nonparty's rights to stay litigation pending the resolution of an arbitrable dispute. Nonetheless, because the instant action raises issues relating to the allocation of authority between this court and the arbitration panel selected pursuant to the Construction Agreement and the Engineering Contract, the principle announced in Wolsey applies with equal force here. Cf. International Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 417 n. 4 (4th Cir.2000) (holding that court must look to "federal substantive law of arbitrability" to resolve the question of whether a nonsignatory is bound by an arbitration agreement). Indeed, because Bechtel seeks to enforce an agreement to arbitrate to which it is not a party, it is unclear whether a "clear intent" to displace federal law could ever be inferred. Accord Sovak, 280 F.3d at 1269. Thus, the court applies California law in interpreting the terms of the contracts at issue but looks to the FAA and federal decisional law to define Bechtel's rights as a nonsignatory to the contracts between Fujian and the Bechtel subsidiaries.
II. The Corporate Guaranty and the Coordination Agreement
Turning now to the merits of the motion before the court, Bechtel first asserts that this action should be dismissed or stayed based on the contracts which it actually signed: namely, the Corporate Guaranty and the Coordination Agreement. When determining whether the parties have agreed to arbitrate a particular dispute, federal courts generally apply state law principles that govern the formation of contracts. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). Like all contracts, an agreement to arbitrate must be construed to give effect to the intent of the parties. Victoria v. Superior Court, 40 Cal.3d 734, 739, 222 Cal.Rptr. 1, 710 P.2d 833 (1985). "While it is true that under the FAA, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, that policy does not come into effect until a court has concluded that under state contract law, the parties entered into an agreement to arbitrate." Lopez v. Charles Schwab & Co., 118 Cal.App.4th 1224, 1229, 13 Cal.Rptr.3d 544 (2004) (internal citations and quotation marks omitted). Indeed, California courts have repeatedly emphasized that "a petition to compel arbitration is simply a suit in equity seeking specific performance of that contract. There is no public policy favoring arbitration of disputes that the parties have not agreed to arbitrate." Id. (citing Cione v. Foresters Equity Servs., Inc. 58 Cal.App.4th 625, 634, 68 Cal.Rptr.2d 167 (1997)) (alterations in original omitted).
Applying these rules to the instant case, it is apparent that the parties did not intend to arbitrate disputes arising solely under the Corporate Guaranty. Unlike the Construction Agreement and Engineering Contract, the contracts between Fujian and Bechtel make no reference to arbitration or alterative dispute resolution. Indeed, the only reference to venue in the Corporate Guaranty is found in section 19, which provides for personal jurisdiction over the parties in this court and San Francisco County Superior Court. Lindsay Decl., Exh. 2, Corporate Guaranty at 8 § 19. Moreover, although Bechtel suggests that the dispute resolution provisions of the Construction Agreement and the Engineering Contract are incorporated by reference into the Coordination Agreement, language evidencing an intent to arbitrate disputes between Fujian and Bechtel is notably absent from the latter agreement. For example, section 12 of the Coordination Agreement provides that "Owner [Fujian] and Contractors [BOC and BCHI] agree that Article XVI [Dispute Resolution] ... of the Engineering Contract[ ][is] hereby incorporated by reference, mutatis mutandis, so that such provisions shall be applied to this Coordination Agreement as if all references to BOC were references to [BOC and BCHI] under this Coordination Agreement." Id., Coordination Agreement at 16-17 § 12. While this passage incorporates the arbitration provision of the Engineering Contract into the Coordination Agreement for the purpose of resolving disputes between Fujian, BOC, and BCHI, the reference to the provisions does not mention disputes between Fujian and Bechtel. In short, there is simply no basis in the Coordination or Guaranty Agreements for concluding that Fujian intended to arbitrate its disputes with Bechtel.
III. The Construction and Engineering Contracts
On the other hand, the parties agree that the Article XVI of the Construction Agreement and Engineering Contract requires Fujian and the Bechtel subsidiaries to arbitrate disputes that arise under those contracts. Although Bechtel is not a party to either agreement, it nonetheless contends that the instant action should be dismissed or stayed based on the dispute resolution clauses included in the contracts between Fujian and the Bechtel subsidiaries. Thus, Bechtel's motion presents the question of when a nonsignatory to a contract that contains a valid arbitration clause can enforce the provisions of that agreement to end or forestall litigation initiated by one of the signatories to the contract. This is an issue of first impression in the Ninth Circuit.
As noted above, arbitration is generally a "matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed to so submit." United Steelworkers, 363 U.S. at 582. However, under certain circumstances, a number of courts have held that a nonsignatory to a contract with an arbitration clause may compel arbitration under an equitable estoppel theory. The Eleventh Circuit has articulated two circumstances in which a nonsignatory may compel arbitration under this theory:
First, equitable estoppel applies when the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the nonsignatory. When each of a signatory's claims against a nonsignatory makes reference to or presumes the existence of the written agreement, the signatory's claims arise out of and relate directly to the written agreement, and arbitration is appropriate. Second, application of equitable estoppel is warranted when the signatory to the contract containing an arbitration clause raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories to the contract. Otherwise the arbitration proceedings between the two signatories would be rendered meaningless and the federal policy in favor of arbitration effectively thwarted.
MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir.1999) (internal citations and quotation marks omitted). The Fifth Circuit adopted the "intertwined claims" prong of this test in Grigson v. Creative Artists Agency L.L.C., 210 F.3d 524 (5th Cir .), reh'g en banc denied, 218 F.3d 745, cert. denied, 531 U.S. 1013, 121 S.Ct. 570, 148 L.Ed.2d 488 (2000). In so doing, the court explained the rationale for applying the doctrine:
The lynchpin for equitable estoppel is equity--fairness.... [A] signatory to [an] agreement cannot, in those instances described in MS Dealer Serv. Corp., 'have it both ways': it cannot on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but on the other hand, deny the arbitration provision's applicability because the defendant is a non-signatory.... [T]o allow such inconsistent positions would be inequitable, to say the least.
Id. at 528 (quoting MS Dealer Serv. Corp., 177 F.3d at 947).
In J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A, 863 F.2d 315 (4th Cir.1988), the Fourth Circuit reached a similar result by focusing on the nature of the parent-subsidiary relationship in an action for civil conspiracy to destroy business goodwill. The court held that "[w]hen the charges against a parent company and its subsidiary are based on the same facts and are inherently inseparable, a court may refer claims against the parent to arbitration even though the parent is not formally a party to the arbitration agreement." Id. at 321-22. The court reasoned that a contrary rule would force the parent corporation to try the case, rendering arbitration proceedings meaningless and thwarting the federal policy in favor of arbitration. Id. at 322 (citing Sam Reisfeld & Son Import Company v. S.A. Eteco, 530 F.2d 679, 681 (5th Cir.1976)).*fn2
The Ninth Circuit has not directly addressed the circumstances under which a signatory to a contract containing an arbitration agreement is estopped from denying a nonsignatory's right to enforce the agreement. However, in United States ex rel. Newton v. Neumann Carribean International, Ltd., 750 F.2d 1422 (9th Cir.1985), the court considered the related issue of whether the litigation of a nonarbitrable third-party complaint should be stayed pending the arbitration of the principal action between the plaintiff and the defendant. Id. at 1426-27. The court held that the district court did not abuse its discretion in staying all proceedings pending the conclusion of arbitration, noting that "[c]onsiderations of economy and efficiency fully support the District Court's determination that the third party claim and other matters must await the final determination made in connection with the arbitration." Id. at 1427.
Turning to the instant case, the court finds that the factors supporting the application of the doctrine of equitable estoppel are clearly present. Fujian's claims against Bechtel directly relate to the Construction Agreement and the Engineering Contract. Indeed, the Corporate Guaranty premises Bechtel's liability for money damages solely on the failure of BOC and BCHI to fulfill their obligations under those agreements. See Lindsay Decl., Exh. 2 at 2 § 2(a). Fujian now asks the court to determine whether these duties have been breached in order to establish Bechtel's liability as guarantor. However, Fujian and the Bechtel subsidiaries agreed to arbitrate any disputes arising under those agreements. If the court were to proceed as Fujian requests, "the arbitration proceedings between the ... signatories would be rendered meaningless and the federal policy in favor of arbitration effectively thwarted." MS Dealer Serv. Corp., 177 F.3d at 947 (quoting Sam Reisfeld & Son, 530 F.2d at 681) (alterations in original omitted). Furthermore, BOC and BCHI, both wholly owned subsidiaries of Bechtel, have sought to arbitrate claims that are based on the same facts and are "inherently inseparable" from the subject matter of the instant action. See id.; see also J.J. Ryan & Sons, 863 F.2d at 321-22 (directing district court to dismiss action in parent-subsidiary context without applying the doctrine of equitable estoppel). Regardless of the label attached to such circumstances, the clear weight of authority compels the court to refrain from adjudicating Fujian's claims.
Attempting to avoid this result, Fujian cites the Minera Alumbrera Ltd. v. Fluor Daniel, Inc., No. 98 CIV.5673 AGS, 1999 WL 269915 (S.D.N.Y. May 4, 1999). As in the instant case, the defendant in Minera sought to dismiss or stay an action to enforce a guaranty agreement provided as security for the performance of a construction contract, relying on an arbitration clause in a contract between the plaintiff and the defendant's subsidiary and the close relationship between the guaranty agreement and the arbitrable dispute. Id. at *1-2. In denying the defendant's motion, the court distinguished contrary precedent by focusing on the narrowness of the arbitration clause in the underlying contract. Id. at *5. However, this focus misapprehends the nature of the doctrine of equitable estoppel, which applies in this context to permit a nonsignatory to a contract to take advantage of an arbitration clause that bars the litigation of a related but nonetheless different dispute. Under such circumstances, it is hardly surprising that the Minera court concluded that plaintiff's action against the parent corporation did not "arise[ ] under" the contract between the plaintiff and the defendant's subsidiary. Id. However, under the majority rule, as set forth in MS Dealer Service and adopted by the Fourth, Fifth, and Eleventh Circuits, the breadth of the arbitration clause is irrelevant to the disposition of the instant action. Indeed, so long as the underlying, "intertwined" dispute itself falls within the scope of the agreement to arbitrate, a narrowly drafted arbitration clause need not prevent the court from applying equitable estoppel to any claim that directly relates to the arbitrable dispute. Accord MS Dealer Serv., 177 F.3d at 947; J.J. Ryan & Sons, 863 F.2d at 321-22. Because Fujian's claims against Bechtel are directly related to the contracts between Fujian and the Bechtel subsidiaries and Fujian must rely on the terms of those contracts to assert its claims against Bechtel, the court holds that the doctrine of equitable estoppel precludes Fujian from asserting an unconditional right to litigate its claims against Bechtel.
The sole remaining issue is whether to grant Bechtel's motion to dismiss or to stay this action pending the arbitration of the claims under the Construction Agreement and the Engineering Contract. There is authority to support a decision granting either form of relief. Compare Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 329 (5th Cir.1999) (upholding stay of action against nonsignatory to contract containing an arbitration clause pending the outcome of arbitration) with Grigson, 210 F.3d at 530-31 (upholding district court's dismissal of action brought against nonsignatory to arbitration agreement and requiring parties to arbitrate claim in mandated forum). See also MS Dealer Serv., 177 F.3d at 949 (remanding action to district court with instructions to grant nonsignatory's petition to compel arbitration). But cf. Thomson-CSF, 64 F.3d at 780 (refusing to accept "[a]nything short of requiring a full showing of some accepted theory under agency or contract law" before compelling arbitration between a signatory and a non-signatory) (emphasis in original). In light of the equitable nature of the relief that defendant seeks, the weight of authority suggests that the court has considerable discretion to select a remedy that is appropriate under the circumstances.
Nonetheless, in exercising this discretion, the court must take into account the intent of the parties as it is expressed in the various contracts at issue here. Accord WorldCrisa Corp. v. Armstrong, 129 F.3d 71, 74 (2d. Cir.1997) (citing Collins & Aikman Prods. Co. v. Building Sys., Inc., 58 F.3d 16, 19 (2d. Cir.1995)) ("Arbitration is essentially contractual, ... and the parties may not be forced into arbitration if that was not their true agreement."). Although Fujian unambiguously agreed to arbitrate disputes related to the Engineering Contract and the Construction Agreement, the Corporate Guaranty leaves little doubt that Fujian and Bechtel did not contemplate that claims arising out of Bechtel's obligations under that agreement would be arbitrated. See, e.g., Lindsay Decl., Exh. 2, Corporate Guaranty at 4 § 3(b) (waiving Bechtel's right to require Fujian to proceed against BOC or BCHI or "pursue any other remedy" prior to proceeding against Bechtel). Accordingly, requiring Fujian to submit its claims against Bechtel to arbitration would fail to give effect to the "true agreement" of the parties.
Accord WorldCrisa, 129 F.3d at 74.
On the other hand, failure to stay this action would result in substantial prejudice to BOC and BCHI, whose dispute with Fujian is subject to arbitration. Prejudice to a third party undeniably provides a basis for staying litigation pending arbitration of a related dispute. See id. at 76. For example, in IDS Life Insurance Co. v. SunAmerica, Inc., 103 F.3d 524 (7th Cir.1996), the Seventh Circuit observed that where a party to an arbitration agreement attempts to avoid the agreement by suing a related party that is not a signatory to the contract, "[s]uch a maneuver should not be allowed to succeed." Id. at 530. In such cases, a district court must "stay the proceedings before it and let the arbitration go forward unimpeded" in order to avoid prejudice to an absent third party who has signed an agreement to arbitrate a related dispute. Id.; see also WorldCrisa, 129 F.3d at 76 (holding that it would be an abuse of discretion to decline to enter a stay in a case where a related nonparty to an arbitration agreement brought suit in the hope that the litigation would have a preclusive effect on the arbitration proceedings). The same principle applies here. Moreover, to the extent that the contradictory provisions of the supposedly coordinated agreements between Fujian and the various Bechtel entities can be reconciled with one another, the court believes that this outcome best reflects the intent expressed by the parties in entering into these agreements. The court therefore holds that the instant action should be stayed pending arbitration of Fujian's claims against BOC and BCHI.*fn3
For the foregoing reasons, the court hereby DENIES defendant's Motion to Dismiss.*fn4 The court GRANTS defendant's motion to stay this action pending the resolution of plaintiff's claims against defendant's subsidiaries.
IT IS SO ORDERED.