Memphis Trust Co. v. Brown-Ketchum Iron Works

166 F. 398, 93 C.C.A. 162, 1909 U.S. App. LEXIS 4288

• Court: Court of Appeals for the Sixth Circuit
• Decided: January 20, 1909
• Docket: No. 1833
• Status: Published

Opinion

KNAPPEN, District Judge

(after stating the facts as above). It is appellee’s contention here that the agreement to submit to arbitration, not having been made by virtue of a statute or rule of court, was revocable by either party at will and without cause, before arbitration actually had thereunder. It is also contended (independently of the foregoing proposition) that Graham, by reason of his interest in the subject-matter and his consequent alleged bias, was disqualified to act as arbitrator, and that this disqualification justified a revocation of the submission.

It is the rule that a naked executory agreement (not under authority of statute or rule of court), made after the arising of a dispute, to submit the same to arbitration, is revocable at will by either party, in advance of the actual carrying out of the agreement by arbitration and award thereon. It is also the rule, even in case of agreement to arbitrate made before the arising of the dispute, and in connection with the contract out of which it is anticipated a dispute may arise (as in contracts of insurance), that, when the egreement for arbitration is merely collateral to and independent of the other provisions of tIme contract, sneh arbitration is not a condition precedent to time rigbt to sue for a breach of such prot ision, and that in such cases the remedy for refusal to arbitrate is by aetiomm for breach of that agreement (Hamilton v. Home Ins. Co., 137 U. S. 370, 11 Sup. Ct. 133, 34 L. Ed. 702), although even in tins class of cases, when in express terms or by necessary imphmcation the parties have stipulated that arbitration as to the amount of time loss shall be a condition precedent to recovery upon the policy, no action .can he maintained without actual or ten (lered compliance with that stipulation (Hamilton v. Liverpool, London & Globe Ins. Co., 136 U. 5. 242, 10 Sup. Ct. 945, 34 L. Ed. 419; Am. Bonding Co. v. Gibson County, 127 Fed. 671, 62 C. C. A. 397, and 145 Fed. 871, 76 C. C. A.155).

It is, flowever, tiow too well settleu to admit 0 t controversy that provisions in a building contract such as exist here, by which a given architect is expressly clothed with the broad authority to determine finally all matters in dispute under the contract, and by which final settlement is to be had and payments made upon architects' certificates, do not create a mere naked agreement to submit differences to arbi~ tration. Nor are such provisions for arbitration merely collateral to and independent of the other provisions of the contract; but they are, on the other hand, of its very essence, and such agreement is not subject to revocation by either party, but actual or tendered coinpliance with the terms of the contract is a necessary condition precedent to recovery upon it; and an award macic by virtue of such contract provision, in the absence of fraud or of such gross mistake as would imply bad faith or a failure to exercise honest judgment, is binding U~Ofl both par1i~~ thereto, so far as it is confined to disputes actually subsisting and open to arbitration. The following are illustrative of the long line of authorities which announce and enforce the proposi~ tion just stated: Kihlberg v. United States, 97 U. S. 398, 24 L. Ed. 1106; Sweeney v. United States, 109 U. S. 618, 3 Sup. Ct. 344, 27 L. Ed. 1053; Martinsburg & Potomac R. R. Co. v. March, 114 U. S. 549, 5 Sup. Ct. 1035, 29 L. Ed. 255; Chicago, S. F. & C. R. R. Co. v. Price, 138 U. S. 185, 102, 111 Sup. Ct. 290, 34 L. Ed. 917; Sheffield, etc., Ry. Co. v. Gordon, 151 U. 5. 285, 292, 14 Sup. Ct. 343, 38 L. Ed. 164; United States v. Gleason, 175 U. S. 588, 602, 20 Sup. Ct. 228, 14 L. Ed. 284; Am. Bonding Co. v. Gibson County, 127 Fed. 671, 62 C. C. A. 397; Pauly Jail Biuilding, etc., Co. v. Hemphill County, 62 Fed. 698, 704, 10 C. C. A. 595; Mundy v. Louisville & N. Ry. Co., 67 Fed. 633, 637, 14 C. C. A. 583; Elliott v. Missouri, K. & T. Ry. Co., 74 Fed. 707, 709, 21 C. C. A. 3; Boyce v. United States Fid. & Guar. Co., 111 Fed. 138, 142, 49 C. C. A. 276; No. American Ry. Cons. Co. v. McMath Surveying Co., 116 Fed. 169, 174, 54 C. C. A. 27; C. & M. Ry. Co. v. Newton, 140 Fed. 225, 71 C. C. A. 655; Railroad Co. v. Central Lumber Co., 95 Tenn. 538, 32 S. W. 695; St. Paul & N. P. Ry. Co. v. Bradbnry, 42 Minn. 222, 227, 411 N. W. 14.

The rule as to the finality of the arbitrator's decision is thus cx-pressed by Judge Taft, speaking for this court in Mundy v. Louisville & N. Ry. Co., at page 637 of 67 Red.; at page 587 of 14 C. C. A.:

“The authorities leave no doubt that construction contracts, in which the contractor stipulates that the engineer or architect of the owner shall finally and conclusively decide, as between him and the owner, what amount of work has been done, and its character, and the amount to be paid therefor under the contract, are legal, and should be enforced. In such cases, after the work has been done, the contractor can recover nothing in excess of the amount found due by the engineer, unless he can make it appear that the engineer’s decision was fraudulently made, or was founded on palpable mistake.” Citing R. R. Co. v. Price; R. R. Co. v. March; Sweeney v. United States; Kihlberg v. United States; and other cases.

This rule has been again thus stated by Judge Severens, on behalf of this court, in Boyce v. United States Fid. & Guar. Co., at page 142 of 111 Fed., at page 280 of 49 C. C. A.:

“This delegation of authority by the parties to works of construction to pass from time to time as occasion shall arise upon incidents of its execution is not unusual. Generally it has devolved upon the engineer in charge, if there be one; but the same rule applies, whoever may be appointed. And if the appointee, without fraud or manifest mistake, makes a determination upon any of the matters falling within the scope of the authority committed to him, the parties are bound by the decision.” Citing Sweeney v. United States, R. R. Co. v. March, and United States v. Gleason.

This rule as to the exclusiveness and finality of the action of the arbitrator named is thus not confined to a determination of the sufficiency and value of labor and materials, or to the question of completeness of performance, but extends to all subjects committed to the judgment of the arbitrator. As said in United States v. Gleason, at page 602 of 175 U. S., at page 234 of 20 Sup. Ct. (44 L. Ed. 284);

“Another rule is that it is competent for parties to a contract, of the nature of the present one, to make it a term of the contract that the decision of an engineer, of other officer, of all or specified matters of dispute that may arise during the execution of the work, shall be final and conclusive, and that, in the absence of fraud or of mistake so gross as to necessarily imply bad faith, such decision will not be subjected to the revisory power of the courts.” Citing Martinsburg & Potomac R. R. Co. v. March, and Chicago, S. F., etc., R. R. Co. v. Price.

Ñor is the rule referred to confined to contracts for railroad construction. It is applied to all manner of building contracts. Thus, the contract in Boyce v. U. S. Fid. & Guar. Co. related to certain public city works; that in Sheffield, etc., R. R. Co. v. Gordon to the construction of blast furnaces; that in United States v. Gleason to excavation of rock; that in St. Paul & N. P. R. R. Co. v. Bradbury to the construction of shops.

Compliance or offer of compliance with the agreement to arbitrate being a condition precedent to the right to sue upon the contract for payment on account of the work and material furnished, it necessarily follows that the agreement to arbitrate was not revocable at will.

It is, however, contended by appellee that the arbitration was not had under the provisions of the original building contract, but by virtue of a new, collateral, and independent agreement. This contention cannot be sustained. Not only does the testimony of the representatives of both parties distinctly assert that the agreement of Jan-nary 20, 1906, was not regarded as a separate or new agreement, but as a mere substitution of Sir. Graham for Mr. Burnham, as expressly authorized by the provisions of the original building contract; but the language of the agreement of January 20th is equally affirmative of that proposition.

It is further contended that Graham was disqualified to act as an arbitrator because of the fact that the controversy involved the question whether the delay on account of which damages were asked was the fault of the contractors or of the architects, and that thus the latter were interested in relieving themselves from liability by throwing the responsibility upon the contractors. Tt is true that the architects were, in their relations toward the contractors, the agents of the owners, and that the fault of the architects' was thus the fault of the owners, but this fact does not of itself disqualify the architect from acting as arbitrator. There is nothing in the record to indicate that the architects would become or were regarded as liable to the owners in case the failure to furnish drawings should turn out to be ¡he fault of the architects, as between them and the contractors. But independently of this consideration, it is common practice in construction and engineering contracts (as shown by the foregoing citations) for the parties to stipulate for the final arbitration of all matters in dispute by an engineer or architect in the employ of the owner, and the fact, of such relation does not affect the qualification of the arbitrator. Such was the situation in Railroad Co. v. March, Railroad Co. v. Price, Mundy v. Railroad Co., and in C. & M. Ry. Co. v. Newton. As suggested in C. & M. Ry. Co. v. Newton, supra, at page 292 of 140 Red., at page 662 of 71 C. C. A.:

“They oso contractors) arc presumed before bidding or signing the contract to have fully advised themselves of the competency, integrity, and judicial fairness of the selected umpire. Their voluntary acceptance of him as the final arbiter on disputed matters as declared In the contract precludes them from any consideration or sympathy because of the engineer being in the employ of the railroad company.”

The proposition that the contractors were ignorant of Graham’s relations toward the trust company and toward the subject-matter of the controversy, when they consented to his substitution in the place of Burnham, is not sustained by the proofs. It affirmatively appears that, when the agreement of January 20th was made, the Brown-Ketchum Company knew not only that Graham was a member of the firm of Burnham & Co., but that the disputes to be arbitrated involved the question of the relative responsibility of the contractors and the architects for the delay. When the original building contract was made, the appellee is presumed to have contemplated that disputes were likely to arise wliteh would involve the question of the fault of the architects as excusing the contractors; and, when the agreement of January 20th was made, appellees actually knew that such question existed. Unless, therefore, there is in the action or award of the arbitrator evidence of fraud or of such gross mistake as would imply bad faith or a failr'-» to exercise honest judgment, the award must he sustained so far as it relates to disputes actually open and subject . , arbitration. .

The record contains no substantial evidence from which an inference of bad faith on the part of the referee can be raised. Neither the failure to correctly recite in the award the action of the Brgwn-Ketch-um Company in' its attendance before the arbitrator and its attempted withdrawal of the submission, nor the previous attitude of the referee toward the question of responsibility for the contractors’ delay throws any discredit upon the referee’s good faith and honest exercise of judgment. Such being the case, the merits of the original controversy are not open here.

It remains to consider whether the award goes beyond a determination of the disputes open to arbitration. The questions of damages for delay, the amount of deductions to which the trust company was entitled, and the amount of the express charges paid by the Brown-Ketchum Company prior to August 24, 1905, were all open and in dispute. We think, however, that in considering the charges of the contractors for express tolls paid since August 24, 1905, the referee acted upon a matter no longer open to dispute, but one which had been before settled between the parties. The trust company was advised on August 23d that owing to the large amount of Sunday and night work put upon the job the Brown-Ketchum' Company was unwilling to pay express charges. The trust company accordingly directed that everything be sent by express, on account of its “urgent need of this material,” and the Brown-Ketchum Company was formally advised to ship the remaining items by express, with the condition that express charges previously paid would later be taken into account, and, if it was found upon investigation that the Brown-Ketchum Company was not responsible for the delay, credit would be given therefor. We think this arrangement by necessary implication excluded any question about the trust company’s liability for express charges thereafter paid. The testimony of the trust company’s officer, Watkins, indicates that such was appellant’s understanding of the agreement, for his only excuse for presenting it to the arbitrator is that he considered that the order to ship by .express was made “under duress, in a way,” and that the trust company “was forced to order it by express at our expense.”

The reason assigned by the arbitrator for holding that the Brown-Ketchum Company should stand the express charges is that the latter was “under contract to furnish this material set in place in the building complete.” We think that in so including this item in the award the adjustment of the question previously made by the trust company was overlooked. As near as we can ascertain from the record, the excess express charges over freight expense incurred previous to August 24, 1905, was $225.26. This amount deducted from $1,108.40, the total excess amount of express charges before and after August 24th, leaves an item of $873.14 included in the award which was not property the subject of arbitration.

It follows from the conclusion reached that the decree of the court below, in wholly setting aside the award, is erroneous. The decree will be reversed, with directions to enter decree in favor of the defendants upon the cross-bill for the amount of the arbitrator’s award, but with the proviso that upon appellee’s amending its answer to the cross-bill (to fit tlie proofs), setting up and claiming the benefit of the error referred to, there be deducted from the amount of the award the sum of $873.14 referred to, and a decree entered in favor of the defendants for the balance.

The appellant will recover the costs of the Circuit Court. The costs of this court will be equally divided.