Worldsource Coil Coating, Inc. v. McGraw Construction Co.

946 F.2d 473

• Court: Court of Appeals for the Sixth Circuit
• Decided: October 16, 1991
• Docket: No. 91-5250
• Status: Published

Opinions

BAILEY BROWN, Senior Circuit Judge.

McGraw Construction Company, Inc. (“McGraw”), appeals from the district court’s refusal to compel arbitration of a dispute that it has with the plaintiffs WorldSource Coil Coating, Inc. (“World-Source”), and General Electric Capital Corporation (“G.E.”). The dispute arises in connection with McGraw’s contract to build a manufacturing plant for WorldSource that G.E. would finance. This construction contract included a mandatory arbitration clause for all disputes. The district court held that McGraw waived the right to compel arbitration by bringing a suit against WorldSource and G.E. in Kentucky State Court for preliminary and permanent in-junctive relief and for compensatory and punitive damages. Because we find that a waiver did occur, we AFFIRM.

I.

On September 26, 1988, McGraw entered into a $16.25 million contract with World-Source to build a factory and office complex in Hancock County, Kentucky.¹ McGraw was the general contractor for the construction, WorldSource was the developer and operator of the factory, and G.E. financed the construction of the project with the assistance of industrial revenue bonds issued by Hancock County.

The contract dealt in specific detail with each party’s obligations under the contract. McGraw agreed to construct the building for a fixed price, and the contract provided that any changes in the scope of the construction would be approved in advance by WorldSource and G.E. McGraw agreed to provide G.E. with an irrevocable letter of credit of $16.25 million as security for completion of the factory. G.E. could draw on the letter of credit if McGraw failed to perform in accordance with the construction contract.

On May 19, 1988, McGraw stopped work on the project. McGraw maintains that the facility was completed and that World-Source owed McGraw an additional $11 million for “extra” work. Although World-Source is occupying and using the facility, WorldSource alleges that McGraw merely abandoned the incompleted project.

On June 5, 1990, counsel for McGraw informed WorldSource and G.E. that it would invoke the arbitration clause. McGraw, however, did not immediately request arbitration.² Instead, McGraw filed an action against WorldSource and G.E. in the Circuit Court of Hancock County, Kentucky requesting that a preliminary and permanent injunction be issued to reduce the letter of credit from $15.15 million to $2 million and that it be awarded compensatory and punitive damages. The complaint alleged that G.E. and WorldSource breached their obligations under the construction contract by refusing to make the final payment to McGraw, refusing to release the letter of credit, inappropriately drawing on the letter of credit, refusing to pay for “extras” performed by McGraw, and incorrectly claiming that McGraw’s work was defective. In the complaint, however, McGraw reiterated its intention to proceed with arbitration, stating that:

McGraw ... [requires] emergency relief which cannot await ... arbitration. The arbitration rules permit McGraw ... to petition the Court for such emergency relief notwithstanding the parties’ agreement to arbitrate. Hence, the existence of McGraw’s ... demand for arbitration is no bar to this Court’s authority to grant the emergency relief herein.

The contract stated that arbitration was governed by the International Chamber of Commerce Rules of Arbitration (“ICC arbitration rules”). Under the ICC arbitration rules,

[b]efore the file is transmitted to the arbitrator, and in exceptional circumstances even thereafter, the parties shall be at liberty to apply to any competent judicial authority for interim or conservatory measures, and they shall not by so doing be held to infringe the agreement to arbitrate or to affect the relevant power of the arbitrator. (Emphasis added).

On June 13, 1990, a hearing was held in state trial court on the motion for a preliminary injunction. The state court refused to grant the injunction for two reasons. First, an injunction would have changed the status quo and the ICC arbitration rules did not authorize such a change. Second, the state trial court held that MeGraw had not shown that equity was on its side. Although such relief was denied, the case remained pending in state court.

On July 31, 1990, WorldSource moved for leave of court to file counterclaims against MeGraw. At a hearing on this motion, MeGraw moved to dismiss the original complaint without prejudice, which the state court granted. Thus the counterclaim was not filed. On August 7, 1990, MeGraw submitted a request for arbitration to the ICC asking that both WorldSource and G.E. be required to arbitrate. In its letter applying for arbitration, MeGraw requested the following relief:

(1) awarding MeGraw $10 million for the cost of extras provided by MeGraw to WorldSource; (2) awarding MeGraw its reasonable profit on the extra work of $1 million; (3) awarding MeGraw $2.16 million held by WorldSource; (4) awarding MeGraw $2.7 million held by respondents which was drawn from the MeGraw letter of credit; (5) ordering GECC to surrender McGraw’s letter of credit; ....

On September 19, 1990, G.E. and World-Source filed suit against MeGraw in Hancock County Circuit Court for breach of contract and requested a stay of the arbitration. The request for a stay alleged that MeGraw had waived the right to compel arbitration by bringing the prior state court action. MeGraw removed the action to federal district court for the Western District of Kentucky based on diversity jurisdiction.

On October 4, 1990, MeGraw filed in federal district court a motion to compel arbitration. After a hearing on the issue, the district court ruled that McGraw’s state court lawsuit was inconsistent with the arbitration agreement and that MeGraw, therefore, waived the right to compel arbitration.³ MeGraw appeals from this order denying its motion to compel arbitration.⁴

II.

As will be seen, under Illinois law, a party waives its right to compel arbitration where its action in enforcing its claim is so inconsistent with arbitration as to indicate an abandonment of that right. If a party’s action so demonstrates abandonment, it may not retain the right to compel arbitration by simply stating such an intent. It is not what you say you are doing, it is what you actually do that controls.⁵ Furthermore, under Illinois law, waiver of arbitration can be controlled by the contract between the parties or by the rules of the arbitration agency that the parties by contract have designated to be applicable. We conclude that McGraw’s action in state court seeking a preliminary and permanent injunction and compensatory and punitive damages indicates an abandonment of the right to compel arbitration and that McGraw’s right to arbitrate is not saved by the terms of the contract or by the rules of the arbitration agency. Moreover, under Illinois law, it is not necessary for WorldSource or G.E. to show prejudice but, in any event, prejudice has been shown in this case.

A.

Under Illinois law, the right to compel arbitration is waived “when a party’s conduct is so inconsistent with the arbitration clause as to demonstrate abandonment of that right.” TDE Ltd. v. Israel, 185 Ill.App.3d 1059, 133 Ill.Dec. 843, 848, 541 N.E.2d 1281, 1286 (1989). The key factor in determining whether a right to compel arbitration has been waived is the type of issues submitted to the court. Id. “A party’s conduct amounts to a waiver when the party submits arbitrable issues to a court for decision.” Cencula v. Keller, 152 Ill.App.3d 754, 105 Ill.Dec. 712, 714, 504 N.E.2d 997, 999 (1987). In Cencula, the court held that waiver had occurred because the “[djefendant, by his answer alleging additional credits offsetting his liability, and by his bill of particulars listing items associated with the [subject matter of the contract] for which he incurred expense, put into issue many facts which appear to fall within the ambit of the arbitration clause.” Id. 105 Ill.Dec. at 714-15, 504 N.E.2d at 999-1000.⁶

Clearly, McGraw submitted arbitrable issues to the state court. Although McGraw stated that it ultimately intended to submit the dispute to arbitration, it did not request arbitration of the ICG until after its state court action was dismissed. McGraw requested several types of relief in its state court complaint:

Wherefore, Plaintiffs respectfully request that the court enter judgment as follows;

1. A preliminary and permanent injunction compelling defendants to reduce the letter of credit to $2 million.

2. An award of compensatory damages to be proved at trial.

3. An award of punitive damages three times the amount of plaintiffs’ compensatory damages award.

4. Such other relief as this court deems just.

A prayer for a permanent injunction and for compensatory and punitive damages raises “arbitrable issues” under Illinois law. See Schwarz v. Buell, 137 Ill.App.3d 29, 91 Ill.Dec. 755, 484 N.E.2d 314 (1985). Under Illinois law, submitting these issues to a judicial forum would generally constitute a waiver.

B.

Parties can, however, modify the general waiver rule by mutual agreement either in the contract or by contractually designating arbitration rules that speak to waiver. Kostakos v. KSN Joint Venture No. 1, 142 Ill.App.3d 533, 96 Ill.Dec. 862, 866, 491 N.E.2d 1322, 1326 (1986). Although this contract is silent as to waiver, the ICC arbitration rules do address the issue. McGraw, under the ICC arbitration rules, as has been seen, could apply to a court for “interim or conservatory measures” without waiving arbitration. This ICC rule contemplates that a party may need to seek “interim or conservatory” relief that could not be provided through arbitration because of time constraints. Seeking relief beyond that required by the emergency, however, would constitute a waiver. Furthermore, this “interim or conservatory” relief authorized by the ICC arbitration rules was obviously intended only to maintain the status quo until arbitration could occur.

McGraw’s state court complaint requested more than such emergency relief. A complaint for compensatory damages and punitive damages goes beyond “interim or conservatory” relief and raises issues that under the ICC arbitration rules are arbitra-ble issues for which no emergency existed. The permanent injunctive relief requested also goes beyond that required for the temporary period before an arbitrator could have acted. The proposed permanent injunction would have reduced finally the letter of credit. A preliminary injunction could have, on the other hand, temporarily prevented G.E. from drawing on the letter of credit until an arbitrator decided the issue. Indeed, if the state trial court had made rulings on all the claims that McGraw presented in the complaint, there would have been little, if anything, left for the arbitrator to decide. By so requesting more than emergency relief, McGraw waived its right to compel arbitration.

C.

In a further attempt to avoid waiver, McGraw asserts that Illinois law requires a showing that WorldSource and G.E. suffered prejudice from the litigation in state court before waiver would occur. In effect, McGraw maintains that even if it submitted arbitrable issues to the state court, no waiver occurred unless World-Source and G.E. thereby suffered prejudice. McGraw cites to only one Illinois case to support this proposition, Kostakos v. KSN Joint Venture No. 1, 142 Ill.App.3d 533, 96 Ill.Dec. 862, 491 N.E.2d 1322 (1986). Kostakos is distinguishable on its facts from this case.

In Kostakos, the plaintiff alleged that the defendants committed fraud to induce his investment in a limited partnership arrangement. The agreement contained a mandatory arbitration clause, with arbitration to occur under the rules of the American Arbitration Association. Id. 96 Ill.Dec. at 866, 491 N.E.2d at 1326. Instead of requesting arbitration, the plaintiff filed suit in state court. The defendants filed various motions in response, including a motion to dismiss for failure to join an indispensable party, a motion to quash service of summons, and a motion to dismiss for failure to plead properly. The parties also conducted limited discovery. Id. 96 Ill.Dec. at 864, 491 N.E,2d at 1324. In their answer, however, the defendants relied on the mandatory arbitration clause as an affirmative defense. Soon after filing the answer, the defendants submitted a motion to compel arbitration. The court held that the defendants’ various pre-an-swer motions and limited discovery conducted by the defendants did not support a waiver.

The American Arbitration Association Rules, applicable in Kostakos but not in this case, state that “[n]o judicial proceedings by a party to the subject matter of the arbitration shall be deemed a waiver of the party’s right to arbitrate.” Id. 96 Ill.Dec. at 866, 491 N.E.2d at 1326. The court in Kostakos relied on this language as a basis for finding that no waiver had occurred. Moreover, in Kostakos, the party seeking to compel arbitration had apparently not sought to submit any arbitrable issues to the court. Accordingly, the specific holding in Kostakos is not applicable in this case because of the difference in facts and in arbitration rules.

Most Illinois cases do not address the issue of prejudice. For example, in Gateway Drywall & Decorating, Inc. v. Village Construction Co., 76 Ill.App.3d 812, 32 Ill.Dec. 383, 395 N.E.2d 613 (1979), the court held that the defendants waived the right to compel arbitration by filing an answer that raised factual issues by their denials and by their setoff claims and did not assert their contractual right to arbitrate. The court stated that “an arbitrable issue may in some circumstances be found to have been submitted to the court so as to waive the right to arbitration where a defendant has presented a factual issue to the court by filing an answer without asserting therein his right to arbitration.” Id. 32 Ill.Dec. at 386, 395 N.E.2d at 616.⁷ The court did not even address the issue of whether the plaintiffs had suffered prejudice.

III.

Unless authorized by contract, submission of arbitrable issues in a judicial proceeding constitutes a waiver of the right to compel arbitration regardless of the prejudice to the other party. By petitioning the state court for relief that was more than “interim or conservatory,” McGraw waived its right to compel arbitration. The district court’s refusal to order arbitration is AFFIRMED.

1 . This amount was later raised to $16,920,000 by mutual agreement of the parties.

2 . Under the contract, arbitration could be had pursuant to the rules of the International Chamber of Commerce.

3 .Article 20 of the construction contract provides that the "arbitration shall be ... governed by the laws of the state of Illinois.... ” The parties relied on Illinois law in the state trial court and in the federal district court proceedings. Moreover, the district court applied Illinois law in this diversity case, and no party has contended in their briefs or at oral argument that this was error. Accordingly, we apply Illinois law. It appears to us that the dissent is a bit quixotic in its insertion of a conflict of laws issue and in its proposal to apply federal law in this diversity case.

4 . This is an appealable interlocutory ruling under 9 U.S.C. § 16(a)(1). See Arnold v. Arnold Corp., 920 F.2d 1269 (6th Cir.1990).

5 . Cf. Yates v. Doctors' Associates, Inc., 193 Ill. App.3d 431, 140 IIl.Dec. 359, 549 N.E.2d 1010 (1990) (Even though franchisor made a motion to compel arbitration, party waived arbitration by having its agent bring an action in state court to have the franchisee evicted).

6 . Contesting venue, however, does not constitute a waiver of the right to arbitrate because it is not an arbitrable issue. Brennan v. Kenwick, 97 Ill.App.3d 1040, 54 Ill.Dec. 574, 425 N.E.2d 439 (1981).

7 . Although a showing of prejudice is not required, G.E. and WorldSource would suffer prejudice if forced to arbitrate this dispute. It would seem that prejudice results when one party invokes the litigation process and then seeks arbitration, thereby causing the other party to incur duplicate expenses. WorldSource and G.E. filed an answer in the Circuit Court of Hancock County that addressed all of McGraw’s claims. After McGraw’s application for a preliminary injunction was, after a hearing, denied, WorldSource and G.E. filed a motion to amend their answer by asserting counterclaims. McGraw then moved for and obtained a dismissal and, therefore, the motion to file the counterclaim was denied. This additional litigation would not have been necessary if arbitration had been sought immediately.