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Liberty Mutual Ins. Co. v. Mandaree Pub. School Dist. #36: ARBITRATION | APPELLATE PROCEEDURE - surety didn't agree to arbitrate; jurisdiction question first on appeal without merit

United States Court of Appeals
No. 06-3957
Liberty Mutual Insurance Company, *
Plaintiff - Appellee, **
Appeal from the United States
v. * District Court for the
* District of North Dakota.
Mandaree Public School District #36, **
Defendant - Appellant. *
Submitted: June 13, 2007
Filed: October 10, 2007
Before LOKEN, Chief Judge, ARNOLD and COLLOTON, Circuit Judges.
LOKEN, Chief Judge.
Mandaree Public School District and Tooz Construction, Inc., entered into a
contract to remodel and expand a public school. The standard AIA contract provided
that disputes between Mandaree as owner and Tooz as contractor would be resolved
by arbitration in accordance with the Rules of the American Arbitration Association
(AAA). Liberty Mutual Insurance Company issued a performance bond to secure
Toozs performance. The bond incorporated the construction contract by reference
and provided that [a]ny proceeding, legal or equitable, under this Bond may be
instituted in any court of competent jurisdiction [where] the work is located . . .within
two years after the Surety . . . fails to perform its obligations under this Bond.
1The HONORABLE DANIEL L. HOVLAND, Chief Judge of the United States
District Court for the District of North Dakota.
When a dispute arose between Tooz and Mandaree, Tooz initiated arbitration.
Mandaree counterclaimed and then attempted to assert a claim against Liberty Mutual
under the bond. Liberty Mutual refused to join the arbitration, and the arbitrator
denied Mandarees request to amend. Liberty Mutual later advised the AAA it would
consent to becoming part of the arbitration, but further actions by Mandaree
prompted Liberty Mutual to send the AAA a letter withdrawing its consent. That
same day, Liberty Mutual filed this lawsuit seeking a declaratory judgment that
Mandaree's unilateral actions discharged Liberty Mutuals obligations under the bond.
An AAA Claims Manager advised, we are not adding [Liberty Mutual] as a party
because it withdrew its consent to participate. Mandaree moved to stay the lawsuit
and to compel Liberty Mutual to arbitrate all of its claims against Mandaree by
joining in the pending arbitration. The district court1 denied the motion, and
Mandaree appeals. The Federal Arbitration Act authorizes appellate review of an
interlocutory order refusing to compel arbitration. 9 U.S.C. 16(a)(1). We affirm.
I. Did Liberty Mutual Agree To Arbitrate?
The Federal Arbitration Act overruled historic judicial hostility to arbitration
and placed agreements to arbitrate upon the same footing as other contracts. Allied-
Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 271 (1995) (quotation omitted).
However, arbitration is a matter of contract and a party cannot be required to submit
to arbitration any dispute which he has not agreed so to submit. AT & T Techs., Inc.
v. Communications Workers of Am., 475 U.S. 643, 648 (1986) (quotation omitted);
see First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995). The district
court denied Mandaree's motion to compel arbitration on the ground that Liberty
Mutual neither agreed nor consented to arbitrate its claims against Mandaree under the
A. Did the Performance Bond Contain an Agreement To Arbitrate?
Mandaree argues that, since the bond incorporated a construction contract that
obligated Mandaree and Tooz to arbitrate their disputes under the contract, the bond
contained an agreement by Liberty Mutual to arbitrate its disputes with Mandaree
under the bond. We apply ordinary state law contract principles to decide whether
parties have agreed to arbitrate a particular matter, giving healthy regard for the
federal policy favoring arbitration. AgGrow Oils, L.L.C. v. Natl Union Fire Ins. Co.
of Pittsburgh, 242 F.3d 777, 780 (8th Cir. 2001) (quotations omitted). In this regard,
it is relevant that the bond contained a provision contemplating that disputes will be
resolved in court, and the construction contract expressly provided that it shall not
be construed to create a contractual relationship of any kind . . . between any persons
or entities other than [Mandaree and Tooz].
Applying North Dakota law, we considered this same issue and resolved it
contrary to Mandarees position in AgGrow Oils, 242 F.3d at 780-82, a case involving
the same bond language and a construction contract with nearly identical arbitration
provisions. We held that the incorporation provision did not reflect a mutual intent
to compel arbitration of all disputes between the surety and the obligee under the
bond. 242 F.3d. at 782. Though it was the surety attempting to compel arbitration
in AgGrow, we noted that a contrary rule would also permit a bond obligee to compel
an unwilling surety to arbitrate defenses unique to the bond, such as whether the
obligee had impaired the suretys position or released the principal obligor. Id. That
is precisely what Mandaree seeks to compel in this case. Concluding that AgGrow
Oils is controlling, the district court held that the incorporation clause in the
performance bond at issue in this dispute does not mandate the surety to arbitrate.
We agree. Mandaree's attempt on appeal to distinguish AgGrow Oils is unpersuasive,
and its frontal attack on the merits of that decision must be addressed to the court en
B. Did Liberty Mutual Otherwise Agree To Arbitrate This Dispute?
In the alternative, Mandaree argues that Liberty Mutual agreed to arbitrate an
existing controversy when it advised the AAA that it consented to becoming part of
the arbitration between Tooz and Mandaree. Acknowledging that the Federal
Arbitration Act applies to an agreement in writing to submit to arbitration an existing
controversy, 9 U.S.C. 2, Liberty Mutual responds that its letter to the AAA
consenting to join the arbitration was not an offer to Mandaree, and that Liberty
Mutual withdrew or revoked its consent before it was accepted by the AAA. In its
reply brief, Mandaree argues that its initial offer to arbitrate remained open after
Liberty Mutual responded that it would not join the arbitration at this time and under
these circumstances, and therefore Liberty Mutual's subsequent letter to the AAA
consenting to join the arbitration was an acceptance that formed an agreement to
arbitrate that was, under the Federal Arbitration Act, irrevocable, and enforceable.
9 U.S.C. 2. For two distinct reasons, we reject the contention that Liberty Mutual
entered into a separate agreement to arbitrate all of its claims against Mandaree.
First, the argument when fully developed in Mandaree's reply brief assumes that
its initial communication to Liberty Mutual was an offer to arbitrate all disputes under
the bond. In fact, it was something quite different. When Tooz initiated the
arbitration in November 2005, Mandaree filed an answer and counterclaim the
following month. On May 17, 2006, Mandaree's attorney submitted a letter request
to the AAA Case Manager to amend its counterclaim and/or to join Liberty Mutual
as a party to this arbitration so as to assert all of its claims presently made against
Tooz . . . against Liberty Mutual. Mandaree requested a status conference with the
arbitrator to discuss amending [the] counterclaim and other pre-hearing issues.
Then, on May 19, Mandaree's attorney sent the so-called offer letter to Liberty
Mutual. After declaring Tooz in default under the construction contract and
demanding that Liberty Mutual meet its obligations under the bond, this letter stated:
An arbitration hearing is presently scheduled for June 12-14 . . . .
Mandaree is in the process of amending its claims in the arbitration to
assert claims against Liberty Mutual, as surety for Tooz. The AAA Case
Manager for this matter is J.D. Allen and we request that Liberty Mutual
contact Mr. Allen for more information about the arbitration. . . . Please
call me to discuss this matter so that we can move forward with the
This was not a letter requesting Liberty Mutual's agreement to arbitrate, like the letter
at issue in Asia Pac. Indus. Corp. v. Rainforest Caf, Inc., 380 F.3d 383, 386 (8th Cir.
2004). Rather, without seeking Liberty Mutual's consent, Mandaree asked the
arbitrator to add Liberty Mutual as a party and then requested that Liberty Mutual
gather more information about the arbitration . . . so that we can move forward with
the arbitration. This was a procedural demand by the adversary in an on-going
dispute, not an offer to agree on a forum for dispute resolution.
Four days later, Liberty Mutual responded that it would not agree to join the
arbitration. The parties held a telephone conference with the arbitrator the next day.
On May 30, the arbitrator issued an order denying Mandaree's request to amend its
counterclaim because Liberty Mutual did not consent to becoming an additional party
to the on-going arbitration. Thus, Mandaree's arbitration request (which in a judicial
forum would be called a motion) that Liberty Mutual be compelled to arbitrate was
denied. That quasi-judicial denial left no contractual offer to arbitrate pending.
Therefore, Liberty Mutual's subsequent notice to the AAA that it consented to join the
arbitration was not an acceptance of a Mandaree offer that formed an agreement to
arbitrate. Rather, it was a voluntary act in the arbitration proceeding that Liberty
Mutual could revoke (at least if the AAA approved) without violating the provision
in 9 U.S.C. 2 that agreements to arbitrate are irrevocable.
Second, even if Mandarees May 19 letter is construed as a contractual offer to
arbitrate, rather than a litigation notice that Liberty Mutual was being compelled to
2We disagree with the suggestion in Sadler that this is a question of the district
court's subject matter jurisdiction. 466 F.3d at 625. In our view, the Supreme Court's
unanimous opinion in First Options made it clear that a federal court has jurisdiction
to determine whether a question of arbitrability must be decided by the court or by the
arbitrator. Here, for example, Mandaree itself invoked the court's Federal Arbitration
Act jurisdiction by filing a motion to compel arbitration.
join the arbitration, it was not an offer commensurate with the scope of Mandaree's
motion to compel here at issue -- that Liberty Mutual agree to arbitrate all of its
claims against Mandaree. Rather, it was a specific offer that Liberty Mutual agree
to join an on-going arbitration for the limited purpose of allowing Mandaree to assert
against Liberty Mutual all of its pending claims against Tooz. The claims that Liberty
Mutual now asserts in this lawsuit are based on its unique defenses under the bond,
which did not even exist until many weeks later, when Mandaree unilaterally hired a
replacement contractor to finish the project. Even construing Liberty Mutual's letter
of June 27 to the AAA Case Manager as an acceptance of Mandaree's unrevoked May
19 offer, Liberty Mutual's consent was not an agreement to arbitrate more than what
was proposed in Mandarees offer -- arbitration of Mandaree's pending claims against
Tooz. Therefore, Mandaree's motion to compel arbitration of Liberty Mutual's very
different claims in this lawsuit was properly denied.
II. A Belated Jurisdiction Argument
Mandaree argues for the first time on appeal that the district court lacked
jurisdiction to deny the motion to compel arbitration because the alleged agreement
to arbitrate left the issue of arbitrability for the arbitrator to decide. See Sadler v.
Green Tree Servicing, LLC, 466 F.3d 623 (8th Cir. 2006) (enforcing an express
provision that the arbitrator would decide arbitrability). In addition to being
untimely,2 this contention is without merit. Courts should not assume that the parties
had agreed to arbitrate arbitrability unless there is clear and unmistakable evidence
that they did so. First Options, 514 U.S. at 944 (quotation omitted). Here, there is
no such evidence because the offer and acceptance allegedly creating an agreement
that Liberty Mutual would join the Tooz/Mandaree arbitration did not address who
would determine whether the parties had in fact agreed to arbitration. We reject as
inconsistent with AgGrow Oils Mandaree's additional contention that Liberty Mutual's
agreement on this issue is irrelevant because Tooz and Mandaree agreed to arbitrate
arbitrability in the construction contract.
The judgment of the district court is affirmed.


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