SR CONSTR., INC. v. PEEK BROS. CONSTR., INC. , 2022 NV 41 ( 2022 )

138 Nev., Advance Opinion 14 I
IN THE SUPREME COURT OF THE STATE OF NEVADA
SR CONSTRUCTION, INC., A NEVADA No. 82786
DOMESTIC CORPORATION,
Appellant,
vs. FILE 011
PEEK BROTHERS CONSTRUCTION,
INC., A NEVADA DOMESTIC JUN 0 2022
CORPORATION, ELI
Respondent. CLERK
BY
DEPUTY CLERK
Appeal from a district court order denying a motion to compel
arbitration. Second judicial District Court, Washoe County; Barry L.
Breslow, Judge.
Reversed and remanded.
Allison Law Firm Chtd. and Noah G. Allison and Heather Caliguire
Fleming, Henderson,
for Appellant.
Viloria, Oliphant, Oster & Aman LLP and Nathan J. Aman and Ernilee N.
Hammond, Reno,
for Respondent.
BEFORE THE SUPREME COURT, SILVER, CADISH, AND PICKERING,
JJ.
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OPINION
By the Court, PICKERING, J.:
This is an appeal from an order denying a motion to compel
arbitration. Appellant SR Construction, Inc., argues that the district court
erroneously denied its motion to compel because its master subcontract
agreement (MSA) with respondent Peek Brothers Construction, Inc.,
includes a valid arbitration provision that applies to the parties underlying
dispute. Peek contends the district court properly held that the underlying
dispute falls outside the bounds of the parties' arbitration agreement. The
parties do not contest the validity of the MSA or its arbitration provision,
thus posing a single question to this court in this appeal: Does the parties'
dispute fit within the scope of the arbitration provision contained in the
MSA?
I.
SR (a general contractor) and Peek (a subcontractor) executed
the MSA to establish the general terms and conditions of their future work
together. The MSA includes an arbitration provision:
(a) Contractor and Subcontractor shall not be
obligated to resolve disputes arising under this
Subcontract by arbitration, unless:
(i) the prime contract has an arbitration
requirement; and
(ii) a particular dispute between Contractor
and Subcontractor involves issues of fact
or law which the Contractor is required to
arbitrate under the terms of the prime
contract.
(emphasis added). S.R later executed an agreement (the prime contract)
with Sparks Family Medical Center, Inc., an affiliate of United Health
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Services of Delaware (UHS, the project owner), to construct a major medical
center in Reno (the project). The prime contract consists of two
documents—American Institute of Architects (AIA) Document A133-2009
and AIA Document A201-2017—each of which incorporates the other by
reference. The prime contract is a "cost-plus" agreement with a guaranteed
maximum price (GMP), meaning that UHS as the project owner bears all
project costs up to the GMP. Cost-Plus Contract, Black's Law Dictionary
(11th ed. 2019) ([A] contract in which payment is based on a fixed fee or a
percentage added to the actual cost incurred; esp., a construction contract
in which the owner pays to the builder the actual costs of material and labor
plus a fixed percentage over that amount."). The parties may seek to
increase the GMP and recover additional "necessarily incurred" costs using
written change orders. If costs exceed the GMP as modified by any
approved change orders, then SR is responsible for the excess costs.
The prime contract also includes an arbitration provision,
which states as follows:
Arbitration shall be utilized as the method for
binding dispute resolution in the Agreement[.]
[A]ny Claim subject to, but not resolved by,
mediation shall be subject to arbitration which,
unless the parties mutually agree otherwise, shall
be administered by the American Arbitration
Association in accordance with its Construction
industry Arbitration Rules in effect on the date of
the Agreement.
(emphasis added). A "claim" under the contract is "a demand or assertion
by one of the parties seeking, as a matter of right, payment of money, a
change in the Contract Time, or other relief with respect to the terms of the
Contract . . . [and] other disputes and matters in question between the
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Owner and Contractor arising out of or relating to the Contract." (emphasis
added). The prime contract further permits SR to include subcontractors in
arbitration of a claim:
Arbitration, at the Contractor's election, may
include Subcontractors to Contractor that
Contractor deems relevant to the matter in dispute
and upon Contractor's request, the Arbitrator shall
decide all or a particular portion of a dispute
between the Contractor and a Subcontractor and,
as Contractor may request, the Arbitrator shall
speak to the extent to which the Arbitrator's
decisions regarding a dispute between Contractor
and Owner and the dispute between Contractor
and Subcontractor are inter-related.
After executing the prime contract with UHS, SR executed a work order
with Peek to complete the core and shell civil work for the project, which
included bringing the building pad to the proper subgrade elevation. SR
agreed to pay Peek $3,062,000 for its work, and the work order expressly
incorporated the MSA's terms and obligations by reference.
The dispute underlying SR's motion to compel arbitration arose
when—for reasons the parties contest—Peek deviated from the means and
methods it used to bid the project in elevating the building pad. Peek states
that it bid the project assuming it would mass-grade the building pad to a
few feet below the required elevation, dig the building footings and
plumbing trenches, and then use the "spoils" from excavating the footings
and trenches to backfill and grade the pad to the proper subgrade elevation.
Instead, Peek imported approximately 150,000 square feet of additional
material to raise the pad to the proper subgrade elevation before digging the
footings and trenches. Peek alleges that it deviated from its bid-based plans
when an SR employee directed it to obtain extra material to raise the pad
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earlier because SR did not want to wait for Peek to excavate the footings
and trenches. SR alleges that Peek did not know the pad's elevation from
the start and thus imported additional material under the incorrect
assumption that it needed it.
The above-described changes added $140,000 to Peek's costs,
which it sought to recover from SR after the fact in two written change
orders. SR relayed the change orders to UHS, who deemed the changes
unnecessary, rejected the change orders, and directed SR to initiate dispute
resolution with Peek. Before SR could do so, Peek sued SR in district court,
alleging breach of contract, unjust enrichment, and violation of NRS
Chapter 624 and seeking over $140,000 in damages and attorney fees. SR
filed a demand for arbitration with the American Arbitration Association
(AAA), in which it named UHS and Peek as defendants, and in tandem with
its demand, SR moved to compel arbitration in district court. The district
court denied SR's motion. It held that the prime contract required
arbitration only of disputes between UHS and SR, so Peek's dispute with
SR was not arbitrable under the MSA because it did not involve UHS and,
therefore, could not involve common issues of fact or law that SR must
arbitrate under the prime contract. SR appeals, and we reverse.1
11.
On appeal, SR argues that Peek's dispute involves issues of fact
and law about the reasonableness of its additional costs that SR must
arbitrate with UHS under the prime contract, so this dispute is therefore
'This court stayed litigation below pending resolution of this appeal,
which order we now vacate.
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arbitrable as between SR and Peek under the MSA provision. SR further
argues that the district court ignored the presumption of arbitrability when
it denied the motion to compel and that Peek cannot artfully plead its way
out of arbitration by omitting UHS as a defendant. Peek argues that this
dispute does not involve UHS because SR is solely responsible for its
additional costs, and the district court therefore correctly concluded that
this dispute is not arbitrable under the MSA provision because the prime
contract only mandates arbitration of disputes between UHS and SR. Peek
further argues that SR's interpretation of the MSA provision would create
the absurd result of forcing SR and Peek to arbitrate all disputes.
To compel arbitration, a moving party must establish that there
is an enforceable agreement to arbitrate and that the dispute fits within the
scope of the arbitration agreement. 4 Am. Jur. 2d Alternative Dispute
Resolution § 100 (2018); see al.so Phillips v. Parker, 106 Nev. 415, 417, 794
P.2d 716. 718 (1990). Here, the parties agree that the MSA includes a valid
and enforceable arbitration provision, so we address the narrow issue of
whether this particular dispute fits within the provision's scope. The
arbitrability of a dispute presents a question of contract construction that
this court reviews de novo. Masto v. Second Judicial Dist. Court, 125 Nev.
37, 44, 199 P.3d 828, 832 (2009). That review only addresses arbitrability,
not the merits of the underlying dispute. Clark Cty. Pub. Emps. Ass'n v.
Pearson, 106 Nev. 587, 591, 798 P.2d 136, 138 (1990).
A.
There is a strong -presumption in favor of arbitrating a dispute
where a valid and enforceable arbitration agreement exists between the
parties. AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 650
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(1986); Int? Ass'n of Firefighters, Local No. 1285 v. City of Las Vegas, 112
Nev. 1319, 1323, 929 P.2d 954, 957 (1996) (Nevada courts resolve all doubts
concerning the arbitrability of the subject matter of a dispute in favor of
arbitration.") (internal quotation marks omitted); cf. Gore v. Alltel
Cornrnc'ns, LLC, 666 F.3d 1027, 1032 (7th Cir. 2012) (holding that no
presumption of arbitrability arises when the court is determining whether
an arbitration agreement exists in the first place). This presumption
applies differently based on the scope of the arbitration agreement. 1
Thomas H. Oehmke & Joan M. Bovins, Commercial Arbitration
§ 6:9 (3d ed. 2021) (noting that the scope of the clause indicates the parties'
intent to arbitrate a particular dispute); 7 Philip L. Bruner & Patrick J.
O'Connor, Jr., Bruner & O'Connor on Construction Law § 21:122 (2014)
(explaining that the presumption of arbitrability applies differently under
broad versus narrow arbitration clauses). Under a broad arbitration
provision—i.e., one that encompasses all disputes related to or arising out
of an agreement—a presumption of arbitrability applies and "only the most
forceful evidence of a purpose to exclude the claim from arbitration can
prevail." Clark Cty. Pub. Ernps. Assn, 106 Nev. at 591, 798 P.2d at 138(quoting AT&T Techs., Inc., 475 U.S. at 650 (holding that only the strongest
evidence against arbitration will remove a dispute from the purview of a
broad arbitration clause)). Even matters tangential to the subject
agreement will be arbitrable under a broad provision. 1 Oehmke, supra,
§ 6:10 (Supp. 2021) ([W]hen the language of the arbitration provision is
broad, a claim will proceed to arbitration if the underlying allegations
simply touch upon any rnatters covered by the provision.").
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Given that a strong presumption of arbitrability applies if the
MSA provision is deemed broad, Peek argues it is narrow—a plausible
position at first blush—because the clause states that a dispute is not
arbitrable "unless" two prerequisites are satisfied. Cf. Louis Dreyfus Negoce
S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 226 (2d Cir. 2001)
(reasoning that words and phrases alone do not dictate whether a clause is
broad or narrow, although words of limitation typically indicate a narrower
clause). But unlike other narrowly phrased arbitration agreements, the
MSA provision does not limit arbitration to specific issues, subject matter,
or dollar amounts. Instead, it incorporates the prirne contract's terms by
looking to (1) whether the prime contract includes an arbitration
requirement, and (2) whether the dispute "involves issues of fact or law
which [SR] is required to arbitrate under the terms of the prime contract."
See Clark Cty. Pub. Emps. Ass'n, 106 Nev. at 591, 798 P.2d at 138 (holding
that an issue was arbitrable where not expressly excluded from the
arbitration provision); cf. Papalote Creek II, LLC v. Lower Colo. River Auth.,
918 F.3d 450, 455-56 (5th Cir. 2019) (noting that a narrow arbitration clause
limits arbitration to a specific category of disputes at the exclusion of
others); 1 Oehmke, supra, § 6:11 (Supp. 2021) (A narrow clause limits the
arbitrator's scope of authority by either including specific disputes or
excluding other identified issues.").
Accordingly, where a prime contract includes a broad
arbitration provision, the MSA provision's purported limits are nearly
illusory. The prime contract applicable here includes an expansive
arbitration provision that covers all disputes between SR and UHS,
including "matters in question . . . arising out of or relating to the contract."
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See 2 Oehinke, supra. § 25:17 (stating that the standard AIA Document
A201 contract includes a broad arbitration clause). The MSA provision is
therefore likewise broad because it requires SR and Peek to arbitrate a
"dispute . . . involv[ing] issues of fact or law [that SR] is required to
arbitrate under the terms of the prime contract," which in turn includes any
dispute or "matted ] in question" arising under the agreement. Further,
because the MSA provision does not limit its application to disputes
involving issues of fact or law that both the contractor and subcontractor
must arbitrate under the prime contract, it is irrelevant to determining the
MSA provision s scope that UHS is not a defendant to the underlying action
and that Peek is not a party to the prime contract's arbitration agreement.
See Clark Cty. Pub. Ernps. Assin, 106 Nev. at 591, 798 P.2d at 138. Rather,
under the MSA provision's plain language, if SR would have to"arbitrate an
issue of fact or law under the prime contract with UHS, then in turn, SR
and Peek must arbitrate that same issue.
In sum, as applied here, the MSA provision is broad and an
attendant presumption of arbitrability applies. Meanwhile, Peek provides
no evidence to rebut this presumption and show that the parties intended
to exclude this dispute from arbitration. See Clark Cty. Pub. Ernps. Ass'n,
106 Nev. at 591, 798 P.2d at 138 ([I]n the absence of any express provision
excluding a particular grievance from arbitration, we think only the most
forceful evidence of a purpose to exclude the claim from arbitration can
prevail.") (emphasis and internal quotation marks omitted). Lacking
forceful evidence of the parties intent to exclude this dispute from
arbitration, Peek's dispute is presumptively arbitrable under the parties'
agreement. This interpretation does not create what Peek characterizes as
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the absurd result of mandating arbitration of all disputes between Peek and
SR; it mandates arbitration of only those disputes including common issues
of fact or law that SR rnust arbitrate with UHS under the prime contract,
which the parties freely agreed to do. See Holcomb Condo. Homeowners'
Ass'n v. Stewart Venture, LLC, 129 Nev. 181, 187, 300 P.3d 124, 128 (2013)
(recognizing Nevada's interest in protecting persons freedom to contract).
B.
Even crediting Peek's argument that the MSA provision is
narrow, this dispute is arbitrable because it fits within the provision's
terms. Clark Cty. Pub. Ernps. Assn, 106 Nev. at 591, 798 P.2d at 138(holding that where no express provision excluded arbitration the court
could not say with "positive assurance that the issue was not arbitrable
(emphasis omitted)); 1 Oehmke, supra, § 6:9 (noting that under a narrow
clause "the sole issue for the arbiter is a dispute that, on its face, falls within
the purview of the clause"). A narrow provision limits arbitration to specific
issues or circumstances; unlike under broad provisions, collateral issues to
the subject agreement are not arbitrable under narrow provisions.
Cummings v. FedEx Ground Package Sys., Inc., 404 F.3d 1258, 1261-62
(10th Cir. 2005); 1 Oehmke, supra, § 6:11. In further contrast to a broad
provision, "a narrow clause indicates a weak presumption of arbitrability."
1 Oehmke, supra, § 6:11 (Supp. 2021). I3ut even under a narrow provision,
the court "should order arbitration of particular grievances 'unless it may
be said with positive assurance that the arbitration clause is not susceptible
of an interpretation that covers the asserted dispute."' Int'l Assn of
Firefighters, Local No. 1285, 112 Nev. at 1324, 929 P.2d at 957 (quoting
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AT&T Techs., Inc., 475 U.S. at 650); Clark Cty. Pub. Ernps. Assn, 106 Nev.
at 591, 798 P.2d at 138.
Fairly read, consistent with even a weak presumption of
arbitrability, the MSA provision covers Peek's dispute because it raises
issues of fact and law regarding the reasonableness of Peek's change orders
that SR must arbitrate with UHS under the prime contract. UHS must
compensate SR—and Peek—only for "costs necessarily incurred by [SR] in
the proper performance of the Work." (emphasis added). See W . Henry
Parkman, Cost-Plus Contracting Without a GMP—Contractor's Risks,
Owner's Rights?, 29 No. 11 ConstruCtion Litig. Rep. 1, 3-4 (2008) (explaining
that a project owner is responsible only for reasonably incurred costs under
a cost-plus contract with a GMP). Costs incurred due to a contractor's fault
or mismanagement are unnecessary and unreasonable, and therefore, a
contractor and owner rnay dispute whether those costs are reimbursable
under the contract. Id.; see also Kerner v. Gilt, 296 So. 2d 428, 431 (La. Ct.
App. 1974) (In any cost-plus contract there is an implicit understanding
between the parties that the cost must be reasonable and proper."). Peek
alleges that SR's mismanagement caused its additional costs—i.e.,
unnecessarily directing Peek to import 150,000 square feet of additional
material to elevate the building pad's subgrade. Peek's allegation amounts
to a "claim" about whether its costs were reasonably incurred, which
involves issues of fact and law that SR would have to arbitrate with UHS
when seeking reimbursement for those costs under the prime contract, at
least until the GMP is exceeded. The GMP was not exceeded when this
claim was filed, and Peek must therefore arbitrate this dispute with SR
because SR must arbitrate the dispute with UHS.
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C.
Other provisions in the prime contract and MSA confirm the
arbitrability of this dispute. See Eversole v. Sunrise Villas VIII Homeowners
Ass'n, 112 Nev. 1255, 1260, 925 P.2d 505, 509 (1996) ("Contractual
provisions should be harmonized whenever possible . . . .”). This court may
order consolidation of arbitration to avoid potentially conflicting awards
and the additional time and expense involved with separate proceedings if
mutual consolidation agreements exist. Compare Exber, Inc. v. Sletten
Constr. Co., 92 Nev. 724, 725-27, 732, 558 P.2d 517, 519-20, 524 (1976)
(ordering consolidated arbitration where common issues of law existed and
all parties agreed to consolidation), with Pueblo of Laguna v. Cillessen &
Son, inc., 682 P.2d 197, 200 (N.M. 1984) (holding that consolidation of
arbitration was improper because consolidation was not provided for in any
of the contract documents). This court's decision in Exber, Inc. v. Sletten
Construction Co. is illustrative: There, as here, the project owner and
general contractor entered an AIA Document A201 agreement that included
a broad arbitration provision. 92 Nev. at 724, 558 P.2d at 518. The general
contractor then entered several subcontracts, which each extended the
contractor's right to arbitrate disputes under the prime contract to the
subcontractors. Id. at 724-25, 558 P.2d at 519. The owner later rejected the
contractor's claim seeking to recover its subcontractors additional costs; the
subcontractors accordingly made a demand on the contractor to submit the
claim to arbitration, who in turn made an arbitration demand on the owner.
Id. at 725, 558 P.2d at 519. The owner challenged joint arbitration because
it did not have a contractual duty to arbitrate with the subcontractors. Id.
at 727, 558 P.2d at 520. This court ordered consolidation of the arbitration
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proceedings because the owner/contractor dispute involved the same
evidence, witnesses, and legal issues as those involved in the
contractor/subcontractors dispute. Id. at 732, 558 P.2d at 524.
The prime contract includes a consolidation-of-arbitration
provision in matters involving common legal and factual issues:
[E]ither party may consolidate an arbitration
conducted under this Agreement with any other
arbitration to which it is a party provided that
(1) the arbitration agreement governing the other
arbitration permits consolidation, (2) the
arbitrations to be consolidated substantially involve
common questions of law or fact, and (3) the
arbitrations employ materially similar procedural
rules and methods for selecting arbitrator(s).
(emphasis added). Section 15.4.4 of the prime contract further provides that
SR may include subcontractors in arbitration under the agreement if SR
"deems [the subcontractor] relevant to the matter in dispute." The MSA
also includes a consolidation clause, which provides that "the same
arbitrator(s) utilized to resolve the dispute between any Owner and
Contractor shall be utilized to resolve the dispute under [the MSA]
provision." See 2 Oehmke, supra, § 25:54 (labeling a provision like that used
in the MSA as a consolidation clause). And like the intertwined disputes in
Exber, common questions of law and fact permeate the disputes between
Peek/SR and SR/UHS—for example, who is at fault for importing the
additional material? Did UHS direct SR to work faster, thus prompting
SR's alleged request of Peek? Was importing additional material
reasonable in view of the larger project timeline? Did Peek and S R comply
with the proper change-order procedures? More than likely, the Peek/SR
dispute will require the same witnesses and evidence to answer these same
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questions in the SIVUHS dispute. This court therefore has the power to
order arbitration because mutual consolidation-of-arbitration provisions
exist, and common questions of fact and law drive these disputes.
To the extent Peek argues that this dispute is not arbitrable
because it does not (and will not) involve UHS, we disagree. UHS has
ultimate authority to approve or reject change-order requests up to the
GMP, as increased (or not) by earlier change orders. UHS—not SR—
rejected Peek's change orders, and UHS cautioned SR against issuing
payment to Peek without its approval. Potential outcomes of the Peek/SR
dispute implicate UHS's financial interests—e.g., if the finder of fact
concludes that Peek's additional costs were reasonable, and SR may seek
reimbursement from UHS. Indeed, UHS already raised Peek's dispute as a
matter in question between itself and SR under the prime contract, thus
permitting consolidation of these common disputes under Section 15.4.4 of
the prime contract. It is simply too early to tell if UHS will bear financial
responsibility for Peek's costs, and absent necessary facts in this pre-
discovery moment, Peek cannot avoid arbitration by strategically omitting
UHS from its complaint. Phillips, 106 Nev. at 417, 794 P.2d at 718 (holding
that a party may not use artful pleading to avoid arbitration); see also Seal
& Co. v. A.S. McGaughan Co., 907 1?.2d 450, 453-55 (4th Cir. 1990) (holding
that subcontractor must comply with alternative dispute resolution
provision of the prime contract where the subject dispute involved
interpretation of the prime contract's terms); Frohberg Elec. Co. v.
Grossenburg Implement, Inc., 900 N.W.2d 32, 38 (Neb. 2017) (holding that
issue was arbitrable between subcontractor and contractor even though
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arbitration clause only referenced disputes between the contractor and
owner).
In sum, the MSA provision incorporates the prime contract
provision, which is broad, so the presumption of arbitrability applies, which
Peek fails to rebut. The dispute is therefore arbitrable. And even
construing the MSA provision narrowly, this dispute is arbitrable because
it fits within the face of the arbitration provision: SR rnust arbitrate
whether costs included in a change order are reasonable and reimbursable
under the prime contract's arbitration agreement. Further, the prime
contract and the MSA both include consolidation-of-arbitration provisions,
and UHS is involved in this dispute because it has a potential financial
interest in it, thus permitting consolidation of the Peek/SR and SR/UHS
disputes. We therefore reverse the district court's order denying SR,'s
motion to compel and remand with instructions to the district court to order
that this matter proceed to arbitration.
jekti J.
Pickering°
We concur:
J.
Silver
Cadish
co:iff•J J.
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