US District Court in Minnesota Holds that Owner Did Not Waive Right to Arbitrate Against Designer by Failing to Join it in Arbitration Against Contractor

Buhler, Inc. v. Reuter Recycling of Florida, Inc.,
889 F. Supp. 1126, 1995 U.S. Dist. LEXIS 9815 (D. Minn. Jul. 10, 1995)

Based on interpretation of two differing arbitration provisions, an owner did not waive its right to arbitrate its claim against designer of facility and seller of equipment by failing to consolidate the arbitration proceeding with the proceeding against its general contractor.

Reuter contracted with Buhler to design a resource recovery and composting facility and to purchase certain equipment for that facility. Reuter also contracted with a general contractor, AMCA, to construct the facility. After completion of the project, Reuter was forced to close the facility after being cited by the local authority for emitting an “objectionable odor.”

Reuter initiated arbitration proceedings against AMCA pursuant to the arbitration clause in the Reuter-AMCA contract and was ultimately awarded $2.5 million. Reuter then initiated arbitration proceedings against Buhler pursuant to the arbitration clause in that contract. In response, Buhler sought injunctive and declaratory relief in federal district court, arguing that Reuter waived any right to compel Buhler to arbitrate claims that arose out of the Reuter-Buhler contract when it failed to consolidate all claims involving the facility in Reuter’s arbitration against AMCA. The court denied Buhler’s request for declaratory relief (which was presented to the court in the form of a motion for summary judgment) on the grounds that Buhler had not met its heavy burden in establishing that Reuter had waived its right to arbitrate.

The Reuter-AMCA contract and the Reuter-Buhler contract both contained arbitration clause the arbitrator or any other party to an arbitration initiated under the arbitration provisions of this Agreement, Buyer, Seller and any other parties bound by this arbitration provision or corresponding provision in any other agreement relating to the Facility shall be joined, become a party to, and be bound by such arbitration proceedings.

The court found that the Federal Arbitration Act applied to this action and that the court’s inquiry was, therefore, generally limited to whether an expressed written agreement to arbitrate the subject matter of the dispute exists between the parties, and if so, whether the agreement to arbitrate has been breached. The court stated that to prove a waiver of the right to arbitrate, the moving party must show (1) a known existing right to arbitration; (2) an act inconsistent with that right; and (3) resulting prejudice. Further, the court noted that the moving party carries a heavy burden in light of the presumption against waiver and the strong federal policy in favor of enforcing arbitration agreements and that any ambiguity regarding the scope of the waiver should be resolved in favor of arbitration.

The court found that Reuter knew it had a right to arbitrate against Buhler at the time it commenced its arbitration proceeding against AMCA. Buhler claimed that by failing to include it in the AMCA arbitration, Reuter acted inconsistently with that right. The court found, however, that this failure is only inconsistent with the right to arbitrate if Reuter was obligated to commence only one consolidated arbitration proceeding. The court analyzed the two arbitration clauses and found that although the Reuter-AMCA contract provides that all related claims “shall” be submitted to the same arbitrator, the Reuter-Buhler contract permits the joinder of additional parties only on demand of the arbitrator or any other party to the arbitration. The court held “these provisions do not unambiguously require Reuter to consolidate all related claims arising from separate agreements in one proceeding. The fact that the contracts are susceptible to different meanings precludes a finding of waiver.” Therefore, the court found that Reuter did not act inconsistently with its right to arbitrate against Buhler. The court also found that Buhler had not suffered prejudice sufficient to overcome the arbitration agreement.

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