D.C. Federal Court Declines to Enjoin Arbitration Because the Arbitrator Could Issue Any Equitable Relief Required, the Integrity of the Arbitration Was Not Threatened and the Movant’s Projected Economic Loss Did Not Prove Irreparable Harm

TK Servs., Inc. v. RWD Consulting, LLC, 2017 U.S. Dist. Lexis 97239 (D.D.C., June 23, 2017)

This litigation arose from a dispute between TK Services, Inc. (“TKS”), as sub-subcontractor, and RWD Consulting, LLC (“RWD”), as prime subcontractor, in connection with a sub-subcontract (the “Subcontract”), whereby TKS agreed to be responsible for managing operation and maintenance-related services (the “Services”) for the Environmental Protection Agency headquarters in Washington DC (the “Project” or the “EPA Building”) in exchange for a monthly fixed fee and a percentage of profits derived from reimbursable projects performed at the EPA Building.  Pursuant to the Subcontract, all funds received by RWD as payment for the Services performed at the Project and all working capital provided by TKS were to be deposited into a joint bank account to which both TKS and RWD were signatories.

In its complaint, TKS alleged that RWD (1) breached the Subcontract by failing to properly compensate TKS and excluding TKS from accessing the EPA Building, (2) converted the funds in the joint bank account by unilaterally closing the account, and (3) was unjustly enriched by its improper conduct.  TKS also moved for a preliminary injunction to sequester the profits received by RWD in connection with the Project, prevent RWD from excluding TKS from the EPA Building and the joint bank account, and reinstate TKS to its prior role under the Subcontract. 

RWD opposed the motion for a preliminary injunction and filed its own motion to dismiss and compel arbitration arguing that the Subcontract contained an arbitration clause, which provided, in pertinent part:

Any controversy or claim between the PARTIES arising out of or in connection with this Agreement, including any claim concerning an alleged breach hereof, shall be subject to final settlement by arbitration. . . The arbitration shall be conducted by a single arbitrator in accordance with the Rules of Arbitration of the American Arbitration Association, as then in effect.

In its opposition papers, TKS conceded that the arbitration clause in the Subcontract covered all of the claims in the complaint, except, TKS argued, the arbitration clause did not provide that arbitration was the sole and exclusive forum for determination of interim injunctive relief.  In denying TKS’ motion for a preliminary injunction, and granting RWD’s motion to compel arbitration, the Court reasoned that the language of the arbitration clause in the Subcontract was broad, clear and mandatory in that the parties agreed to arbitrate “[a]ny controversy or claim” involving the Project, so the parties would have had to explicitly carve out the ability to litigate claims for injunctive relief if that had been their intent.  Additionally, the rules of the selected arbitral forum, the American Arbitration Association, provide for interim and injunctive relief, which the Court held further demonstrated that injunctive relief was covered by the clause.

The Court rejected TKS’ argument that the Court had the power to issue an injunction to maintain the status quo while the arbitration was pending because, in addition to the usual requirements for granting a preliminary injunction (i.e., a showing that the moving party is likely to succeed on the merits, will be irreparably harmed in the absence of the relief, the balance of equities tip in its favor, and the injunction serves the public interest), TKS would have to demonstrate that the integrity of the arbitration process would be threatened absent the injunction.  TKS failed to make that requisite showing.

In any event, the Court held that TKS did not establish that it would be irreparably harmed in the absence of a preliminary injunction.  TKS alleged that, by diminishing TKS’ total annual revenue by 17.68%, TKS would go out of business within months and be unable to meet its obligations under a Chapter 11 Reorganization plan without the income due under the Subcontract.  Economic loss constitutes irreparable harm if it threatens the existence of the movant’s business, but the Court had previously held that a diminution of annual revenues of 24% was not enough to establish that the monetary loss threatened the existence of a movant’s business, so a 17.68% diminution was not enough either.  Additionally, by waiting three-months to file its complaint after RWD closed the joint bank account and locked TKS out of the EPA Building, TKS undermined its claim that its financial situation was urgent.

Accordingly, the Court dismissed the complaint and sent the matter to arbitration noting that if TKS was in dire financial straits, it was free to seek interim relief from the arbitrators.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

Emily D. Anderson

 

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