United States District Court, D. South Dakota, Western Division
JEFFREY L. VIKEN CHIEF JUDGE.
Dlorah, Inc., (“Dlorah”) filed a complaint
against defendant KLE Construction, LLC, (“KLE”)
in South Dakota state court. (Docket 1-2). KLE removed the
case to this court and filed an answer to Dlorah's
complaint. (Dockets 1 & 6). KLE moves the court to compel
arbitration of the dispute or alternatively to stay the case
pending arbitration. (Docket 7).
complaint revolves around an agreement it formed with KLE for
KLE to perform construction services at an apartment complex
in Rapid City, South Dakota. (Docket 1-2 at pp. 1-2).
According to Dlorah, KLE's actions in carrying out the
construction breached the agreement and constituted fraud.
Id. at pp. 7-8. The complaint advances three counts:
breach of contract, fraud/deceit and exemplary damages.
court must highlight its role in relation to legal questions
on submitting disputes to arbitration. The United States
Supreme Court held “there are two gateway questions of
‘arbitrability' for courts to decide.”
Int'l Ass'n of Bridge, Structural, Ornamental
& Reinforcing Ironworkers, Shopman's Local 493 v.
EFCO Corp. & Const. Prods., Inc., 359 F.3d 954, 956
(8th Cir. 2004) (citing First Options of Chicago, Inc. v.
Kaplan, 514 U.S. 938, 943-46 (1995)). First,
“whether the parties have a valid arbitration agreement
that binds them is a question for judicial
determination.” Id. (citing First
Options, 514 U.S. at 943-46); see ABF Freight Sys.,
Inc. v. Int'l Bhd. of Teamsters, 728 F.3d 853, 864
(8th Cir. 2013). And second, “any question as to
whether a valid arbitration agreement applies to the subject
matter at hand is a question for a court to consider.”
EFCO, 359 F.3d at 956 (citing AT&T Techs.,
Inc. v. Commc'ns Workers, 475 U.S. 643, 651-52
(1986)); see Strain v. Murphy Oil USA, Inc.,
6:15-CV-3246, 2016 WL 540810, at *2 (W.D. Mo. Feb. 9, 2016).
the Federal Arbitration Act (“FAA”), a federal
court shall stay a case when it refers to arbitration the
issues the case raises. 9 U.S.C. § 3.“Before a
district court may grant a motion to stay pending arbitration
under 9 U.S.C. § 3, it ‘must engage in a limited
inquiry to determine whether a valid agreement to arbitrate
exists between the parties and whether the specific dispute
falls within the scope of that agreement.' ”
Express Scripts, Inc. v. Aegon Direct Mktg. Servs.,
Inc., 516 F.3d 695, 699 (8th Cir. 2008) (citing
Houlihan v. Offerman & Co., Inc., 31 F.3d 692,
696 (8th Cir. 1994)) (internal quotation marks omitted).
Whether a valid agreement to arbitrate exists
first issue in the court's “limited inquiry”
is determining whether the parties formed a valid agreement
to arbitrate. Id. Courts “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.”
Asia Pacific Indust. Corp., Rainforest Cafe, Inc.,
380 F.3d 383, 385 (8th Cir. 2004).
South Dakota law, “[a] contract is formed when all
essential elements are met: (1) the parties are capable of
contracting; (2) they consent to the subject of the contract;
(3) the object of the contract is lawful; and (4) there was
sufficient cause or consideration.” Mueller v.
Cedar Shore Resort, Inc., 643 N.W.2d 56, 70 (S.D. 2002)
(citing SDCL § 53-1-2); see McNamara v. Yellow
Transp., Inc., 570 F.3d 950, 956 (8th Cir. 2009)
(applying SDCL § 53-1-2 to an arbitration agreement).
party argues the arbitration agreement is not a valid
contract under South Dakota law. The complaint Dlorah filed
in state court asserts it “entered into a Standard Form
of Agreement” with KLE for KLE to help build an
apartment complex. (Docket 1-2 at p. 2). Within that
contract, Section 21.1 delineates the procedure for handling
disputes prior to “binding dispute resolution.”
(Docket 9-1 at p. 17). Section 5.1 of the contract provides,
“[f]or any claim subject to, but not resolved by,
mediation pursuant to Section 21.3, the method of binding
dispute resolution shall be as follows: Arbitration pursuant
to Section 21.4 of this Agreement.” Id. at p.
4. Section 21.4 describes the procedure for carrying out the
arbitration. Dlorah's filings suggest-but do not directly
state-it believes the entire contract is valid. KLE
affirmatively claims the contract and arbitration agreement
within it are valid. (Docket 8 at pp. 2-4). Based on the
filed copy of the entire contract between Dlorah and KLE, and
the parties' representations in their filings, the court
finds the contract, including the agreement to arbitrate, is
valid under South Dakota law.
the FAA, a written arbitration agreement by itself or in a
contract ‘shall be valid, irrevocable, and enforceable,
save upon such grounds as exist at law or in equity for the
revocation of any contract.' ” Express
Scripts, 516 F.3d at 700 (quoting 9 U.S.C. § 2).
“Congress enacted the [FAA] ¶ 1925 to
‘establish and regulat[e] the duty to honor' . .
. arbitration agreements.” Id. at 699 (quoting
Moses H. Cone Mem'l Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 26 n.32 (1983)) (internal citations
omitted). “[T]he FAA applies to all arbitration
agreements involving transactions in . . . interstate
commerce . . . .” Id. (citing 9 U.S.C. §
argues the FAA applies because this case involves interstate
commerce in the form of companies from different states
transacting for construction services. (Docket 8 at p. 4).
The court has diversity jurisdiction over the case because
Dlorah is a South Dakota company, KLE is a North Dakota
company, and the amount in controversy exceeds $75, 000.
See Dockets 1 at p. 1 & 1-2 at p. 1. Because the
court has diversity jurisdiction and the case involves
interstate commerce, the court finds the FAA applies. See
Express Scripts, 516 F.3d at 699 (“The FAA applies
to the [parties'] Agreement because the prescription drug
plan in dispute involved interstate commerce, and the
district court's jurisdiction was based on the diversity
of the parties, 28 U.S.C. § 1332.”). The FAA
provides an additional basis for finding Dlorah and KLE's
agreement to arbitrate “valid, irrevocable, and
enforceable . . . .” 9 U.S.C. § 2.
Whether this dispute is within the arbitration
second issue, ‘whether the specific dispute falls
within the scope of [the] agreement, ' must also be
resolved by a court to ensure that a party is not unfairly
stripped of its right to a judicial decision about a matter
it had not agreed to arbitrate.” Express
Scripts, 516 F.3d at 700 (quoting First
Options, 514 U.S. at 945).
to this point, Dlorah argues arbitration in this case is not
proper because KLE deviated from the procedure in the
agreement for carrying out arbitration. (Docket 10 at pp.
2-6). This is one of Dlorah's main arguments. Although
Dlorah does not frame it under the issue of whether a dispute
falls within the scope of the arbitration agreement, that is
not of consequence because the argument is unavailing under
the law of the United States Court of Appeals for the Eighth
Circuit. Dlorah specifically argues KLE failed to refer its
dispute to the engineer designated in the contract, which the
contract states is a prerequisite to binding dispute
resolution. The applicable section provides:
Claims, disputes and other matters in question arising out of
or relating to this Contract, including those alleging an
error or omission by the Engineer but excluding those arising
under Section 16.2, shall be referred initially to the
Engineer for decision. Such matters, except those waived as
provided for in Section 21.8 and Sections 15.5.3 and 15.5.4,
shall, after initial decision by the Engineer or 30 days
after submission of the matter to the Engineer, be subject to
mediation as a condition precedent to binding dispute
(Docket 9-1 at p. 17). Section 21.2.1 details further
procedures for the parties to “attempt in good faith to
resolve any claim” through meetings. Id. at p.
18. Dlorah is correct the contract features prerequisites for
the parties to satisfy before seeking arbitration.
Id. at pp. 17-18. Dlorah is not correct that failure