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Dlorah, Inc. v. Kle Construction, LLC

United States District Court, D. South Dakota, Western Division

July 17, 2017

DLORAH, INC., Plaintiff,




         Plaintiff 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).

         Dlorah's 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. Id.


         The 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).

         Under 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.[1]“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).

         I. Whether a valid agreement to arbitrate exists

         The 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).

         Under 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).

         Neither 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.

         “Under 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. § 2).

         KLE 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.

         II. Whether this dispute is within the arbitration agreement's scope

         “The 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).

         Relevant 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 resolution.

(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 ...

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