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John F. Harkins Co. v. Waldinger Corp.

filed: July 14, 1986.

JOHN F. HARKINS COMPANY, INC.
v.
THE WALDINGER CORPORATION, APPELLANT



Appeal from the United States District Court for the District of New Jersey - Camden (D.C. Civil No. 85-2379)

Author: Aldisert

ALDISERT, Chief Judge, and GARTH and SLOVITER, Circuit Judges

ALDISERT, Chief Judge.

This appeal involves a dispute between a contractor and subcontractor. The district court held that a seemingly broad arbitration provision set forth in one clause of the subcontractor was limited by another subcontractor clause which incorporated a narrow arbitration clause contained in the primary or principal contract between the contractor and the project manager. The crucial issue is whether we characterize the function performed by the district court as contract interpretation or contract construction. We hold that the district court was interpreting language contained in the contracts, rather than deciding the legal relations between the parties, and therefore review its determination under the clearly erroneous standard. Ram Construction Co. v. American States Insurance Co., 749 F.2d 1049, 1052-53 (3d Cir. 1984). We further conclude that the court's interpretation was not clearly erroneous and will therefore affirm.

I.

John F. Harkins Co. was one of several primary contractors on the construction project for the Atlantic City Hilton Casino/Hotel. Harkins contracted with Hilton and the construction manager, Tishman Construction Co., to install the heating, ventilation, and air conditioning systems. Harkins subcontracted sheetmetal ductwork to Waldinger Corporation.

On November 9, 1984, Waldinger commenced an arbitration proceeding against Harkins before the American Arbitration Association, pursuant to what it considered a mandatory arbitration clause in the subcontract. Waldinger alleged that Harkins had "changed the conditions, sequence and schedule under which [Waldinger's] work was to be performed . . .," resulting in excess costs to Waldinger, and requested an award of $6 million. App. at 34. Harkins disagreed that this was subject to arbitration. It then initiated this action in New Jersey state court seeking to enjoin the arbitration. Harkins relied on a restrictive arbitration clause in the primary contract, which Harkins maintains was incorporated into its subcontract with Waldinger, a clause that limits arbitration to disputes over signed change orders. Waldinger then removed the state court action to federal district court.

The district court agreed with Waldinger and held that this dispute was not covered by the arbitration clause. It concluded that "the proper interpretation of the disputed contractual provisions limits arbitrability to disputes over signed change orders . . ." App. at 60. The court determined that this was the primary contract a arbitration limitation and that this limitation was incorporated into the subcontract. Because Waldinger's dispute did not involve a signed change order, the court ruled that it was not arbitrable. The court therefore denied Waldinger's motion for a stay of the district court action pending arbitration, and granted Harkins' motion to stay the arbitration. Id. Waldinger appeals. We have jurisdiction under 28 U.S.C. § 1292(a)(1). J&R Sportswear & Co. v. Bobbie Brooks, Inc., 611 F.2d 29, 29 (3d Cir. 1979); Becker Autoradio U.S.A., Inc. v. Becker Autoradiowerk GmbH, 585 F.2d 39, 42 n.7 (3d Cir. 1978).

II.

Before us Waldinger contends that the district court erred in construing the contract's arbitration language. Although terms of an injunction are normally reviewed for abuse of discretion, any determination that is a prerequisite to the issuance of an injunction, i.e., the term of a contractual arbitration provision, is reviewed according to the standard applicable to that particular determination . See Weiss v. York Hospital, 745 F.2d 786, 829-30 (3d Cir. 1984). Therefore, the crucial task before us is to decide the appropriate standard of review of the district court's examination of the contractual arbitration provisions.*fn1 Both Waldinger and and Harkins cite Ram Construction Co. v. American States Insurance Co., 749 F.2d 1049 (3d Cir. 1984), for different standards of review on this issue. We agree that Ram Construction controls.

In Ram Construction, we distinguished between the standards of review for contract interpretation and contract consideration. Id. at 1052-53. Contract interpretation is a question of fact, and review is according to the clearly erroneous standard. Id. at 1053. In contrast, contract construction is a question of law mandating plenary review. Id. Harkins argues that this case turns on interpreting the contract's terms in order to ascertain the intent of the parties. Waldinger contends that the case pivots on construing the contract according to law.

The distinction between interpretation and construction is not always easy. Professor Corbin described the distinction:

By "interpretation of language" we determine what ideas that language induces in other persons. By "construction of the contract," as that term will be used here, we determine its legal operation -- its effect upon the action of courts and administrative officials. If we make this distinction, then the construction of a contract starts with the interpretation of its language but does not end with it; while the process of interpretation stops wholly short of a determination of the legal relations of the parties. When a court gives a construction to the contract as that is affected by events subsequent to its making and not foreseen by the parties, it is departing very far from mere interpretation of their symbols of expression, although even then it may claim somewhat erroneously to be giving effect to the "intention" of the parties.

3 Corbin, Corbin on Contracts § 534 at 9 (1960) (footnotes omitted). Our opinion in Ram Construction further illuminates the distinction between contract interpretation and contract construction. In that case we were faced with the question of whether the provisions of a contract for removal of one rock slide from a roadway covered a subsequent rock slide, or whether the actions of the parties had created a second contract. Speaking through Judge Weis, we said:

The decision that two separate agreements for slide removal existed was one of contract construction, not interpretation. As the surety states and the record confirms, there are no differences between the parties on the material terms of the Slide II agreement. The amount and type of work, compensation, time and method of carrying out the work, and other details are not contested. No question of interpretation is presented, only the construction of the agreement; that is whether Slide II is to be considered legally part of the December 8, 1982 contract or as a separate agreement.

749 F.2d at 1053. We also quoted Professor Patterson: "'Construction, which may be usefully distinguished from interpretation, is a process by which legal consequences are made to follow from the term of the contract and its more or less immediate context, and from a legal policy or policies that are applicable to the situation.'" Id. (quoting Patterson, The Interpretation and Construction of Contracts, 64 COLUM. L. REV. 833, 835 (1964)).

III.

In the case at bar, the clash between the contracting parties centered on whether the parties intended that the liberal language of the subcontract's arbitration clause should apply, or whether they intended that the subcontract incorporate the primary contract's arbitration provision. Thus, when we use the Ram Construction -Professor Corbin-Professor Patterson nomenclature of "interpreting the contract," in this case this means ascertaining the intent of the parties as to what arbitration clause controlled. We have previously held that this is a question of fact, governed by the clearly erroneous standard. Matter of Barclay Industries, Inc., 736 F.2d 75, 79 (3d Cir. 1984) ("Interpretation of an ambiguous contract . . . is a question of the parties' intent, and thus a question of fact."); Landtect Corp v. State Mutual Life Assurance Co., 605 F.2d 75, 79 (3d Cir. 1979) ("Discerning contractual intent's is a question of fact unless the provisions of a contract are 'wholly unambiguous.'" (quoting Heyman v. Commerce & Industry Insurance Co., 524 F.2d 1317, 1320 (2d Cir. 1975)). We therefore conclude that the judicial task performed by the district court here was contract interpretation, i.e., determining the intent of the parties regarding arbitration. The court was required to find as a fact what the contracting parties intended. It had to divine this intent from the language of the contract documents and any extrinsic evidence that went to the issue of intent. Once we review the district court's language interpretation, the legal operation of that interpretation on review follows easily. The proper standard of review has to be whether the district court's findings - interpretation of the contract, that is, the intent of the parties as to the meaning of the contract's language - are clearly erroneous. We hold that its interpretation is not clearly erroneous.

IV.

A.

Harkins and Waldinger disagree over the interpretation of two provisions in the primary contract between Tishman, the construction manager, and Harkins, the heating, ventilation and air conditioning contractor, and two provisions in the subcontract between Harkins and Waldinger, the sheetmetal subcontractors. These provisions describe arbitration of disputes between parties to the two contracts. Section 17 of the Harkins/Waldinger subcontract provides:

17. All disputes, claims or questions arising hereunder shall be subject to arbitration and shall be submitted to arbitration in accordance with the provisions, then obtaining, of the Standard Form of Arbitration Procedure of the A.I.A. A determination thereunder shall be final and binding upon the parties thereto. Pending determination, there shall be no work stoppage.

L. App. at 22. Waldinger contends that this section alone made all disputes arising under the subcontract subject to mandatory arbitration.

In response, Harkins contends that other provisions -- one in the subcontract and two in Tishman/Harkins' primary or principal contract -- limited the scope of arbitration. Harkins relies on Section 2 of the Harkins/Waldinger subcontract which provides:

2. Work performed by subcontractor shall be in strict accordance with CONTRACT DOCUMENTS applicable to the work to be performed and materials, articles and/or equipment to be furnished hereunder. SUBCONTRACTOR shall be bound by all provisions of these documents and also by applicable provisions of the PRINCIPAL CONTRACT to which the CONTRACTOR is bound, and to the same extent. . . .

Id. (emphasis supplied). Harkins argues that the phrase "and to the same extent" in this section limited any mandatory arbitration provision in the subcontract to the scope of those arbitration provisions contained in the primary contract.

Arbitration provisions contained in the primary contract have a much narrower scope than that of the subcontract. Section 37 of the Tishman/Harkins primary contract refers to arbitration in general and limits arbitration to only those disputes ...


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