Dlorah, Inc. v. KLE Constr., LLC, No. CIV. 16-5102-JLV, 2017 U.S. Dist. LEXIS 11043 (D.S.D. July 17, 2017)

Plaintiff, Dlorah, Inc. (“Dlorah”), filed suit against defendant, KLE Construction, LLC (“KLE”), in connection with an agreement for KLE to perform construction services at an apartment complex in Rapid City, South Dakota.  According to Dlorah, KLE’s actions while carrying out the construction breached the agreement and constituted fraud/deceit.

KLE moved the court to compel arbitration or alternatively stay the proceedings pursuant to an arbitration clause contained in the parties’ agreement.  Dlorah objected to KLE’s motion on three grounds: (i) defendant had not satisfied the conditions precedent to compel arbitration; (ii) the dispute at issue did not fall within the scope of the arbitration clause; and (iii) the arbitration clause was permissive, not mandatory, and therefore permitted Dlorah to file suit in court.  After concluding that the parties had in fact entered into a binding arbitration agreement, the court considered and rejected each of Dlorah’s arguments.

Dlorah’s first argument related to the following contract provision:

Claims, disputes and other matters in question arising out of or relating to this Contract . . . shall be referred initially to the Engineer for decision.  Such matters . . . 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.

Because KLE failed to submit the issues to the Project Engineer, Dlorah argued that there could be no arbitration.

In dismissing this argument, the court stated that “Dlorah is correct the contract features prerequisites for the parties to satisfy before seeking arbitration. . . . ,” but “Dlorah is not correct that failure to follow that process precludes the court from submitting the dispute to arbitration.”  The court held that it lacked jurisdiction to determine whether KLE had satisfied the conditions precedent to compel arbitration.  According to the court, questions of “procedural arbitrability”—such as the question of whether a party satisfied the conditions precedent to arbitration—are presumptively for the arbitrator, not the court, to decide.

The court also dismissed Dlorah’s contention that its cause of action for fraud/deceit fell outside the scope of the arbitration agreement because those claims touched upon the contract and KLE’s performance thereunder.

Finally, the court dismissed Dlorah’s assertion that the arbitration clause was permissive, rather than mandatory.  The court explained that Dlorah’s position was inconsistent with the terms of the contract which stated that the parties “shall” resolve any disputes arising out of the contract through arbitration.
Accordingly, the court granted KLE’s motion to compel arbitration.

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