Matson, Inc. v. Lamb & Associates Packaging, Inc.

MATSON, INC. v. LAMB & ASSOCIATES PACKAGING,
Inc., and Jerry Don LAMB

96-606                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
                 Opinion delivered June 2, 1997



1.   Civil procedure -- intervention -- order denying is appealable. -- An
     order denying intervention is appealable.

2.   Civil procedure -- intervention -- three requirements for intervention as
     matter of right. -- Three requirements must be met for
     intervention as a matter of right: (1) a recognized interest
     in the subject matter of the primary litigation; (2) an
     interest that might be impaired by the disposition of the
     suit; and (3) an interest not adequately represented by
     existing parties.

3.   Civil procedure -- intervention -- burden to demonstrate adequacy of
     representation falls on party opposing intervention. -- The burden of
     persuasion to demonstrate adequacy of representation falls on
     the party opposing intervention.

4.   Civil procedure -- intervention -- when interest of litigant adequately
     represented. -- An interest of a litigant is adequately
     represented when it is identical to, or not significantly
     different from, that of the proposed intervenor.

5.   Civil procedure -- intervention -- party's interest in enforcing
     arbitration rights is significant factor in determining whether to allow
     intervention as of right pursuant to federal rule. -- A party's
     interest in enforcing arbitration rights has been held to be
     a significant factor in determining whether to allow
     intervention as of right pursuant to the federal intervention
     rule, which is identical to ARCP Rule 24(a).

6.   Civil procedure -- intervention -- appellant should have been allowed to
     intervene to protect its right to arbitration. -- Even though
     appellant and the insurance company from which it purchased a
     performance bond were represented by one attorney, appellee
     failed to show that the insurance company's interest was
     identical to or not significantly different from appellant's;
     although appellant and the insurance company may have had the
     same interest in disputing appellee's claim of breach of
     contract at the present stage of the proceedings, it was
     apparent that their interests would diverge if appellee were
     able to demonstrate that appellant had breached the
     construction contract at issue; it was ultimately appellant's
     conduct in performing or failing to perform the construction
     contract that was at issue, and that was a matter that
     appellee agreed to arbitrate; as the insurance company had a
     right to indemnity from appellant in the event that appellee
     recovered against the insurance company, it was clear that the
     bond company might not have the same interest in arbitration
     as appellant at the present stage of the proceeding; appellant
     should have been allowed to intervene to protect its right to
     arbitration.

7.   Principal & surety -- contractual relationship -- principal's contract and
     surety's bond construed together as one instrument. -- The terms of the
     contract of which the surety promises performance must be read
     into his own contract; the principal's contract and the bond
     or undertaking of the surety are to be construed together as
     one instrument.

8.   Principal & surety -- appellee bound by arbitration provision incorporated
     by reference in performance bond. -- Where appellee was relying on
     the construction contract to prove its breach-of-contract
     claim but seeking to avoid the arbitration provision contained
     in the same contract, and where appellee had signed the
     underlying contract containing the arbitration clause, the
     supreme court held that appellee was bound by the arbitration
     provision incorporated by reference in the performance bond.

9.   Principal & surety -- suretyship defined and discussed. -- Suretyship
     may be defined as a contractual relation whereby one person
     engages to be answerable for the debt or default of another;
     where the contract takes the form of ordinary suretyship, the
     agreement of the surety is that he will do the thing that the
     principal has undertaken.

10.  Principal & surety -- enforcement of bond provision agreeing that questions
     of breach and performance were subject to arbitration not prohibited by
     Arbitration Act. -- Where the surety bond on which appellee
     brought suit incorporated an agreement to the effect that
     questions of breach and performance were subject to
     arbitration, the supreme court concluded that the Arkansas
     Arbitration Act did not prohibit the enforcement of that
     provision.

11.  Civil procedure -- intervention -- appellant entitled to intervene with
     limiting intervention to protection of right to defend reimbursement claim
     -- reversed and remanded. -- The supreme court held that appellant
     was entitled to intervene without limiting intervention to
     protection of its right to defend a claim for reimbursement
     from the insurance company from which it had purchased the
     performance bond; the matter was reversed and remanded.


     Appeal from Pulaski Circuit Court; John Ward, Judge; reversed
and remanded. 
     Jack East III, for appellant.
     David M. Hargis, for appellee.

     David Newbern, Justice.
     Lamb & Associates Packaging, Inc., and Jerry Don Lamb
(referred to collectively as Lamb) entered an agreement with
Matson, Inc. (Matson), pursuant to which Matson constructed a
commercial building for Lamb in exchange for $789,543.  The
construction contract contained a clause requiring arbitration of
disputes relating to performance or breach of the contract.  Matson
purchased a performance bond from United States Fidelity and
Guarantee Co. (USF&G).  The bond agreement incorporated the
construction contract by reference.  Lamb sued USF&G on the bond,
alleging defects in the building and thus breach of the contract. 
Matson sought to intervene to protect its interests, including
enforcement of the arbitration clause.  
     The Trial Court allowed Matson to intervene, but only to the
extent of protecting its rights in the event a judgment were
entered against USF&G which might then claim against Matson. 
Matson appeals from the order and claims that intervention should
have been allowed for the purpose of protecting all its interests
in the contract, including its right to arbitration.  An order
denying intervention is appealable.  Ark. R. App. P. 2(a); Cupples
Farms Partnership v. Forrest City Prod. Credit Ass'n, 310 Ark. 597,
839 S.W.2d 187 (1992).  We reverse and remand because intervention
should have been allowed without the limitation imposed by the
Trial Court.
     Matson asserts its right to unlimited intervention pursuant to
Ark. R. Civ. P. 24(a) and its right to arbitration on the ground
that Lamb agreed to binding arbitration in the construction
contract which was incorporated in the bond upon which Lamb has
brought suit.  Matson also argues it is entitled to arbitration in
accordance with the Federal Arbitration Act, 9 U.S.C.  1 through
307 (1994).  Lamb asserts that the bond is a separate agreement
giving rise to a separate obligation on the part of USF&G.  Lamb
argues it is entitled to a jury trial of its claim against USF&G
and contends that the bond is an insurance agreement which,
according to Ark. Code Ann.  16-108-201(b) (Supp. 1995), is not
subject to arbitration.
     As we hold that Matson is entitled to unlimited intervention
in accordance with Rule 24(a), and that  16-108-201(b) does not
apply to prevent arbitration, we need not address the federal law.

                         1. Intervention
     In his letter opinion the Trial Court wrote the following:

     It is true that the Matson [construction] contract was
     referred to and incorporated by reference into the
     performance bond, but the incorporation was not for the
     purpose of pulling in the arbitration clause found in the
     Matson contract.  To find that the arbitration clause was
     incorporated would render the performance bond
     meaningless.  Rather, the incorporation of the Matson
     contract was for the purpose of defining the terms of
     USF&G's obligations under the performance bond.  * * * 
     This Court believes that to allow Matson to intervene for
     the purpose of demanding arbitration would deny Plaintiff
     the benefits of the performance bond and would allow
     USF&G to simply sit by and refuse to perform one of its
     two obligations that it signed its name to perform.

     Ark. R. Civ. P. 24(a) states:

     Upon timely application anyone shall be permitted to
     intervene in an action: ... (2) when the applicant claims
     an interest relating to the property or transaction which
     is the subject of the action and he is so situated that
     the disposition of the action may as a practical matter
     impair or impede his ability to protect that interest,
     unless the applicant's interest is adequately represented
     by existing parties.

     Thus, three requirements must be met for intervention as a
matter of right:  (1) a recognized interest in the subject matter
of the primary litigation; (2) an interest that might be impaired
by the disposition of the suit; and (3) an interest not adequately
represented by existing parties.  Pearson v. First Nat'l Bank, 325
Ark. 127, 924 S.W.2d 460 (1996);  Billabong Prods., Inc. v. Orange
City Bank, 278 Ark. 206, 644 S.W.2d 594 (1983).
     Lamb does not dispute the existence of Matson's interest in
the subject matter or the possibility that Matson's interest might
be impaired.  Lamb contends, however, that Matson's interest is
adequately represented.  The burden of persuasion to demonstrate
adequacy of representation falls on the party opposing
intervention.  SEC v. Dresser Indus., Inc., 628 F.2d 1368 (C.A.D.C.
1980), cert. den.  449 U.S. 993 (1980).  Liz Claiborne, Inc. v.
Mademoiselle Knitware, Inc., 1996 WL 346352 (S.D.N.Y.);  CBS, Inc.
v. Snyder, 136 F.R.D. 364 (S.D.N.Y. 1991).  See also Wright,
Miller, and Kane, Federal Practice and Procedure,  Civil 2d  1909
(1986).  
     An interest of a litigant is adequately represented when it is
identical to, or not significantly different from, that of the
proposed intervenor.  National Enterprises, Inc. v. Union Planters
Nat'l Bank, 322 Ark. 590, 910 S.W.2d 691 (1995).  A party's
interest in enforcing arbitration rights has been held to be a
significant factor in determining whether to allow intervention as
of right pursuant to the federal rule, which is identical to our
Rule 24(a).  See CBS, Inc. v. Snyder, supra.
     Even though USF&G and Matson are presently represented in this
case by one attorney, Lamb has failed to show that USF&G's interest
is identical to or not significantly different from Matson's. 
Although USF&G and Matson may have the same interest in disputing 
Lamb's claim of breach of contract at this stage of the
proceedings, it is apparent that their interests would diverge if
Lamb were able to demonstrate that Matson breached the construction
contract.  To recover under the bond, Lamb must show that Matson
has not performed or has not properly performed.  It is ultimately
the conduct of Matson in performance or failure to perform the
construction contract which is at issue, and that is a matter Lamb
agreed to arbitrate.  As USF&G has a right to indemnity from Matson
in the event Lamb recovers against USF&G, it is clear that USF&G
may not have the same interest in arbitration that Matson does at
this stage of the proceeding.  Matson should have been allowed to
intervene to protect its right to arbitration.

                         2.  Arbitration
                   a.  Contract interpretation
     The performance bond states, "Contractor [Matson] has by
written agreement dated October 31, 1991, entered into a contract
with Owner [Lamb] for a new manufacturing building . . . which
contract is by reference made a part hereof, and is hereinafter
referred to as the Contract."  The bond then provides that "Any
suit under this bond must be instituted before the expiration of
two (2) years from the date on which final payment under the
Contract falls due."
     Matson contends that the Trial Court should compel arbitration
in accordance with the terms of the construction contract because
that contract was specifically incorporated into the performance
bond.  Lamb submits that the arbitration clause is inapplicable
because the performance bond specifically provides for the
commencement of any "suit" within two years of the completion of
the contract.
     Initially, we note that other jurisdictions have not hesitated
to enforce arbitration agreements incorporated by reference in
performance bonds.  See Commercial Union Ins. Co. v. Gilbane Bldg.
Co., 992 F.2d 386 (1st Cir. 1993).  See also Fireman's Ins. Co. of
Newark New Jersey v. Edgewater Bean Owner's Assoc., Inc,  1996 WL
509270 (N.D. Fla.);  City of Piqua v. Ohio Farmers Ins. Co., 617 N.E.2d 780 (Ohio App. 2 Dist. 1992).  In our cases of Fausett
Builders, Inc. v. Globe Indemnity Co., 220 Ark. 301, 247 S.W.2d 469
(1952), and American Ins. Co. v. Cazort, 316 Ark 314, 871 S.W.2d 575 (1994), we find support for incorporation and enforcement of
arbitration agreements in suretyship agreements.  
     In Fausett Builders, Inc. v. Globe Indemnity Co., supra, we
discussed the contractual relationship between surety and
principal, quoting Stearns, Law of Suretyship, Fifth Edition, pages 1,
13, 14 and 262:  "The terms of the contract of which the surety
promises performance must be read into his own contract.  The
principal's contract and the bond or undertaking of the surety are
to be construed together as one instrument."

     In American Ins. Co. v. Cazort, supra, Mr. Cazort opened a
securities brokerage account through NAP Financial Corporation with
Marc Berman, who was an employee of MJB Associates, Inc.  Mr.
Cazort signed an asset-management agreement with Mr. Berman and
MJB, a letter of transmittal with NAP, and an asset-management
agreement with First Southwest Company.  Each of those documents
contained a clause by which Mr. Cazort agreed to arbitrate all
controversies between himself and NAP, Berman, and MJB.  
     American Insurance Company, the appellant, filed a corporate
bond with the Arkansas Securities Department in which it agreed to
be "liable to any and all persons who may suffer loss by reason of
[NAP's or Berman's] failure to comply with the law of securities
transactions."
    Mr. Cazort sued NAP, Mr. Berman, and American Insurance Co. 
NAP and Mr. Berman moved to compel arbitration and were voluntarily
dismissed by Mr. Cazort from the litigation.  American Insurance
Co.'s motion to compel was denied.      
     On appeal, one of the issues was whether American could compel
arbitration as Mr. Cazort did not sign an arbitration agreement
with American Insurance Co.  We held that even though the Federal
Arbitration Act applied to the dispute because it involved
interstate commerce, our state law contract principles determined
whether Mr. Cazort was bound by the arbitration clause in the
contract.  In holding that Mr. Cazort was subject to the
arbitration clause, we said:

     Cazort's allegation, in part, is that NAP and Berman
     breached their contract with him, and they are liable for
     that breach of contract.  He relies on the contract for
     his breach of contract claim, but, at the same time,
     seeks to circumvent the arbitration provision of the same
     contract by dismissing his claims against the principals
     NAP and Berman.  * * *  If this procedure were to be
     allowed, NAP and Berman would be denied the benefit of
     their arbitration agreement.  

     Like Mr. Cazort, Lamb is relying on the construction contract
to prove its breach of contract claim but seeking to avoid the
arbitration provision contained in that same contract.  Further,
unlike Mr. Cazort, Mr. Lamb signed the underlying contract
containing the arbitration clause.  We hold that Lamb is bound by
the arbitration provision incorporated by reference in the
performance bond.

                  b.  Arkansas Arbitration Act
     Section 16-108-201 is entitled "Agreement to arbitrate Ä
Application" and provides:

     (a) A written agreement to submit any existing
     controversy to arbitration arising between the parties
     bound by the terms of the writing is valid, enforceable,
     and irrevocable, save upon such grounds as exist at law
     or in equity for the revocation of any contract.

     (b) A written provision to submit to arbitration any
     controversy thereafter arising between the parties bound
     by the terms of the writing is valid, enforceable, and
     irrevocable, save upon such grounds as exist at law or in
     equity for the revocation of any contract; provided, that
     this subsection shall have no application to personal
     injury or tort matters, employer-employee disputes, nor
     to any insured or beneficiary under any insurance policy
     or annuity contract.  [Emphasis added.]

     Lamb contends that the Arkansas Insurance Code, particularly
the provisions found in Ark. Code Ann.  23-60-102 and 23-60-106
(1987), make it clear that a surety bond is a form of insurance. 
We concur in that contention to the extent of recognizing that
companies offering surety bonds come within the regulatory
provisions of the Code.  We do not, however, agree that a surety
bond is an "insurance policy" as contemplated by the Arbitration
Act and  16-108-201(b).
     In Fausett Builders v. Globe Indemnity Co., supra, we stated
that suretyship may be defined as a contractual relation whereby
one person engages to be answerable for the debt or default of
another.  In that case, we explained the concept of suretyship, by
quoting the following language from Hall v. Equitable Surety
Company, 126 Ark. 535, 191 S.W. 32 (1917):  "Where the contract
takes the form of ordinary suretyship, `the agreement of the surety
is that he will do the thing which the principal has undertaken.'" 
     Lamb has not been insured against loss; rather, it has been
assured performance of the contract with Matson.  The surety bond
on which Lamb has brought suit incorporates an agreement to the
effect that questions of breach and performance are subject to
arbitration.  The Arkansas Arbitration Act does not prohibit the
enforcement of that provision.
     In conclusion, we understand the Trial Court's remark that if
Lamb is required to arbitrate the bond becomes meaningless, but we
do not necessarily agree with it.  That statement takes no account
of the possibility that a remedy may remain against USF&G if it is
determined through arbitration that Matson has not performed or has
not properly performed the contract.  We do not decide that issue
here.  Of course, it is equally logical to say that, if Lamb is
allowed to sue USF&G with respect to whether Matson has performed,
the arbitration clause in the construction contract becomes
meaningless.  Our view is that, at least at this juncture in the
proceedings, there remains the possibility that effect may be given
to both the arbitration clause and the performance bond.
     We hold that Matson is entitled to intervene without limiting
intervention to protection of its right to defend a claim for
reimbursement from USF&G.
     Reversed and remanded.