First Department Unanimously Affirms Denial of Motion to Compel Arbitration and Motion to Dismiss Fraud Claims

• Posted on: Jul 8 2019

Sometimes state appellate courts affirm or modify lower court decisions without providing much in the way of analysis. With overburdened dockets and substantially similar issues being decided, it is no surprise these courts issue short decisions that have more value to the parties than to the bar. Such is the case in BML Properties Ltd. v. China Construction America Inc., 2019 N.Y. Slip Op. 05339 (1st Dept. July 2, 2019) (here).  

Overview and the First Department’s Decision

In late 2017, BML Properties Ltd. (“BML” or “Plaintiff”) filed an action against China Construction America Inc. (“CCA”), an indirect subsidiary of China State Construction Engineering Co. Ltd., claiming that CCA falsely represented and assured BML that the multi-billion dollar Baha Mar resort complex in Nassau, Bahamas, would be opened on time and within budget.

CCA argued that the dispute belonged in arbitration under an amendment to the construction contract that was originally signed by its local unit, CCA Bahamas Ltd. (“CCA Bahamas”), and Baha Mar Ltd. (“Bar Mar”), an entity owned by BML that had been created to develop the resort. The motion court (Scarpulla, J.) rejected BML’s argument, noting that the claims actually arose under a different contract signed by CCA, its affiliates and BML when the latter made an $830 million investment in the development of the project. [A copy of Justice Scarpulla’s decision can be found  (here).] According to the motion court, CCA Bahamas and a non-party to the lawsuit signed the agreement to which the parties agreed to arbitrate disputes arising under their contract.

The Appellate Division, First Department, unanimously affirmed the motion court’s decision, holding that the motion “court correctly denied the branch of defendants’ motion seeking to compel arbitration because plaintiff was not a party to the agreement containing the arbitration clause and the claims at issue were, by separate agreement, required to be litigated in New York.” Slip op. at *1, citing Matter of Cammarata v. InfoExchange, Inc., 122 A.D.3d 459, 460 (1st Dept. 2014), and Oxbow Calcining USA Inc. v. American Indus. Partners, 96 A.D.3d 646, 649-650 (1st Dept 2012).

Defendants also argued that BML’s fraud claims should be dismissed because it failed to allege that it justifiably relied on any claimed misstatement and omission cited in the complaint.  In the complaint, BML alleged that CCA orchestrated a “massive fraudulent scheme” by creating the false and misleading impression that it was meeting on-time and on-budget schedules necessary to open the resort in December 2014, when in fact, Defendants were concealing massive delays that, inter alia, increased the costs of construction to the detriment of BML. Justice Scarpulla disagreed, denying the motion to dismiss.

The First Department affirmed, holding that “Plaintiff adequately stated a claim for fraud, by asserting justifiable reliance upon assurances, alleged to have been false when made, regarding the project’s status, and the workforce and resources available to meet the deadline for completion of the project, which were collateral to, and not duplicative of plaintiff’s claims for breach of contract.” Id., citing Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956 (1986); MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 87 A.D.3d 287, 294 (1st Dept. 2011); and GoSmile, Inc. v. Levine, 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed, 17 N.Y.3d 782 (2011).

Background

On March 9, 2009, Baha Mar and CCA Bahamas entered into an agreement (known as the “Main Construction Contract” or the “MCC”) regarding the development of the multi-billion-dollar Baha Mar resort complex in Nassau, Bahamas (the “Project”). Among other things, the MCC contained a dispute resolution provision that required any claims arising under the agreement to “be initially decided by a three-person Dispute Resolution Board [“DRB”] as a condition precedent to commencement of any legal proceedings.”

On January 13, 2011, BML and Defendants entered into an Amended and Restated Investors Agreement (the “Investors Agreement”), pursuant to which BML made an $830 million equity investment in the development of the Project. Under the Investors Agreement, BML was responsible for Baha Mar’s day-to-day management, subject to the direction of the Board (i.e., a five member panel consisting of three members, a chairman nominated by BML, and one member nominated by CSCEC (Bahamas), Ltd. a/k/a “China State”).

On February 14, 2011, Baha Mar issued a Notice to Proceed to CCA Bahamas, pursuant to the MCC, effective May 1, 2011, with a contractual construction completion schedule of 44 months (which expired on November 20, 2014).

Progress on the Project was slow. To resolve disputes arising from the delays, on May 17, 2013, Baha Mar and CCA entered into a Memorandum of Understanding (“MOU”). In the MOU, CCA represented that it would provide Baha Mar with access on or before March 31, 2014 to, at a minimum, the key ballrooms and meeting rooms of the Convention Center. Further, the MOU required CCA to expedite labor mobilization in exchange for BML’s agreement to award the Convention Center MEPF (mechanical, electrical, plumbing and fire protection) package to CCA.

Defendants did not meet the October and December 2013 milestone dates. To address the delays, the parties engaged in several “summits” in December 2013 and January 2014, during which CCA agreed to address its missed milestones.

In May 2014, Baha Mar demanded, pursuant to the MCC, that the DRB convene to address the Convention Center delays and, among other things, establish that CCA had breached the MCC and not adequately staffed the Convention Center or the entire Project.

In July 2014, the DRB convened, reviewed the parties’ written submissions, and held two days of testimony. The DRB ruled, on August 13, 2014, that “the weight of the evidence show[ed] that CCA ha[d] proceeded in breach of the Contract by failing to proceed expeditiously with adequate forces sufficient to comply with the Contract.” Slip Op. at *7. In addition, the DRB ordered CCA, among other things, “to continue to maintain at least that level of labor and resources on the Convention Center, in good faith, as permitted by law, until further order of the DRB, at CCA’s own expense, sufficient to maintain maximum progress on the Convention Center, while not adversely impacting the Substantial Completion date for the Project as a whole” and to “provide to BML . . . an accurate, complete and realistic Construction Schedule that strictly meets all requirements of the Contract.” Id.

Notwithstanding the DRB ruling, none of the milestones to which CCA “committed” were achieved. Id.

In another effort to resolve Project disputes pertaining to finances and scheduling, a series of meetings were held by China Exim Bank, CCA and Baha Mar in November 2014, which resulted in signed minutes (the “November 2014 Meeting Minutes”). Under the November 2014 Meeting Minutes, CCA received a $54 million advance on disputed “change orders” and in exchange promised an increased workforce, refocused and increased efforts of senior management, and accelerated work to achieve an opening date of March 27, 2015.

The March 27, 2015, deadline was not met. Consequently, Defendants produced revised schedules, which they also did not meet. Id. at *9.

Bankruptcy and Receivership

On June 29, 2015, Baha Mar filed for bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware and took measures to secure the Project site and all the on-site offices, including those occupied by CCA.

On July 16, 2015, the Attorney General of the GOB filed a “winding up” action against Baha Mar and affiliates, including BML. The Supreme Court of the GOB (the trial level court) dismissed the winding up petition against BML (and other Baha Mar affiliates) on September 4, 2015.

On October 30, 2015, China Exim Bank commenced proceedings in The Bahamas to appoint a receiver to marshal the assets of Baha Mar and its subsidiaries, pursuant to a Credit Facility Agreement (“CFA”) between Baha Mar and China Exim Bank, and exercised its rights under the Pledge Agreements dated January 2011 (in which BML pledged its shares in Baha Mar as collateral for the loan proceeds provided under the CFA), and thereby took control over the entirety of the BML’s common shares in Baha Mar.

The Bahamian receivership proceedings resulted in an agreement for the sale of Baha Mar’s assets to Perfect Luck Assets Ltd. (“Perfect Luck”), an entity owned by China Exim Bank, on or about September 27, 2016, pursuant to an undisclosed agreement followed by a conditional agreement of merger of Perfect Luck into an entity known as Chow Tai Fook Enterprises Limited (“CTFE”). Consequently, BML lost its investment in Baha Mar, or approximately $845 million, as well as its expected future profits from the resort.

On August 30, 2016, Perfect Luck (as owner) and CCA Bahamas (as construction manager) entered into an agreement (“Amendment No. 9”), which amended the MCC. Amendment No. 9 set out conditions for the completion of the Project, including the scope of the work and payment amounts. Amendment No. 9 also deleted the DRB dispute resolution clause and the forum selection clause of the MCC and inserted a new section which stated that any dispute would be referred to and finally resolved by arbitration under the Rules of the International Chamber of Commerce.

The Complaint and Motion Proceedings

On December 26, 2017, BML filed a 259-page complaint, alleging causes of action for fraud and breach of contract.

BML alleged that CCA, acting as China State, failed to advise the Board of its findings and concerns regarding the Project’s construction as required by both the Investors Agreement and the MCC. In that regard, BML alleged that Defendants failed to report accurately, or at all, the true state of its scheduling, deadline compliance, the amount or experience of its workforce and status of its procurement.

Moreover, BML stated that from 2012 to 2013 and beyond, CCA failed to deliver the documentation required by the MCC and Investors Agreement preventing it from effectively monitoring the Project’s progress and governing its finances. BML contended that the accuracy of Defendants’ reporting directly affected its ability to predict and protect against risks to its equity investment.

BML also alleged that Defendants made false representations regarding the progress and status of the Project.

Defendants moved to compel mediation and arbitration or, alternatively, to dismiss BML’s complaint based on, inter alia, the failure to state a cause of action for fraud.

The Court’s Decision: Motion to Compel Arbitration

Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. Rent-A-Ctr., W, Inc. v. Jackson, 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State of New York. Matter of Smith Barney Shearson v. Sacharow, 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Id. at 49-50. (citations omitted).

Since arbitration is a “creature of contract” (Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC, 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960)). See also Holick v. Cellular Sales of New York, LLC, 802 F.3d 391, 395 (2d Cir. 2015) (because arbitration is contractual, “a party cannot be required to submit to arbitration any dispute which [it] has not agreed so to submit.”) (citation and internal quotation marks omitted); Brookfield Clothes, Inc. v. Tandler Textiles, Inc., 78 A.D.2d 841, 841 (1st Dept. 1980) (holding that “[o]nly persons who expressly agree to arbitrate can be compelled to do so”).

Against these principles, Justice Scarpulla denied the motion to compel arbitration, holding that BML was not a signatory to any arbitration agreement, including Amendment No. 9, which “clearly define[d] the parties bound to the agreement as Perfect Luck and CCA Bahamas.” Slip Op. at *13.

The Court rejected Defendants’ argument that BML’ claims were subject to arbitration “despite [the fact] that BML Properties did not execute Amendment No. 9 (containing the agreement to arbitrate).…” Id. Defendants claimed that even if BML was not a signatory to Amendment No. 9, New York courts “‘frequently’ impute[d] the intent to arbitrate to a non-signatory.” Id.

In rejecting the argument, the Court explained that “the Court of Appeals has held that only in ‘certain limited circumstances’ should courts impute the intent to arbitrate to a non-signatory.” Id., quoting TNS Holdings v. MKI Sec. Corp., 92 N.Y.2d 335, 339 (1998). Those circumstances arise, said the Court, when the non-signatory “either acted in a way that evinced an intent to be bound or received a direct benefit from a contract containing an arbitration clause which precluded them from disavowing the arbitration clause.” Id. In BML, neither circumstance was present.

First, Defendants failed to allege any facts to show that BML intended to be bound by the arbitration clause in Amendment No. 9. This was especially so, said the Court, because “Amendment No. 9 post-date[d] the events at issue here and was not discovered by BML Properties until it was produced in th[e] litigation.” Id. at **13-14.

Second, Defendants failed to demonstrate that BML’s reliance on the MCC in the complaint “tether[ed] the claims [alleged] to the arbitration clause.” Id. at *14. In fact, noted the Court, Defendants’ reliance on the MCC was misplaced because “BML Properties’ claims … do not stem from the MCC.” Id.  They arise, said the Court, “pursuant to the Investors Agreement,” in which “Defendants were obligated accurately to relay findings and concerns regarding the construction work to BML Properties.” Id.

The construction work was governed by the MCC and Defendants allegedly repeatedly failed to meet the MCC’s obligations. BML Properties contends that Defendants’ alleged repeated failures under the MCC rendered its statements to BML Properties false and therefore violated its Investors Agreement obligation to accurately report to BML. While referring to Defendants’ obligations under the MCC, BML’s claims arise under the Investor Agreement.

Id.

Thus, because “Defendants failed to produce evidence of BML Properties’ intent to be bound by the arbitration clause or furnish a basis for imputing such intention to it,” the Court denied the motion to compel arbitration. Id. at *15.

The Court’s Decision: Motion to Dismiss Fraud Claim

To plead a fraud claim, a plaintiff must plead with particularity each of the following elements: “a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009); CPLR § 3016(b) (requiring fraud to be pleaded with particularity).

In BML, Defendants argued that Plaintiff failed to plead that it justifiably relied on “any alleged misrepresentation,” because BML was “‘responsible for the day-to-day management of the Company’ and that this role prevent[ed] BML Properties from claiming ignorance about Defendants’ alleged misrepresentations.” Slip Op. at *21. The Court rejected this argument finding that “the complaint describe[d] numerous meetings, discussions and emails in which BML Properties sought (and received) alleged false assurances from Defendants about their existing workforce, available resources and ability to complete the Project.” Id. At the pre-discovery phase of the litigation, noted the Court, such allegations sufficed. Id., citing ACA Fin. Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043, 1045 (2015) (noting, the issue of justifiable reliance “is not generally a question to be resolved as a matter of law on a motion to dismiss”).

Defendants also argued that BML’s fraud claims duplicated its contract claims. The Court rejected the argument.

First, “neither of BML Properties’ claims for breach of contract” were “based on obligations created by the MCC” – they were based on the Investors Agreement, the MOU and the November 2014 Meeting Minutes. Id. at *21.

Second, noted the Court, the fraud claims were based on misrepresentations concerning workforce numbers and Project status “and allege misrepresentations of then-present facts collateral to the Investors Agreement.” Id. at **21-22, citing GoSmile, Inc. v. Levine, 81 A.D.3d 77, 81 (1st Dept. 2010) (finding that under New York law, plaintiffs may plead a fraud claim, as well as a contract claim, if the fraud claim alleges “a misrepresentation of present fact, unlike a misrepresentation of future intent to perform under the contract….”).

Finally, the Court found that the damages sought by BML under the fraud claim were not identical to those under its contract claim. The former sought damages “for the loss of mitigation expenses and further investment efforts,” while the latter sought “damages for the value of the Project if it was timely completed on budget.” Id. at *22.