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Mainline Rock & Ballast, Inc. v. Barnes, Inc.

Court of Appeals of Washington, Division 3

April 16, 2019

BARNES, INC., Appellant.

          Fearing, J.

         Jim wins. Complete letter ruling of beloved Benton-Franklin Counties Superior Court Judge Albert J. Yencopal.

         Barnes, Inc., a blasting contractor, asked the superior court to vacate an arbitration award issued in a contract dispute between Barnes and a party hiring its services. The superior court instead confirmed the arbitration award. Because the award shows no facial error, we affirm.


         The arbitrated dispute arises from a commercial contract for the mining and crushing of rock. The parties recite facts in their briefs despite the lack of a record from the arbitration hearing. Therefore, we are unable to confirm the accuracy of the facts. We recite some of those facts behind the dispute despite a conclusion that most of those facts lack relevance to this appeal. In the end, we consider only the arbitrator's award important.

         Mainline Rock & Ballast, Inc. (Mainline Rock) develops and operates rock quarries to extract, crush, and sell ballast, rock material used as the footing or base for railroad tracks. Mainline Rock's principal place of business is Washington State. Between 2004 and 2017, Mainline Rock owned and operated a rock quarry in Torrance County, New Mexico, near Encino. Mainline Rock intended to sell ballast from the Torrance site to BNSF Railway.

         In the process of generating ballast, the crushing operation creates by-product aggregate material and waste or reject material. Some by-product rock material may be sold for use in road construction and other infrastructure projects. The waste material, generally not commercially sellable, consists of dirt screened during the crushing process. Mainline Rock stockpiled the Torrance waste for later use in reclamation of the pit at the quarry.

         Barnes, Inc. (Barnes) works as a drilling and blasting contractor with its principal place of business in Idaho. On July 27, 2004, through a cryptic letter of understanding (LOU), Mainline Rock retained Barnes to drill and blast solid rock at the Torrance, New Mexico site. The LOU declared that Barnes would drill and blast material for railroad and retail sales at a rate of $0.78 per ton. The price included "anticipated rejects [waste material] of approximately 10 [percent] of the material blasted." Clerk's Papers (CP) at 20. This contract provision suggested Barnes would be paid a small amount for waste, but not an amount separate from the price paid for the other blasted material. The contract does not explicitly state that the waste will be separated from the ballast and byproduct. Nevertheless, according to the LOU, Mainline Rock expected that BNSF Railway would purchase the waste produced during the first year of operation. We assume a railway occasionally needs fill dirt to shore up its rail lines, but still the record does not explain why BNSF Railway would purchase dirt from Mainline Rock. Under the LOU, if the waste amount proved to be higher than anticipated, Mainline Rock would renegotiate the price.

         Under the 2004 LOU, Mainline Rock also agreed to pay Barnes a rate of $1.56 per solid cubic yard of material blasted for site development. The record does not clarify the need, nature, and extent of site development, but we assume site development entailed blasting commercially nonviable areas in order to gain access to the sellable ballast and by-product.

         The parties operated under the 2004 LOU until 2008, when the parties executed a master blasting agreement (MBA) for all locations at which Barnes would perform services for Mainline Rock. The 2008 agreement outlined the basic terms and conditions for the drilling and blasting to be performed by Barnes. The MBA did not include terms and conditions for services performed at a specific location, since the parties would include those details in work orders. The MBA read:

Upon acceptance and agreement of a Work Order, Mainline hereby authorizes Barnes to occupy Mainline Locations to operate its Drilling and Blasting operations for Mainline in accordance with the Work Order and this Agreement.

CP at 22.

         The MBA's term was three years, but the agreement could be renewed by the parties. The MBA stated that Mainline Rock would pay Barnes for blasted rock materials when Mainline Rock sold the rock to a third party:

9. Payment Terms: Unless otherwise noted herein, Mainline agrees to pay for all materials sold and invoiced, in full, within 20 days at the end of the month in which the rock is sold and invoiced. A late fee computed by a periodic rate of 1.5% per month will be applied to any overdue balance. If Products are for resale, no sales tax will apply.

CP at 23 (bold print in original; italics added). Individual work orders would determine the rate of payment.

         The 2008 MBA did not reference the 2004 LOU. The 2008 agreement contained an integration or merger clause that declared:

26. Entire Agreement: This writing is intended by the parties to be the final, complete and exclusive statement of their Agreement relating to the matters covered herein. There are no other oral understandings, representations or warranties affecting it.

CP at 29. Paragraph 27 of the agreement read:

Governing Law: This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of Washington. Or as required by law to be in the state of a specific operation.

CP at 29. The MBA included an arbitration clause that read, in part:

25. Arbitration and Waiver of Jury Trial: The parties hereby select binding arbitration as the exclusive method for resolving any dispute arising out of or otherwise relating to this Agreement, whether based on contract, tort, statute, or otherwise. To the extent not inconsistent herewith, arbitration shall be conducted in accordance with the Washington State Arbitration Act, RCW 7.04 et seq.

CP at 28. Finally, paragraph 29 of the MBA declared:

Attorney Fees: If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney fees, court costs and out-of-pocket costs, in addition to any other relief to which the party may be entitled. The provisions of this section shall survive the termination or expiration of this Agreement.

CP at 29.

         On June 1, 2008, Mainline Rock and Barnes entered a work order authorization for blasting work at the Torrance County location. The work order would be continued "as needed." CP at 31. The 2008 work order directed Mainline Rock to pay Barnes for its drilling and blasting services at $ 0.87 per ton. The work order further declared:

7.0 Special Terms and Conditions. Quantity shall be measured and paid as sold. Barnes retains the Drilling and Blasting interest in byproducts stockpiled on-site to be sold at a later date. Barnes['] interest in by-products survives the termination of the Master Drilling and Blasting contract for materials produced from Barnes blasted rock. This is a continuation of Blasting services at an ongoing quarry. The prices paid for blasting of ballast and by-product shall escalate (deescalate) at the same percentage rate as applicable to Mainline's ballast supply agreement with BNSF. The value of the blasting interest in by-products or other carried materials shall be equal to the adjusted price at the time of sale. Inventories carried beyond the termination of the master agreement shall be purchased [sic] paid for within 5 years of termination by Mainline.

CP at 31. Neither the MBA nor the work authorization mentioned rejects or waste materials.

         In 2016, the parties executed an amendment to the MBA and 2008 Work Order relating to the Torrance County site. The amendment created two different prices for materials. Mainline Rock would pay Barnes the amount of $1.20 per ton for a category of material labeled "Drilling and Blasting 2016 (includes non-rail by-product)." CP at 44. Mainline Rock would pay Barnes $1.00 per ton for a second category of material entitled "Commercial by-product by rail shipped to CSA and Vulcan." CP at 44. The amendment did not identify "CSA." The first category constituted ballast Mainline Rock could sell to BNSF and rock by-product that could be sold as commercial aggregate products for delivery by truck. The second category included rock by-product blasted by Barnes and sold by Mainline Rock as commercial aggregate products that could be sold and delivered in large volumes by rail car.

         According to Mainline Rock, Barnes drilled and blasted for Mainline Rock, between 2004 and 2017, and Mainline Rock paid Barnes based on the blasted materials actually sold. During the thirteen years, Mainline Rock never paid Barnes for reject or waste material, and Barnes never made a request for such payment. According to Barnes, it never requested payment for the waste because the waste had yet to be sold.

         In December 2016, Mainline Rock notified Barnes of an anticipated sale of its Torrance County operation site. Mainline Rock disclosed that it planned to include in the sale stockpiled materials, which sale would trigger a payment to Barnes for the stored commercially sellable materials. Mainline Rock conducted three discrete drone surveys of the stockpiled materials, each which calculated a quantity of 2.8 million tons of material. Mainline Rock announced that, on closing of the sale, it would pay Barnes $2.8 million based on a rate of $1.00 per ton. In response, Barnes, based on pre-blast measurements, expressed its belief that Mainline Rock possessed 6 million tons of stockpiled materials. Barnes demanded to be paid based on a quantity of 6 million tons. According to Mainline Rock, Barnes unreasonably demanded payment for waste and reject materials.

         On April 7, 2017, Mainline Rock sold its Torrance County operation site to Vulcan Materials Corporation. The sale included all stockpiled commercially sellable aggregate inventory. Barnes suggests the sale also included stockpiled waste, which makes sense since the waste probably sat on the sold real estate. Barnes further suggests that the waste had been separated from rock by the time of the sale. Nevertheless, neither party provides any evidence to show that the separated rejects or waste sat on the land at the time of sale. Barnes' contentions imply that the purchase price of the quarry reflected a sum for the stockpiled waste, although neither party provides evidence as to whether or not the buyer paid a separate sum for waste material.

         On May 17, 2017, Mainline Rock sent Barnes payment of $908, 596. Mainline Rock lowered the sum from its anticipated payment of $2.8 million based on its unilateral determination that 1.9 million tons of stockpiled material was unsellable waste. Barnes responded that Mainline Rock owed it payment for 5.65 million tons of stockpiled material at $1.25 per ton because the unit price per ton increased to $1.25 in 2017. In short, Barnes demanded payment of $7, 062, 500. The parties differed in amount owed by $6, 156, 904.

         Pursuant to their 2008 master blasting agreement, the parties submitted their dispute to arbitration before a three-member panel of arbitrators. A majority of the panel determined that Barnes was entitled to an additional payment of $354, 839.50 beyond the $908, 596.00 already tendered. The language of the majority's ruling looms critical for this appeal. The award reads:

This matter having come before the arbitration panel for hearing on May 22-24, 2017, and the arbitration panel having considered the evidence presented by both Mainline Rock & Ballast, Inc., the Claimant, and Barnes, Inc., the Respondent, the arbitration panel presents its majority arbitration award as follows:
1. By-Product Inventory On-Hand (original): The panel awards Barnes Inc. the amount of $206, 848.50 calculated (827, 394 tons x $0.25/ton).
2. By-Product Inventory On-Hand (corrected): The panel awards Barnes, Inc. the amount of $78, 872.50 calculated as follows: (65, 158 tons by-product x $1.25 = $81, 447.50) less ballast overpay calculated as: (2, 060 tons x $1.25 = <$2, 575.00>) for adjusted total calculated: ($81, 447.50 -$2, 575.00=$78, 872.50).
3. By-Product Inventory Loose Under Jaw: $40, 547.50 (32, 438 tons x $1.25/ton).
4. Drilling Holes by Barnes: The panel awards Barnes, Inc. the amount of $28, 571.00 for 109 drill holes drilled but not shot prior to the Vulcan sale calculated as follow: ($41, 400.00 billed by Barnes, Inc. less $12, 829.00 paid by Mainline = $28, 571.00).
5. Attorneys Fees and Costs: Under the facts and circumstances, the arbitration panel determines that neither party is a prevailing party and, therefore awards no attorney's fees or costs to either party.
6. Total Majority Award to Barnes, Inc: $354, 839.50.
A summary of the majority's award is as follows:
1. The majority concludes that the unit price negotiated between Mainline and Barnes in June 2008 was inclusive of anticipated reject material. This conclusion is supported by the parties' course of performance and treatment of reject material from the time the quarry was established in 2004 up through the sale to Vulcan in April 2017. In particular, by letter dated July 27, 2004, Barnes specifically noted that its negotiated unit price was inclusive of anticipated reject material. Barnes re-affirmed this understanding in its February 7, 2006 letter. Accordingly, the unit price Barnes negotiated and agreed to in June 1, 2008 Work Order Authorization (i.e., $0.87/ton) was inclusive of anticipated reject material. This was the purpose for having a unit price based on tons sold as opposed to a contract based on solid cubic yards blasted.
2. The majority concludes that Barnes was owed $1.25/ton for the rock by-product inventoried and on-hand. Although Mainline argued that the price should be $1.00/ton based on a volume sale to Vulcan, the majority finds that the unit price of $1.00/ton would only have applied had that by-product inventory been actually rail shipped to Vulcan (or CSA). As it was, the by-product remained stockpiled and inventoried at the quarry on the date ...

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