The Maryland Court of Special Appeal has recently issued decisions in two separate matters, reaching similar conclusions on very different sets of facts. The outcomes were (1) a related non-party could not be compelled to arbitrate, nor (2) could a performance bond surety whose bond incorporated the subcontract with an arbitration clause.
Case 1: A project owner signed a design-build contract containing an arbitration clause with a construction company, whose related entity was performing the design. After disputes arose, the owner demanded arbitration with both contractor and designer. The designer entity declined to arbitrate, but a lower court denied its motion to stay arbitration. The Maryland Court of Special Appeal overturned the lower court, ruling that the designer entity had not agreed to arbitrate and thus could not be compelled to do so.
The parties used an AIA Form A133 CM agreement, typically used for construction management but not for design-build, as was the case here. Just the same, the disputes clause stated:
No arbitration arising out of or relating to the Contract shall include, by consolidation or joinder or in any other manner, the Architect, the Architect's employees or consultants, except by written consent containing specific reference to the Agreement and signed by the Architect, Owner, Contractor and any other person or entity sought to be joined.
The owner argued that one person on behalf of both designer and contractor had negotiated the contract, that contract modifications had resulted in one contract covering both design and construction, and the person referred to had remained involved in the project for both designer and contractor entities. The lower court apparently accepted the factual arguments in compelling arbitration with the designer entity.
But the Court of Special Appeals held otherwise. Noting that the contract specifically excluded the designer entity from arbitration, the appellate court had found no case compelling arbitration with a party specifically excluded in this manner. Here, the designer entity “is neither a signatory to the Contract nor the party seeking relief under the Contract. Moreover, here the Contract includes a provision expressly excluding WBCM, as the Architect, from any arbitration proceeding arising under the Contract, absent written consent . . .”
Where the owner agreed by contract that the designer would be expressly excluded from arbitration, it could not repudiate that contract term and seek to involve the designer entity in arbitration. The case is WBCM v. BCC Props., 2016 Md. App. LEXIS 1463 (Nov. 30, 2016) (LEXIS subscription required).
Case 2: In a familiar fact pattern, a performance bond obligee sought to compel the surety to arbitrate the underlying dispute between bond obligee and bond principal. The Maryland appellate court declined to do so, based on language in the performance bond that references litigation.
The subcontract in question referenced a master subcontract agreement between the two contractor entities, and the master agreement included an arbitration clause. As is typical, the performance bond incorporated the subcontract by reference. Thus, the obligee argued, the surety was bound by the arbitration clause. The appellate court said, in essence: not so fast.
The court acknowledged several decisions from other jurisdictions holding that sureties are bound by the terms of an arbitration clause in such instances. But here, the court also noted a term in the bond:
Any proceeding, legal or equitable, under this Bond may be instituted in any court of competent jurisdiction in the location in which the work or part of the work is located and shall be instituted within two years after Contractor default or within two years after the Contractor ceased working or within two years after the Surety refuses or fails to perform its obligations under this Bond, whichever occurs first. If the provisions of this Paragraph are void or prohibited by law, the minimum period of limitation available to sureties as a defense in the jurisdiction of the suit shall be applicable.
Thus, the bond specifically envisioned litigation and not arbitration. The court held that “a bond's mere incorporation by reference of a contract, containing an arbitration clause, did not obligate the issuer of that bond to arbitrate.” So the obligee, having obtained an arbitration award in its favor, must now begin round two against the surety to seek to enforce that award and turn it into real dollars. The case is Schneider Elec. Bldgs. Critical Sys. v. Western Surety Co., 2016 Md. App. LEXIS 1405 (Nov. 30, 2016).
© 2020 Commonsense Construction Law