Surety’s Indemnity Rights Eliminated by Subsequent Arbitration Agreement

Most readers are familiar with the concept that performance bond sureties expect to recoup, from their principals, every dollar of cost incurred in responding to demands on the bond. And most readers are aware that the typical general indemnity agreement (GIA) gives the surety extensive rights, against the persons and companies signing on as indemnitors, to recover every dollar spent. But one surety was stopped short when it sought to recover costs of an arbitration from its principal, after the surety signed a three-party arbitration agreement, post-project, providing that all parties would be responsible for their own costs.

A dispute arose between subcontractor and prime contractor, and the prime contractor also made demands against the sub’s surety. The prime and sub commenced arbitration. Then, prime, sub and surety entered into what the decision refers to as an amended arbitration panel agreement, and the surety joined the arbitration. This later agreement included the following: “Each party shall be responsible for and bear the costs of its own attorney’s fees and expenses and an equal portion of the panel’s costs and expenses.” The arbitration ended with an award in favor of the sub and surety and against the prime.

The surety turned around and demanded that the sub reimburse the surety for $748,843.85 in arbitration costs, citing the terms of the GIA calling for that result. But the sub argued in response that the amended arbitration panel agreement had superseded the GIA, and the surety was thus not entitled to recover any such costs from the sub. A US District Court judge agreed with the sub, at least denying the surety’s request for summary judgment based on the terms of the GIA.

The court noted: “It is a well-settled tenet of contract law that a latter-signed contract between parties on the same subject modifies a pre-existing contract.” And it stated that if the surety had wanted to preserve its rights under the GIA, when entering into the amended arbitration panel agreement, the surety “should have executed contractual amendments or other documents clarifying the status of [the sub’s] duty to indemnify [the surety].”

This is basic contract law. The surety will undoubtedly remember should this scenario arise again. The case is Western Surety Co. v. S3H, Inc., 2016 U.S. Dist. LEXIS 101769 (D. Nev., Aug. 3, 2016), available here (LEXIS subscription required).