Schneider Elect. Build. Critical Systems v. Western Surety Co., 0020/15

Background

Schneider Electric and NCS executed a Master Subcontract Agreement (MSA) with a mandatory arbitration clause for disputes between them; future subcontracts would incorporate the MSA.
Schneider and NCS entered a subcontract for work at Aberdeen Proving Ground that incorporated the MSA; subcontract required a 100% performance bond from NCS.
Western Surety issued an AIA A312 performance bond naming Schneider as obligee; the bond incorporated the subcontract (and thus the MSA) by reference and bound NCS and Western “jointly and severally” for performance of the “Construction Contract.”
NCS stopped work and Schneider terminated the subcontract for cause; Schneider sought arbitration against NCS, later amending to add Western as a co-respondent on the theory the bond incorporated the arbitration clause.
Western sued in state court to stay arbitration and for declaratory relief; the Harford County circuit court granted partial summary judgment holding Western was not bound to arbitrate under either federal or state law.
The Court of Special Appeals affirmed: federal/state arbitration statutes do not change that state contract law governs whether a non-signatory surety is bound, and the bond’s language did not evidence intent to bind Western to the MSA arbitration clause.

Issues

Issue	Plaintiff's Argument (Schneider)	Defendant's Argument (Western)	Held
Whether federal or state law governs whether a non‑signatory can be bound to arbitrate	FAA applies and presumption in favor of arbitration supports binding Western because bond incorporated the subcontract/MSA	State contract law governs formation/enforceability of arbitration agreements; FAA doesn’t displace that	State contract law governs whether a non‑signatory is bound (consistent with Supreme Court precedents)
Whether incorporation-by-reference of the subcontract/MSA into the bond binds Western to the MSA arbitration clause	Incorporation by reference of the subcontract (which incorporates the MSA) into the bond makes the arbitration clause applicable to Western	Mere incorporation to define the primary obligation does not alone make the incorporated contract an agreement between different parties	Incorporation by reference alone did not bind Western to arbitrate; no clear intent to make the MSA a contract between Western and Schneider
Whether the bond’s “jointly and severally” promise to ensure “performance of the Construction Contract” obligates Western to arbitrate	“Jointly and severally” language obligates Western to the Construction Contract’s terms, including arbitration	“Performance” means completion of work (NCS’s construction obligations); arbitration is an enforcement mechanism, not a performance duty	“Performance” in the bond refers to the contractor’s work; joint-and-several clause did not evidence assent by Western to arbitrate
Whether the bond’s forum/limitations clause requires judicial resolution and precludes compelling Western to arbitrate	The arbitration clause governs disputes arising from the Construction Contract and should be enforced against the surety	Bond expressly provides for court actions and statute-of-limitations language; enforcing arbitration would read out that judicial remedy	The bond’s paragraph providing for court proceedings and time limits demonstrates intent to allow judicial suits; compelling arbitration would render those provisions meaningless

Key Cases Cited

Perry v. Thomas, 482 U.S. 483 (Supreme Court) (state law governs defenses to arbitration’s enforceability)
Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (Supreme Court) (whether non‑signatory may be bound is resolved by state contract law principles)
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (Supreme Court) (principles on abstention and parallel proceedings)
Scarlett Harbor Associates Ltd. P’ship v. Hartford Accident & Indem. Co. (Scarlett Harbor I), 109 Md. App. 217 (Md. Ct. Spec. App.) (incorporation by reference into a bond does not automatically bind surety to arbitration; contract should be construed to give effect to all provisions)
Scarlett Harbor Associates Ltd. P’ship v. Hartford Accident & Indem. Co. (Scarlett Harbor II), 346 Md. 122 (Md.) (affirming Scarlett Harbor I)
AgGrow Oils, LLC v. Nat. Union Fire Ins. Co., 242 F.3d 777 (8th Cir.) (applies state contract principles to decide whether incorporation binds surety to arbitrate)
Liberty Mut. Ins. Co. v. Mandaree Pub. Sch. Dist. #36, 503 F.3d 709 (8th Cir.) (similar application of state law; incorporation alone did not bind surety to arbitrate)

MOTION TO DISMISS DENIED. JUDGMENT OF THE CIRCUIT COURT FOR HARFORD COUNTY AFFIRMED. CASE REMANDED.