Schneider Electric Buildings Critical System, Inc. v. Western Surety Co.
165 A.3d 485
| Md. | 2017Background
- Schneider (subcontractor’s obligee on the project) contracted with NCS (subcontractor) under a Master Subcontract Agreement that included a mandatory arbitration clause for disputes between Contractor and Subcontractor.
- NCS executed a project-specific subcontract incorporating the Master Subcontract Agreement and its arbitration clause, and obtained a 100% performance bond from Western Surety (the Bond), which incorporated the subcontract by reference.
- NCS defaulted and abandoned the job; Schneider terminated the subcontract and claimed approximately $1.5M in damages and demanded arbitration against NCS, later adding Western.
- Western sought a court stay of arbitration and declaratory relief that it was not bound to arbitrate; the trial court granted partial summary judgment for Western, holding the surety need not arbitrate.
- The Court of Special Appeals affirmed; the Court of Appeals of Maryland granted certiorari and affirmed, holding the Bond did not bind Western to the subcontract’s arbitration clause.
Issues
| Issue | Schneider’s Argument | Western’s Argument | Held |
|---|---|---|---|
| Whether the surety’s promise to be “jointly and severally” liable for the “performance of the Construction Contract” makes it a party to the subcontract’s arbitration clause | The phrase makes Western as much a party as NCS, so Western assented to arbitrate | The bond only obligates Western if NCS defaults on performance of work; it does not make Western interchangeable with NCS or a party to the arbitration clause | Held: No — context shows “performance” refers to work performance, not assent to all contractual provisions, so Western is not bound by the arbitration clause |
| Whether incorporation of the subcontract by reference in the Bond binds Western to the subcontract’s arbitration clause | Incorporation by reference imports the arbitration clause into the Bond and triggers the FAA presumption in favor of arbitration | Incorporation insured NCS’s promise to arbitrate but did not make Western a party to that promise; state contract law determines assent | Held: No — incorporation insured NCS’s obligation but did not create Western’s agreement to arbitrate with Schneider |
| Whether the Federal Arbitration Act compels arbitration between Schneider and Western | FAA applies because the Bond is a written agreement to arbitrate and involves interstate commerce, invoking a presumption favoring arbitration | Whether an arbitration agreement exists between the parties is resolved under ordinary state-law contract principles; absent mutual assent, FAA does not compel arbitration | Held: State contract-law governs formation; no mutual assent, so FAA does not compel arbitration |
| Whether the Bond’s court-action clause is compatible with compelling arbitration | Arbitration and court clauses can coexist so incorporation should permit either forum | The Bond’s court-action clause (allowing suit in court) demonstrates intent to permit litigation of Bond disputes, inconsistent with forcing arbitration | Held: The court-action clause confirms parties intended litigation option; compelling arbitration would nullify that provision |
Key Cases Cited
- First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (courts apply ordinary state-law contract principles to determine arbitration assent)
- Cain v. Midland Funding, LLC, 452 Md. 141 (contract-based challenges to arbitration governed by state law)
- O’Brien & Gere Engs., Inc. v. City of Salisbury, 447 Md. 394 (contract interpretation: parties’ expressed intent controls)
- Rourke v. Amchem Prods., Inc., 384 Md. 329 (ambiguous contracts: plain meaning controls; interpret as whole)
- Hartford Accident & Indem. Co. v. Scarlett Harbor Assocs., 346 Md. 122 (surety who incorporated subcontract by reference not bound to subcontract arbitration clause between other parties)
- Liberty Mut. Ins. Co. v. Mandaree Pub. Sch. Dist. #36, 503 F.3d 709 (8th Cir.) (performance bond incorporating contract with arbitration clause and a court-action clause did not compel surety to arbitrate)