Schneider Electric Buildings Critical Systems, Inc. v. Western Surety Co.
149 A.3d 778
Md. Ct. Spec. App.2016Background
- Schneider Electric and National Control Services (NCS) entered a Master Subcontract Agreement containing a mandatory arbitration provision for disputes between them; future subcontracts would incorporate that Master Agreement.
- Schneider executed a project-specific subcontract with NCS that incorporated the Master Subcontract Agreement; that subcontract required NCS to obtain a performance bond naming Schneider as obligee.
- NCS obtained a performance bond (AIA A312 form) from Western Surety; the bond incorporated the subcontract (and thus the Master Subcontract Agreement) by reference and bound NCS and Western Surety “jointly and severally” for the performance of the Construction Contract.
- NCS abandoned the job; Schneider terminated for cause, hired replacement contractors, incurred substantial costs, and demanded arbitration under the Master Subcontract Agreement, later naming Western Surety as a co-respondent.
- Western Surety sought a court stay of arbitration and declaratory relief, arguing it was not a party to any arbitration agreement; the Harford County circuit court granted partial summary judgment for Western Surety, concluding it was not bound to arbitrate under either federal or state law.
- The arbitration between Schneider and NCS proceeded (not stayed) and an arbitrator awarded Schneider damages; this appeal addresses whether Western Surety can be compelled to arbitrate disputes under the incorporated arbitration clause.
Issues
| Issue | Plaintiff's Argument (Schneider) | Defendant's Argument (Western Surety) | Held |
|---|---|---|---|
| Whether federal or state law governs whether a non-signatory (Western) can be bound to arbitrate | FAA applies; presumption favoring arbitration; compel Western under federal law | State contract law controls formation/assent; FAA does not displace state law on non-signatory enforcement | State contract law governs whether a non-signatory is bound to arbitrate (apply Maryland law) |
| Whether the bond’s “jointly and severally” obligation to perform binds Western to arbitration in the incorporated documents | "Jointly and severally" obligates Western to perform the Construction Contract, including arbitration obligations | "Performance" refers to completing work; arbitration is an enforcement mechanism, not "performance"; no assent to arbitrate | "Jointly and severally" to perform does not show Western’s assent to arbitrate; term limited to performance of work tasks |
| Whether incorporation-by-reference of the subcontract/Master Agreement into the bond binds Western to the subcontract’s arbitration clause | Incorporation makes the arbitration clause part of the bond and binds Western as obligor | Mere incorporation does not transform the incorporated contract into an agreement between bond issuer and obligee absent contrary intent; bond contains forum/jurisdiction clauses for judicial remedies | Incorporation by reference alone does not bind a surety to an arbitration clause; no contrary intent appears in bond language |
| Whether reading arbitration into the bond would conflict with other bond provisions (e.g., judicial-suit clause/limitations) | Arbitration can coexist; incorporated clause controls disputes "arising out of" the contract | Compelling arbitration would nullify express bond provisions that require court suits and limitation periods | Court refused to rewrite contract; arbitration could not be compelled because it would read out express judicial remedy provisions |
Key Cases Cited
- Perry v. Thomas, 482 U.S. 483 (1987) (FAA preserves arbitration agreements but state law governs contract defenses affecting enforceability)
- Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009) (whether non-signatories can enforce or be bound by arbitration agreements is resolved by state contract law principles)
- First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (arbitrability is a matter of contract and courts apply ordinary state-law principles to decide who is bound)
- Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983) (federal abstention principles and strong federal policy favoring arbitration in parallel proceedings)
- Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976) (doctrine permitting dismissal of federal actions in favor of concurrent state litigation under exceptional circumstances)
- Hartford Accident & Indem. Co. v. Scarlett Harbor Associates Ltd. P'ship, 346 Md. 122 (1997) (Scarlett Harbor II) (Maryland court affirmed that incorporation-by-reference in a bond does not automatically bind surety to arbitration absent contrary intent)
- AgGrow Oils, LLC v. Nat. Union Fire Ins. Co., 242 F.3d 777 (8th Cir. 2001) (applying state contract principles and holding incorporation of arbitration clause into bond did not obligate surety to arbitrate)
MOTION TO DISMISS DENIED. JUDGMENT AFFIRMED; REMANDED FOR FURTHER PROCEEDINGS.