Lead Opinion
Travelers Casualty and Surety Company of America (Travelers), the surety on a construction payment bond, appeals from a judgment entered after a Superior Court judge confirmed an arbitration award. In confirming the award, the judge ordered entry of judgment against Travelers and Peabody Construction Company, Inc. (Peabody), Travelers’ principal, both for contract and for punitive damages. Travelers contends that it was not a party to the arbitration and, as a consequence, there was no award against it to be confirmed. Travelers also contends that its obligations under the payment bond do not
1. Background. On January 30, 2002, the town of Westford awarded Peabody a contract for construction of the Westford Middle School at Stony Brook Center (project). The contract and G. L. c. 149, § 29, required a payment bond, which Peabody obtained from Travelers in the penal sum of $22,411,590, the full value of the contract.
Peabody thereafter entered into a written subcontract with C & I Steel, Inc. (C & I), for performance of the structural steel work the project required. The subcontract, valued at $1,460,000, contained a broad arbitration clause under which Peabody and C & I agreed that, at Peabody’s election, “[a] 11 claims, disputes, and other matters in question arising out of, or relating to, this Subcontract, or the breach thereof, shall be decided by arbitration.”
As work under the subcontract proceeded, Peabody and C & I had numerous disputes and disagreements about such things as extra work, backcharges and delay. Ultimately, they reached an impasse. At that point, C & I commenced this action in the Superior Court against Peabody, Travelers, and the architect, Drummey Rosane Anderson, Inc. Four counts of C & I’s complaint asserted claims against Peabody for breach of contract, breach of the covenant of good faith and fair dealing, quantum meruit, and violation of G. L. c. 93A. Two counts asserted claims against
Invoking the subcontract’s arbitration clause, Peabody moved to stay judicial proceedings and compel arbitration. Travelers simultaneously filed a separate motion for a stay of what it described as C & I’s premature action pending conclusion of binding arbitration. In its motion, Travelers asserted, among other things, that its liability was derivative of Peabody’s. C & I filed a partial opposition, seeking freedom only to proceed with its action against the architect. A Superior Court judge allowed both motions to stay but, in accordance with C & I’s request, allowed the action against the architect to proceed.
After the stay was in place, C & I filed a demand for arbitration with the American Arbitration Association. The demand named Peabody alone and sought arbitration only of the four claims C & I had asserted against Peabody in the Superior Court complaint, i.e., the claims for breach of contract, breach of the covenant of good faith and fair dealing, quantum meruit, and Peabody’s alleged violation of G. L. c. 93A. C & I’s demand did not name Travelers as a respondent nor did it assert any claims involving Travelers’ own alleged acts or omissions.
The arbitration hearing proceeded over two days before a single arbitrator. Peabody, represented by the attorney who had represented both Peabody and Travelers in the Superior Court proceedings, participated fully. Travelers knew of the arbitration but did not seek to participate. Following the hearing, the arbitrator issued an award in favor of C & I and against Peabody, and broke down the award into ten separate elements. Those elements fit into three general categories, i.e., contract damages amounting to $313,439.54, double contract damages, or $626,879.08, for violation of c. 93A and breach of the covenant
At that point, C & I returned to Superior Court seeking confirmation of the entire award against both Peabody and Travelers. Peabody filed no opposition. Insofar as is here material, Travelers opposed the motion to the extent that the award contained punitive damages or other derivatives of the arbitrator’s conclusion that Peabody had violated the covenant of good faith and fair dealing and G. L. c. 93A. In its opposition, Travelers argued broadly that a surety is not liable for punitive damages assessed against its principal and, more narrowly, that payment for punitive damages was not an obligation it had undertaken in the bond.
A Superior Court judge rejected those arguments and confirmed the entire award against Travelers. Although he acknowledged that the award contained both contract and “bad faith” damages, the judge reasoned that
“[b]y executing the Bond Agreement that incorporated the subcontract, Travelers implicitly agreed to be bound by the arbitration proceedings as required by the arbitration provision in the subcontract. If Travelers sought to avoid liability for its principal’s bad faith damages, it could have expressed that limitation in its agreement with Peabody. Travelers correctly relies on the principle that a surety is bound only to the extent of its agreement with Peabody. The conclusion from this premise, however, must be that because its agreement with Peabody did not limit its liability and instead implicitly agreed to arbitration, Travelers must now be bound by the entirety of the arbitration award against its principal, Peabody.”
Judgment in the amount of $1,209,268.75 thereupon entered against Travelers and Peabody. See G. L. c. 251, §§ 11, 14; Mass.R.Civ.P. 54(b),
“[a] surety’s bond is a contract. It sets the limits of the surety’s liability. The fact that [the] bond is required by statute does nothing to alter the settled principles of contract and suretyship law. That this is a statutory bond does not ‘enlarge the risk’ which the bonding company has undertaken. ... A surety ‘cannot be holden beyond the fair scope of [its] engagement, as intended by the parties when undertaken.’ President of Dedham Bank v. Chickering, 4 Pick. 314, 340 (1827).”
Peerless Ins. Co. v. South Boston Storage & Warehouse, Inc.,
In the absence of ambiguity, interpretation of a contract presents a pure question of law. See Roberts Indus., Inc. v. Spence,
By its terms, then, the bond did not cover punitive damages,
In reaching that conclusion, we join the authors of the Restatement of Suretyship and Guarantee and the vast majority of other courts that have considered the issue.
We are unpersuaded by C & I’s argument that Travelers’ liability under the bond was limited only by the bond’s twenty-two million dollar penal sum and by a requirement that a claim be “related to” the construction contract. The latter notion springs from the terms of the bond’s paragraph 9, which, in material part, provide that “[t]he surety shall not be liable to the [o]wner, [claimants or others for obligations of the contractor that are unrelated to” the construction contract. The quoted terms, framed entirely in the negative, contain no new undertakings, reenforce the limitation on Travelers’ obligations found in paragraph 1, and are designed to forestall claims by those who furnish labor or materials that the construction contract does not require. Equally important, C & I’s argument, if accepted, would convert Travelers’ straightforward payment bond into a general liability policy with the broadest imaginable coverage.
Having established that the terms of the bond do not cover punitive damages, the next question is whether the arbitration proceedings, or the way Travelers approached those proceedings, somehow expanded the scope of Travelers’ obligation so that it
C & I’s first contention is that judicial review of an arbitration award is limited to determining whether the award “was procured by corruption, fraud, or other undue means” and whether the “arbitrators exceeded their powers.” G. L. c. 251, § 12. That limitation, C & I contends, prohibits a court from parsing an award to confirm some parts while rejecting others. Nothing in § 12, however, prohibits a court from looking at what an arbitrator has done and, in an appropriate case, confirming the award only in part. See, e.g., National Grid USA v. TransCanada Power Mktg. Ltd.,
The more fundamental problem for C & I, though, is that there was no award against Travelers for the court to confirm. As mentioned earlier, C & I neither demanded arbitration against Travelers nor made claims against Travelers in the arbitration proceedings, and the award said nothing about Travelers.
To be sure, in Powers Regulator Co. v. United States Fid. & Guar. Co.,
More fundamentally difficult for C & I, however, is that the result in Kearsarge and in Powers Regulator Co. was premised on the courts’ conclusion that the bonds in those cases incorporated construction contracts containing arbitration clauses, with the consequence that the bonding company had implicitly agreed to arbitrate disputes arising under those contracts. The same conclusion lies at the heart of the dissenting opinion here.
With all due respect, however, there is no basis in this record for concluding that an arbitration clause appeared, or was incorporated, in any contract to which Travelers was a party. The bond at issue did not contain an arbitration clause. As noted earlier, the bond did incorporate the construction contract between the Town and Peabody, the construction contract being defined to mean “[t]he agreement between the [Town] and [Peabody],” including all contract documents and changes thereto. That contract is not part of the record and we therefore have no knowledge of its contents. The subcontract between Peabody and C & I incorporated the contract between the town and Peabody and, in addition, contained the arbitration provisions Peabody successfully enforced by its motion in Superior Court. It is clear, therefore, that the contract between the town and Peabody was part of the contract between Peabody and C & I. Nothing in the record before us, though, supports a conclusion that the contract between Peabody and C & I, including that contract’s arbitration clause, was part of the contract
At best, then, Travelers was bound by the resolution of any issue actually decided in the arbitration proceedings. But the issue of Travelers’ obligation to pay punitive damages was not raised by the demand for arbitration, and nothing remotely touching on that issue appears in the arbitrator’s award. The award, therefore, did not preclude Travelers from challenging its obligation to pay the punitive damages the arbitrator assessed against Peabody.
The remaining question thus becomes whether Travelers’ failure to insert itself into C & I’s arbitration proceeding against Peabody created some kind of a preclusive force the award itself did not. C & I, the motion judge, and our dissenting colleague all find such a force in principles of estoppel flowing from Travelers’ statement in its motion to compel arbitration that “the liability of Travelers is derivative of the liability of Peabody” and by Travelers’ absence from the arbitration proceedings.
Travelers’ statement that its liability was derivative, however, was simply a restatement of the obvious. Travelers never suggested that its liability was coequal with that of its principal and at all times focused on its liability under the contract, not its liability for noncontractual obligations. Travelers’ absence from an arbitration to which it was not a party and in which no claims had been asserted directly against it produces neither surprise nor the detrimental reliance that is the hallmark of estoppel. See, e.g., Sullivan v. Chief Justice for Admn. & Mgmt. of the Trial Ct.,
The dissent suggests that Travelers’ participation in the arbitration would have helped to conserve scarce judicial resources. Even if true, the impulse to conserve cannot trump substantive law. The question whether the bond obligated Travelers to pay punitive damages was akin to a coverage question. Coverage or scope of insurance questions generally are for the court, not the arbitrator. Allstate Ins. Co. v. Harris,
Because Travelers was entitled to a judicial assessment of its coverage obligations, the route most likely to conserve resources is the route followed here. Where, as here, the surety is not a participant in the arbitration, and the arbitration proceeds before litigation of coverage or scope issues, liability questions may disappear, taking coverage questions with them. Whether or not that result occurs in every case, the approach Travelers took in this case is the approach most likely to conserve resources where conservation is possible.
In sum, neither the bond nor any aspect of Travelers’ approach to arbitration required it to pay the punitive damages the arbitrator awarded C & I. The judgment is vacated. The case is remanded for entry of a new judgment against Peabody in the amount of the arbitrator’s award and against Travelers in the amount of the contract damages and interest the award contains.
So ordered.
Notes
We acknowledge the amicus curiae brief submitted by The Surety & Fidelity Association of America.
The parties executed the 1984 edition of the standard form payment bond issued by the American Institute of Architects (AIA Document 312).
More precisely, the subcontract gave Peabody the sole right to choose litigation or arbitration for resolution of any claim valued, as here, in excess of $25,000. Claims valued at $25,000 or less required arbitration under all circumstances.
By agreement, C & I’s claims against the architect were later withdrawn.
Travelers argued in Superior Court that judgment should not enter against
In material part the statute states that “[o]fficers or agents contracting in behalf of . . . any . . . town ... for the construction ... of public buildings .... when the amount of the contract ... is more than two thousand
See Restatement (Third) of Suretyship & Guarantee § 73 (1996) (surety’s liability generally does not include any penalties beyond the actual losses resulting from the principal’s breach); Bull v. Albright,
In fact, the claim against Travelers for its own alleged violations of c. 93A remains pending in the Superior Court. The motion judge certified the arbitration judgment as a final partial judgment pursuant to Mass.R.Civ.P. 54(b),
The award’s binding effect, therefore, comes from a preclusive force, similar to the preclusive force of a judgment against an indemnitee who has properly vouched a nonparticipating indemnitor into the litigation before the judgment entered in the underlying matter. In both cases, the absent party is precluded from relitigating issues actually decided in contested proceedings. See, e.g., Oates v. Diamond Shamrock Corp.,
An insurer’s participation in arbitration where a question of coverage is at issue without raising claims regarding the scope of coverage possibly may bind that insurer to the arbitration’s outcome. See, e.g., Lumbermens Mut.
Dissenting Opinion
(dissenting). If the same counsel had not represented the general contractor and the surety,
In applying principles of estoppel here to bind Travelers to the full amount of the arbitration award, the judge refused to look behind the amount of the award in order to determine whether Travelers undertook a contractual obligation to pay for punitive damages.
The question here boils down to whether Travelers was entitled to sit out the arbitration and to select the Superior Court as the forum to litigate its bond defenses, if any. See Fidelity & Deposit Co. of Md. v. Parsons & Whittemore Contrs. Corp.,
Courts have split on this issue. In the majority of jurisdictions that have considered this issue, courts, applying an expansive view of incorporation by reference, have compelled sureties to arbitrate their personal defenses to liability under both the underlying construction contract and the surety bond.
This holding promotes our “strong public policy favoring arbitration as an expeditious alternative to litigation for settling commercial disputes,” Miller v. Cotter,
In sum, I take the view, as did the Superior Court judge, that Travelers was not without recourse to have avoided an arbitral assessment of punitive damages. For instance, it could have expressly disclaimed coverage for punitive damages in the payment bond. It also could, by careful drafting of the bond, have set limits on the scope of arbitral claims in the underlying construction contracts as a condition of bonding. See Drywall Sys., Inc. v. ZVI Constr. Co.,
I do not pause to discuss the potential conflict of interest. I do note, however, that the relationship between the principal and the surety is one of
Although the complaint has not been made part of the record, the answers (which were included) dispute any bad faith conduct.
Under Massachusetts law, the preferred procedural vehicle for establishing the liability of a surety would seem to be a motion for summary judgment on the bond claim in the Superior Court. See Floors, Inc. v. B.G. Danis of New England,
In passing, I note that there is authority for a surety to seek declaratory relief when faced with such a dilemma as is presented here. See, e.g., Pensacola Constr. Co. v. St. Paul Fire & Marine Ins. Co.,
“Judges don’t like slick.” Britt v. Rosenberg,
I agree with Travelers that the judge seemed to confuse the limit of liability with the scope of liability under the bond. Any error here was harmless.
Travelers monitored the arbitration, watched Peabody do an “inadequate” job on its own contract defenses (since Peabody was in financial distress), did not intervene, and then reversed course, stepped in, and argued that it should be entitled to relitigate Peabody’s defenses in the Superior Court because they were “not actually litigated.”
One leading commentator has noted that because most payment bonds incorporate the terms of the underlying contract, “it is increasingly likely that a surety will be deemed to have agreed to be bound by an arbitration award.” Gallagher, Payment Bond Manual 70 (2d ed. 1995). The commentator also noted the trend in more recent case law not to distinguish between contractual and bond defenses and to compel the arbitration of both. See id. at 72.
Here, however, Travelers never disputed the incorporation of the arbitration clause into the bond; in fact, it conceded that it had agreed to arbitrate.
I also note in passing that shared counsel in his dual role may have gleaned from tea leaves the “trickling negativity of an impending disaster” (or perhaps tardily reviewed the law) when he filed an emergency motion to withdraw immediately after receiving notice of the adverse arbitration award. The two most relevant Massachusetts cases, Kearsage, supra, and Powers Regulator Co. v. United States Fid. & Guar. Co., 7 Mass. App. Ct. 913 (1979), are conspicuously absent from Travelers’ brief and reply brief.
Travelers did move to stay the Superior Court proceedings.