Schneider Elect. Build. Critical Systems v. Western Surety Co. ( 2016 )

REPORTED
IN THE COURT OF SPECIAL APPEALS
OF MARYLAND
No. 20
September Term, 2015
______________________________________
SCHNEIDER ELECTRIC BUILDINGS
CRITICAL SYSTEMS, INC.
v.
WESTERN SURETY COMPANY
______________________________________
Krauser, C.J.,
Berger,
Zarnoch, Robert A.
(Senior Judge, Specially Assigned),
JJ.
______________________________________
Opinion by Krauser, C.J.
______________________________________
Filed: November 30, 2016
The issue before us is whether Western Surety Company, the appellee, is bound by
the mandatory arbitration clause of an agreement between Schneider Electric Buildings
Critical Systems, Inc., the appellant, and National Control Services, Inc. (“NCS”), as that
agreement was later incorporated by reference into a subcontract between Schneider
Electric and NCS, which was thereafter incorporated by reference into a performance bond
issued by Western Surety on behalf of NCS for work it was to perform for Schneider
Electric.
The aforementioned agreement between Schneider Electric and NCS, containing
the arbitration clause at issue, in this appeal, was entitled the “Master Subcontract
Agreement.” Its purpose was to enable Schneider Electric, “from time to time,” to “engage
the services of [NCS] to provide labor, material, equipment and services . . . in connection
with construction projects,” and its terms were to cover all future subcontracts between
them. Of particular relevance to the issue before us, the Master Subcontract Agreement
provided that any disputes that might arise between those two corporate entities, which
could not be resolved by “good faith negotiations,” must be submitted to arbitration.
One year later, Schneider Electric was retained to assist in the building of a facility
at Aberdeen Proving Ground, whereupon it entered into a subcontract agreement with
NCS, in accordance with the parties’ Master Subcontract Agreement, providing that NCS
was to perform certain work at the construction site of that facility. The subcontract
required NCS to furnish a performance bond, which it did. The issuer of that bond was
Western Surety. And, significantly, the bond incorporated by reference the subcontract
between Schneider Electric and NCS, which had incorporated by reference the Master
Subcontract Agreement between those two parties, with its mandatory arbitration clause.
When NCS thereafter declined to perform the construction required by the
subcontract, as a result of a payment dispute, Schneider Electric filed, as provided by the
parties’ Master Subcontract Agreement, a demand for arbitration. Although that demand,
initially, named only NCS as a respondent, it was subsequently amended to include
Western Surety, as a co-respondent, on the grounds that the performance bond, issued by
Western Surety, incorporated by reference the subcontract, which, in turn, had incorporated
by reference the Master Subcontract Agreement, with its mandatory arbitration clause, and
thereby purportedly bound Western Surety to that clause.
In response to its belated inclusion into Schneider Electric’s demand for arbitration,
Western Surety filed a petition, in the Circuit Court for Howard County, to stay that
arbitration and for a declaratory judgment, avowing, among other things, that it was not a
party to Schneider Electric’s and NCS’ agreement to arbitrate their disputes and therefore
could not be compelled to participate in the arbitration proceeding pending between them;
it asserted, moreover, that Schneider Electric had breached the performance bond and that
that breach had relieved Western Surety of any liability under that instrument. Then,
following the transfer of this dispute from Howard County to Harford County, the Circuit
Court for Harford County granted partial summary judgment in favor of Western Surety,
concluding that, under either federal or state law, Western Surety was not subject to the
arbitration provision of the incorporated Master Subcontract Agreement and therefore
2
could not be compelled to participate in the pending arbitration proceeding between
Schneider Electric and NCS.
In so ruling, the Harford County circuit court cited three grounds for its decision:
first, the words of the performance bond evinced an intent by Western Surety to guarantee
the performance of all construction work to be performed by NCS, but not all contractual
obligations undertaken by NCS, pursuant to the subcontract; second, the arbitration clause
of the Master Subcontract Agreement, even if ultimately incorporated by reference into the
performance bond, mandated arbitration only as to disputes between Schneider Electric
and NCS; and, third, to rule otherwise, would, in effect, read out of the performance bond
language expressly providing for a judicial resolution of any dispute, involving the bond,
that might arise.
Schneider Electric then noted this appeal, contending that the Harford County
circuit court’s ruling was in error for two reasons: first, by agreeing, in the performance
bond, to “jointly and severally” bind themselves to the performance of the subcontract
between Schneider Electric and NCS, both Western Surety and NCS were thereby bound
to comply with the arbitration clause incorporated by reference into that subcontract; and,
second, because the performance bond incorporated by reference that subcontract, Western
Surety was rendered subject to the arbitration clause. Finding no merit to either claim of
error, we shall affirm the judgment of the circuit court.
3
I.
In May 2009, Schneider Electric1 and NCS entered into a “Master Subcontract
Agreement,” in which the parties agreed, as noted, that NCS would “provide labor,
material, equipment and services necessary to perform work in connection with
construction projects, from time to time[.]” The Master Subcontract Agreement set forth,
among other things, the terms and conditions that would apply to all future subcontracts
between the two companies. It also included a provision, which is the crux of this appeal,
that any dispute between them would be subject to arbitration, if they were unable to
negotiate a resolution of that dispute.
Several months later, on August 14, 2009, Clark Construction Group, LLC, which
is not a party to this matter, entered into a contract with the United States Army Corps of
Engineers to build a replacement facility for medical research at Aberdeen Proving Ground
in Harford County, Maryland. The following October, Clark Construction, now the general
contractor for that construction project, contractually retained the services of Schneider
Electric to assist in the construction of that facility.
Seven months after Schneider Electric was engaged, by Clark Construction, as a
subcontractor for the construction project, Schneider Electric, pursuant to its Master
Subcontract Agreement with NCS, entered into a subcontract with NCS, to perform work
1
When the parties entered into the Master Subcontract Agreement, Schneider
Electric was known as TAC Critical Systems, Inc. In July 2011, more than two years after
the execution of the Master Subcontract Agreement, TAC Critical Systems changed its
name to Schneider Electric Buildings Critical Systems, Inc.
4
for that project. The subcontract incorporated by reference the Master Subcontract
Agreement, which contained the arbitration clause at issue.
Specifically, the subcontract provided that NCS would perform “electrical and
pneumatic installation” work at the Aberdeen facility. For that work, NCS was to be paid
$2,050,000, “in installments as the Work progresses.”
The subcontract also required NCS to furnish a performance bond, designating
Schneider Electric as the obligee, for 100 per cent of the “Subcontract value,” that is,
$2,050,000.2 NCS subsequently obtained that bond from Western Surety. The
performance bond, issued by Western Surety, at NCS’ request, was an American Institute
of Architects (“AIA”) form A3123 and bound Western Surety and NCS to Schneider
Electric “for the performance of the Construction Contract,” which was incorporated by
reference into the performance bond. The term “Construction Contract,” as defined by the
performance bond, included the subcontract, between Schneider Electric and NCS, and
thereby the Master Subcontract Agreement between those two entities, with its mandatory
arbitration clause, which had been incorporated by reference into the subcontract.
2
Although the court below stated, in its opinion, that the bond amount was
$2,600,000, the bond and pleadings below indicate the amount was $2,050,000.
3
The American Institute of Architects is an organization which, among other things,
“[s]ets the industry standard in contract documents with more than 100 forms and contracts
used in the design and construction industry.” See “About the AIA,” available at
http://www.aia.org/about/index.htm (last visited Nov. 7, 2016).
5
The subcontract specified that NCS’ work would begin on May 25, 2010 and
conclude by May 31, 2013. As the work progressed, numerous change orders eventually
increased the amount to be paid NCS, by Schneider Electric, from $2,050,000 to
$2,309,883, and extended the date that NCS was to complete its work from May 31, 2013
to February 28, 2014.4
In the summer of 2013, a dispute arose between Schneider Electric and NCS
concerning payment for work NCS had purportedly performed. NCS claimed it was owed
approximately $410,000, by Schneider Electric, for various progress payments, claims, and
change orders. When Schneider Electric rejected NCS’ demand for payment, the parties
attempted, as required by their Master Subcontract Agreement, which had been
incorporated by reference into their subcontract, to resolve their dispute “through good
faith negotiations and settlement.” When those efforts proved unavailing, NCS, on August
30, 2013, abandoned the job site, notwithstanding a provision in the Master Subcontract
Agreement requiring it to “continue to diligently perform the Work and maintain the
progress schedule (without waiving its claims) despite the pendency of any dispute or any
arbitration or litigation proceeding[.]”
Upon learning of NCS’ cessation of work, Schneider Electric promptly sent an
initial notice of default to both NCS and Western Surety, advising them of what Schneider
Electric believed to be a breach of contract by NCS. After two months had passed and
4
There were fourteen change orders issued by Schneider Electric to NCS, as well
as a promise to issue an additional change order, extending the date for completion of the
work from September 19, 2013 to February 28, 2014, pending the conclusion of
negotiations between Schneider Electric and Clark Construction.
6
NCS had still not resumed its work at the job site, Schneider Electric, on October 25, 2013,
sent a final notice of default to both NCS and Western Surety, declaring that Schneider
Electric intended to “terminate for cause” the subcontract between it and NCS, that
Schneider Electric would “proceed to complete NCS’ work in an expeditious manner using
manpower supplied by other electrical subcontractors,” and that NCS and Western Surety
would “remain liable for all costs and expenses incurred” by Schneider Electric to complete
NCS’ work. Schneider Electric then, on November 12, 2013, notified both NCS and
Western Surety that the NCS subcontract had “been terminated for cause pursuant to
Section 18.3” of the Master Subcontract Agreement, which permitted it to do so if NCS
abandoned the work it was contractually required to perform.
Because NCS, as of August 30, 2013 (the date it left the job site), had performed
only 70 per cent of the work required under the subcontract, Schneider Electric hired other
electrical subcontractors to complete the remaining work. It, ultimately, paid those
subcontractors approximately $2,000,000 to fulfil NCS’ contractual obligations, which
further fueled the dispute between the parties, as that amount substantially exceeded the
amount that NCS was to be paid upon the completion of the work it had not yet performed,
when it ceased any further activity at the construction site. In fact, according to Schneider
Electric, NCS’ breach of the subcontract had caused it to suffer nearly $1,500,000 in
damages, which was the difference between the approximately $2,000,000 it paid others to
complete the work NCS was to perform under the subcontract and the approximately
$500,000 NCS was to be paid had it fulfilled its contractual obligations.
7
In February 2014, Schneider Electric filed a demand for arbitration, with the
American Arbitration Association, naming NCS as the sole respondent and claiming
damages in the amount of $1,473,100 as well as attorneys’ fees, interest, and costs. Then,
two months later, it amended that demand, to include Western Surety as a co-respondent.
Finding, itself, now a party to the arbitration demanded by Schneider Electric,
Western Surety filed, in response to that demand, a petition, in the Circuit Court for Howard
County, seeking both a stay of arbitration and a declaratory judgment. Specifically,
Western Surety requested, invoking Courts and Judicial Proceedings Article (“CJ”),
§ 3-208,5 that the circuit court stay arbitration “with respect to any claims asserted by”
Schneider Electric against it because it was not, it averred, a party to any arbitration
agreement with Schneider Electric or NCS or to any agreement between them. Western
5
Maryland Code (1974, 2013 Repl. Vol.), Courts and Judicial Proceedings Article
(“CJ”), § 3-208 provides:
(a) If a party denies existence of the arbitration
agreement, he may petition a court to stay commenced or
threatened arbitration proceedings.
(b)(1) A petition to stay arbitration shall be filed with
the court where a petition to order arbitration has been filed.
(2) If a petition for order to arbitrate has not been filed,
the petition to stay arbitration may be filed in any court subject
to venue provisions of Title 6 of this article.
(c) If the court determines that existence of the
arbitration agreement is in substantial and bona fide dispute, it
shall try this issue promptly and order a stay if it finds for the
petitioner. If the court finds for the adverse party, it shall order
the parties to proceed with arbitration.
8
Surety further requested that the court “issue a declaratory judgment with respect to the
legal relations between” it and Schneider Electric and, in so doing, to specify the reasons
that it, Western Surety, could not be required to participate in the arbitration currently
pending between Schneider Electric and NCS, as well as to specify any “suretyship
defenses” Western Surety could invoke, were Schneider Electric to bring a claim against it
under the performance bond, should it prevail in the pending arbitration proceeding with
NCS.
In reply, Schneider Electric filed a motion to dismiss the state court action, brought
by Western Surety, on the grounds of improper venue. Although Western Surety opposed
that motion, it did agree to Schneider Electric’s request for a change of venue, which led
the Howard County court to subsequently transfer this matter to the Circuit Court for
Harford County. See Md. Rule 2-327(b) (authorizing a circuit court, upon sustaining
defense of improper venue but determining that “in the interest of justice the action should
not be dismissed,” to transfer that action” to any county in which it could have been
brought”).
At the same time that Schneider Electric moved to dismiss the state court
proceedings, it filed a petition, in the United States District Court for the District of
Maryland, seeking to compel Western Surety to arbitrate their dispute. The federal district
court dismissed that petition, citing the “abstention doctrine,” promulgated by the Supreme
Court, in Colorado River Water Conservation District v. United States, 424 U.S. 800
(1976), which permits a federal district court to dismiss a federal action, when “the parallel
state-court litigation will be an adequate vehicle for the complete and prompt resolution of
9
the issues between the parties.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 28 (1983).
Later that year, following the transfer of the case to the Harford County circuit court,
Western Surety, in September 2014, filed, in that court, a motion for partial summary
judgment, asserting that, because there was no agreement to arbitrate between it and
Schneider Electric, it was entitled to judgment as a matter of law as to its request for a stay
of arbitration. The granting of that motion by the Harford County circuit court prompted
the filing of this interlocutory appeal6 by Schneider Electric.
II.
Having not been stayed during the pendency of this appeal, arbitration proceedings,
to which only Schneider Electric and NCS were parties, continued without interruption. In
fact, shortly after the parties’ presentation of oral argument, before this Court, those
proceedings concluded with a determination, by the arbitrator, that NCS had breached its
subcontract with Schneider Electric, whereupon Schneider Electric was awarded, by the
arbitrator, a total of $1,653,924.21 in damages, attorneys’ fees, arbitrator’s fees, and costs
that Schneider Electric had incurred. Following that decision, Western Surety promptly
filed a motion to dismiss this appeal, contending that, because the dispute between
Schneider Electric and Western Surety was, principally, whether Western Surety was
6
This appeal was filed, pursuant to Courts and Judicial Proceedings Article (“CJ”),
§ 12-303(3)(ix), which permits an interlocutory appeal from an order “[g]ranting a petition
to stay arbitration pursuant to § 3-208.”
10
contractually obligated to submit to arbitration and, as that arbitration had concluded, the
instant appeal is now moot and warrants dismissal.
“A question is moot if, at the time it is before the court, there is no longer an existing
controversy between the parties, so that there is no longer any effective remedy which the
court can provide.” Falik v. Hornage, 413 Md. 163, 186 (2010) (citation and quotation
omitted). Although the arbitration between Schneider Electric and NCS has, indeed,
ended, the issue of whether Schneider Electric may seek payment of that award from
Western Surety via arbitration is still before us. That issue was understandably neither
addressed nor resolved during the arbitration proceedings between Schneider Electric and
NCS. It therefore remains an “existing controversy” between the parties and, in fact, lies
at the heart of this appeal. Accordingly, we shall deny Western Surety’s motion to dismiss
and proceed to the merits of the issue presently before us.
III.
Under Maryland Rule 2-501(f), a circuit court may grant summary judgment, if
there is “no genuine dispute as to any material fact,” and “the party in whose favor
judgment is entered is entitled to judgment as a matter of law.” “Because a grant of
summary judgment is predicated upon a ruling on a question of law and not a dispute of
fact, our review is de novo.” Stein v. Pfizer Inc., 228 Md. App. 72, 85 (2016) (citation
omitted), cert. denied, __ Md. __, 2016 WL 5724833 (Sept. 29, 2016). Keeping that
standard of review in mind, we turn now to the first issue we have been asked to decide
and, that is, whether we must apply federal law, specifically, the Federal Arbitration Act
11
and its attendant presumption in favor of arbitration, in determining whether Western
Surety is bound contractually to arbitrate, as Schneider Electric contends, or state contract
law, as Western Surety claims.
Preliminarily, we note that the court below did not address whether the contracts at
issue, in this appeal, involved interstate commerce and, consequently, it never determined
whether the Federal Arbitration Act applied to the instant controversy. See 9 U.S.C. § 1
(defining “commerce,” for purposes of the Federal Arbitration Act, as including
“commerce among the several States”). Nor was it necessary that it do so, given that it
found that, under either federal or state law, Western Surety was not contractually bound
to arbitrate any disputes arising from the performance bond it had issued because,
regardless of which Act, federal or state, applies, state law governs the issue of contract
formation. We agree.
The Supreme Court first annunciated this principle in Perry v. Thomas, 482 U.S.
483 (1987), and then later reiterated it, in Arthur Andersen LLP v. Carlisle, 556 U.S. 624
(2009), to clear up an apparent misreading of Section 2 of the Federal Arbitration Act by a
number of federal and state courts.
Section 2 of that federal Act states that a written arbitration provision “in any . . .
contract evidencing a transaction involving commerce . . . shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of
any contract,” 9 U.S.C. § 2 (emphasis added), an ambiguous clause, to be sure. Then, in
Perry v. Thomas, 482 U.S. 483, the Supreme Court indicated, apparently not plainly
enough, that, while the former clause — “in any . . . contract evidencing a transaction
12
involving commerce . . . shall be valid, irrevocable, and enforceable” — generally provides
that “[a]n agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of
federal law,” the language that follows — “save upon such grounds as exist at law or in
equity for the revocation of any contract” — provides that “state law, whether of legislative
or judicial origin, is applicable if that law arose to govern issues concerning the validity,
revocability, and enforceability of contracts generally.” Id. at 492-93 n.9.
Nonetheless, a significant number of federal and state courts, in addressing whether
non-signatories to contracts containing arbitration clauses may either compel a signatory
or be compelled by a signatory to arbitrate disputes arising under those contracts, have
misconstrued Section 2 and mistakenly concluded that it provides that enforceability of an
arbitration clause by or against a non-signatory is to be resolved, in accordance with federal
common law. See, e.g., R.J. Griffin & Co. v. Beach Club II Homeowners Assoc., 384 F.3d
157, 160 n.1 (4th Cir. 2004); Int’l Paper Co. v. Schwabedissen Maschinen & Anlagen
GMBH, 206 F.3d 411, 417 n.4 (4th Cir. 2000); MS Dealer Service Corp. v. Franklin, 177
F.3d 942, 947-48 (11th Cir. 1999); Grundstad v. Ritt, 106 F.3d 201, 204-05 (7th Cir. 1997);
Commercial Union Ins. Co. v. Gilbane Building Co., 992 F.2d 386, 388-89 (1st Cir. 1993);
United States Fidelity & Guaranty Co. v. West Point Constr. Co., 837 F.2d 1507, 1508
(11th Cir. 1988) (per curiam); Exchange Mut. Ins. Co. v. Haskell Co., 742 F.2d 274, 275-76
(6th Cir. 1984) (per curiam); Rashid v. Schenck Const. Co., Inc., 438 S.E.2d 543, 547 (W.
Va. 1993); St. Paul Fire & Marine Ins. Co. v. Woolley/Sweeney Hotel No. 5, 545 So. 2d
958 (Fla. Dist. Ct. App. 1989) (per curiam).
13
This misreading of Section 2 has engendered much confusion among many state
courts, including Maryland’s Court of Special Appeals. See, e.g., Thompson v.
Witherspoon, 197 Md. App. 69, 81 (2011) (“Under the [Federal Arbitration Act], courts
look to substantive provisions of state law regarding threshold issues of the validity,
revocability, or enforceability of contracts, but to federal law to resolve issues as to whether
a non-signatory to a contract can enforce, or be bound by, an arbitration provision in a
contract signed by other parties.”) (citation omitted); Case Handyman and Remodeling
Servs., LLC v. Schuele, 183 Md. App. 44, 57 (2008) (“To resolve the issue whether a non-
signatory can enforce a contract’s arbitration provision under the doctrine of equitable
estoppel, courts look to the federal substantive law of arbitrability.”), vacated on other
grounds, 412 Md. 555 (2010).
In 2009, the Supreme Court laid to rest this misinterpretation of that section of the
Federal Arbitration Act, in Arthur Andersen LLP v. Carlisle, supra, 556 U.S. 624. There,
it explained that when, as in this case, a question arises as to whether an arbitration clause
may be enforced by or against non-parties to a contract containing such a clause,
“‘traditional principles’ of state law,” which “allow a contract to be enforced by or against
non[-]parties . . . through ‘assumption, piercing the corporate veil, alter ego, incorporation
by reference, third-party beneficiary theories, waiver and estoppel,’” provide the answer to
14
that question. Id. at 631 (quoting 21 R. Lord, Williston on Contracts § 57:19, at 183 (4th
ed. 2001)).7
Moreover, in the past few years, several federal courts of appeals, consistent with
the Carlisle Court’s relatively recent admonition, have candidly conceded their mistaken
impression that federal common law controls in such situations. See, e.g., Crawford Prof.
Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 255 (5th Cir. 2014) (recognizing that
“prior decisions applying federal common law, rather than state contract law, to decide”
whether an arbitration clause may be enforced by or against nonparties to the contract were
in error); Lawson v. Life of the South Ins. Co., 648 F.3d 1166, 1170-71 (11th Cir. 2011)
(declaring that many of that circuit’s prior “decisions involving the question of whether a
non-party can enforce an arbitration clause against a party have not made clear that the
applicable state law provides the rule of decision for that question”). We now join those
courts in stressing that, under the Federal Arbitration Act, as interpreted by the Supreme
Court, the question of whether an agreement to arbitrate binds a non-signatory is a question
of state contract law. Arthur Andersen LLP v. Carlisle, 556 U.S. at 631; First Options of
7
The question at issue in Arthur Andersen was whether a non-signatory to a
contract, containing an arbitration clause, could, nonetheless, invoke provisions, in the
Federal Arbitration Act, entitling “litigants in federal court to a stay of any action that is
‘referable to arbitration under an agreement in writing’” as well as to seek an appeal from
a district court’s order denying such a stay. Arthur Andersen, 556 U.S. at 625 (quoting 9
U.S.C. § 3) (citing 9 U.S.C. § 16). The Supreme Court held that, “if the relevant state
contract law” permits a non-signatory to enforce such an arbitration agreement, that non-
signatory is entitled to seek a stay, under 9 U.S.C. § 3, as well as to appeal, under 9 U.S.C.
§ 16, from the denial of such a stay. Id. at 632.
15
Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995); Perry v. Thomas, 482 U.S. at 492-93
n.9.
Finally, if the Maryland Uniform Arbitration Act, rather than the Federal Arbitration
Act, applies in this case, we, of course, reach the same conclusion, that is, state contract
law, not federal law, governs whether an agreement to arbitrate binds a non-signatory.8 See
Cheek v. United Healthcare of the Mid-Atlantic, Inc., 378 Md. 139, 147 (2003) (observing
that, under the Maryland Uniform Arbitration Act,9 the “determination of whether there is
an agreement to arbitrate . . . depends on contract principles since arbitration is a matter of
contract”).
8
Western Surety is domiciled in South Dakota, as stated on the website of its
corporate parents, CNA Surety and CNA Financial Corporation. Furthermore, Schneider
Electric is a Delaware corporation, with its principal place of business in Maryland.
Moreover, the work to be performed by NCS, under its subcontract with Schneider Electric,
was to be done at a federal military installation, Aberdeen Proving Ground. For all of these
reasons, we would conclude that, were it necessary for our decision, the Federal Arbitration
Act applies in this case.
9
Courts and Judicial Proceedings Article, § 3-206(a), part of the Maryland Uniform
Arbitration Act, provides:
Except as otherwise provided in this subtitle, a written
agreement to submit any existing controversy to arbitration or
a provision in a written contract to submit to arbitration any
controversy arising between the parties in the future is valid
and enforceable, and is irrevocable, except upon grounds that
exist at law or in equity for the revocation of a contract.
(Emphasis added.) The bolded language in the Maryland Act is virtually identical to the
corresponding language in the Federal Arbitration Act.
16
IV.
We now turn to the issue, which is the fulcrum of this case: whether, under
Maryland contract law, Western Surety, in effect, agreed to arbitrate any disputes between
it and Schneider Electric, because the performance bond, issued by Western Surety, on
behalf of NCS, incorporated by reference the subcontract, which, in turn, incorporated by
reference the Master Subcontract Agreement, with its arbitration clause, to which only
Schneider Electric and NCS were parties.
“Maryland follows the objective theory of contract interpretation,” Nationwide Mut.
Ins. Co. v. Regency Furniture, Inc., 183 Md. App. 710, 722 (2009), according to which a
“court must, as its first step, determine from the language of the agreement what a
reasonable person in the position of the parties would have meant at the time the agreement
was effectuated.” Hartford Accident and Indemnity Co. v. Scarlett Harbor Associates Ltd.
Partnership, 109 Md. App. 217, 291 (1996) (“Scarlett Harbor I”), aff’d, 346 Md. 122
(1997) (“Scarlett Harbor II”). Moreover, “[w]here the contract comprises two or more
documents, the documents are to be construed together, harmoniously, so that, to the extent
possible, all of the provisions can be given effect.” Regency Furniture, 183 Md. App. at
722-23 (quoting Rourke v. Amchem Prods., Inc., 384 Md. 329, 354 (2004)).
The latter principle of contract interpretation bears particular relevance to the issue
before us, because the agreement between Western Surety and Schneider Electric is the
product of principally three documents: the performance bond together with the
subcontract and the Master Subcontract Agreement, with its arbitration clause, the former
of which incorporates the latter two.
17
Paragraph 1 of the performance bond states:
[NCS] and [Western Surety], jointly and severally, bind
themselves, their heirs, executors, administrators, successors
and assigns to [Schneider Electric] for the performance of the
Construction Contract [which includes both the Subcontract
and the Master Subcontract Agreement], which is incorporated
herein by reference.
According to Schneider Electric, paragraph 1 of the bond binds Western Surety to
submit to arbitration all disputes, arising under what is referred to above as the
“Construction Contract,” first, because it “jointly and severally” binds Western Surety to
ensure “the performance of the Construction Contract,” which includes, insists Schneider
Electric, compliance with the arbitration clause, if invoked, and, second, because paragraph
1 of the bond incorporates by reference the subcontract, which, in turn, incorporates by
reference the Master Subcontract Agreement and thus its arbitration clause.
A.
Schneider Electric’s assertion that Western Surety, by “jointly and severally”
binding itself to “the performance of the Construction Contract,” as stated in paragraph 1
of the performance bond, also bound itself to the incorporated Master Subcontract
Agreement’s arbitration clause, ignores the context of those words as well as misconstrues
the term “performance.” The Master Subcontract Agreement states that Schneider Electric
“desires to engage the services of [NCS] to provide labor, material, equipment and services
necessary to perform work in connection with construction projects, from time to time, in
accordance with the terms and conditions set forth in” the Master Subcontract Agreement.
(Emphasis added.) As the purpose of the Master Subcontract Agreement (and the
18
subcontract, which incorporated that agreement by reference) was to ensure that NCS
would “perform work,” prescribed by that agreement, it is with that purpose in mind that
the term “performance” should be construed. Ocean Petroleum Co. v. Yanek, 416 Md. 74,
88 (2010) (citation and quotation omitted). The arbitration clause, on the other hand, is
nothing more than an enforcement mechanism, which may never come into play, if all
parties proceed as agreed.
Moreover, the paragraphs of the bond, which immediately follow paragraph 1 and
employ the verb “perform,” confirm that the term “performance,” contrary to Schneider
Electric’s contention, extends only to the tasks that NCS was to complete. Paragraph 2 of
the bond states:
If [NCS] performs the Construction Contract, [Western
Surety] and [NCS] shall have no obligation under this Bond,
except to participate in conferences as provided in
Subparagraph 3.1.
(Emphasis added.)
Subparagraph 3.1 of the bond, in turn, provides:
If there is no [default by Schneider Electric], [Western
Surety’s] obligation under this Bond shall arise after . . .
[Schneider Electric] has notified [NCS] and [Western Surety]
. . . that [Schneider Electric] is considering declaring a [default
by NCS] and has requested and attempted to arrange a
conference with [NCS] and [Western Surety] to be held not
later than fifteen days after receipt of such notice to discuss
methods of performing the Construction Contract. If
[Schneider Electric], [NCS] and [Western Surety] agree,
[NCS] shall be allowed a reasonable time to perform the
Construction Contract, waive [Schneider Electric’s] right, if
19
any, subsequently to declare but such an agreement shall not a
[default by NCS.]
(Emphasis added.)
In sum, NCS’ obligation to “perform,” as set forth in paragraph 2 and subparagraph
3.1 of the bond, refers to the performance of the work it agreed to complete and not to
every contractual provision in the incorporation-by-reference chain, which runs from the
Master Subcontract Agreement, between Schneider Electric and NCS, to the subcontract
between those two parties, to the performance bond, issued by Western Surety. We
therefore conclude that the “joint and several” obligation clause in paragraph 1 of the
performance bond does not evince Western Surety’s assent to be bound by the arbitration
clause in the incorporated-by-reference chain of documents, particularly as it was not a
party to either of the two earlier contractual links in that chain, namely, the Master
Subcontract Agreement and the subcontract that followed.
B.
We turn now to consider whether the language in paragraph 1 of the bond, providing
that the “Construction Contract [which, as noted earlier, includes the Master Subcontract
Agreement, with its arbitration clause] . . . is incorporated herein by reference,” compels
Western Surety to submit to the arbitration clause of that Agreement. In Scarlett Harbor
I, supra, 109 Md. App. 217, this Court specifically addressed the question whether a
non-signatory surety on a performance bond, which incorporated by reference a
construction contract (containing an arbitration clause) between a developer of a
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condominium project and one of its subcontractors, could compel the developer to arbitrate
its dispute with the surety.
That case arose from complaints by unit owners alleging defective design and
construction of a high-rise condominium development, Scarlett Place Residential
Condominium. Id. at 229. Those complaints led the council of unit owners of the
condominium to file a civil action, in the Circuit Court for Baltimore County, against the
project developer, Scarlett Harbor Associates Limited Partnership (“SHALP”), its general
partners, and its former general partners, “asserting breach of the statutory implied
warranty, breach of express warranty, breach of contract, and violation of the Maryland
Consumer Protection Act.” Id. The defendants, in turn, impleaded several other entities,
including a subcontractor, Leonard A. Kraus, Inc., and Hartford Accident and Indemnity
Company, which had issued Kraus’s performance bond. Id.
Because the subcontract between SHALP and Kraus contained a broadly worded
arbitration clause,10 which, as this Court explained, “entitled Kraus to require arbitration to
10
The arbitration clause at issue in Hartford Accident and Indemnity Co. v. Scarlett
Harbor Associates Ltd. Partnership, 109 Md. App. 217 (1996) (Scarlett Harbor I), aff’d,
346 Md. 122 (1997) (Scarlett Harbor II), provided:
All claims, disputes and other matters in question between the
Contractor [Kraus] and the Owner [SHALP] arising out of or
relating to the Contract Documents or the breach thereof . . .
shall be decided by arbitration in accordance with the
Construction Industry Arbitration Rules of the American
Arbitration Association then obtaining unless the parties
mutually agree otherwise. . . . No arbitration shall include by
consolidation, joinder, or in any other manner, parties other
than the Owner, the Contractor and any other persons
21
resolve any ‘claims, disputes, [or] other matters . . . arising out of or relating to the Contract
Documents or breach thereof,’” Kraus filed a petition, in the Baltimore County circuit
court, to compel the SHALP defendants to submit to arbitration. Id. at 289. Though
Hartford was not a party to the subcontract between SHALP and Kraus, Hartford also filed
a petition, in the same court, to compel arbitration, asserting its right to invoke the
subcontract’s arbitration clause, because the performance bond it had issued incorporated
the subcontract by reference.11 Id. at 292. The circuit court granted Kraus’s petition but
denied Hartford’s, “ruling that the performance bond contract did not contain an arbitration
agreement” for Hartford to invoke and that Hartford was not a party to the subcontract,
which did. Id. at 289.
In affirming that ruling, this Court observed that “[w]hen an earlier document is
‘incorporated by reference’ into a subsequent contract, it simply means that the earlier
substantially involved in a common question of fact or law,
whose presence is required if complete relief is to be accorded
in the arbitration.
Id. at 288.
11
The performance bond contained the following provision:
Whereas, Principal [Kraus] has by written agreement dated
8/12/86 entered into a subcontract with Obligee [SHALP] for
Renovation and addition to Scarlett Seed Building—Light
Gauge Metal Framing (Scarlett Place Phase II & III) in
accordance with drawings and specifications prepared by
Meyers & D’Aleo which subcontract is by reference made a
part hereof, and is hereinafter referred to as the subcontract.
Scarlett Harbor I, 109 Md. App. at 289.
22
document is made a part of the second document, as if the earlier document were fully set
forth therein.” Id. at 292 (citations omitted). But, we then stressed that the mere
“incorporation of one contract into another contract involving different parties does not
automatically transform the incorporated document into an agreement between the parties
to the second contract,” unless there is “an indication of a contrary intention” to do so. Id.
We therefore rejected Hartford’s contention that such “an indication” was evident, noting
that the purpose of the incorporation-by-reference bond language was “simply to establish
the primary obligation on which Hartford’s secondary obligation would depend.” Id. And,
then, we noted that, even if the arbitration clause were incorporated into the bond, that
clause “only require[d] arbitration of disputes between Kraus and SHALP, not Hartford
and SHALP,” id., much like, as we shall see, the arbitration clause at issue here, which
expressly requires the arbitration of disputes between Schneider Electric and NCS but not
disputes between Schneider Electric and Western Surety.
Moreover, the bond in Scarlett Harbor, like the bond in the instant case, contained
a clause that, in the Court’s words, “indicate[d] an intention to litigate disputes.” Id. at
293. That clause stated: “Any suit under the bond must be instituted before the expiration
of two years from the date on which final payment under the subcontract falls due.” Id.
Because Hartford’s interpretation of its bond would have read those words out of the
contract, the Scarlett Harbor I Court rejected that construction, on the grounds that “a
contract should not be interpreted in a manner in which a meaningful part of the agreement
is disregarded.” Id. (citations omitted).
23
It is true, as Schneider Electric points out, that the Court of Appeals, in affirming
this Court’s decision in Scarlett Harbor I, expressly declined to say whether its holding
would apply to the specific question presented in this case, namely, whether a surety could
be compelled to arbitrate, on the grounds that, in issuing a bond that incorporated by
reference a contract, with an arbitration clause, it had agreed “to arbitrate claims on the
bond.” Scarlett Harbor II, 346 Md. at 129 n.7. Nonetheless, when the same principles of
Maryland contract law that were invoked by this Court, in Scarlett Harbor I, are applied to
the bond and other contractual documents at issue here, we are compelled to reach a
conclusion that logically follows the holding of the Court of Appeals in Scarlett Harbor II
— that is, that Western Surety is not compelled to arbitrate any dispute involving the
performance bond it issued, simply because that bond incorporated by reference an
agreement, to which it was not a party, containing a mandatory arbitration clause.
As we noted in Scarlett Harbor I, the “incorporation of one contract into another
contract involving different parties does not automatically transform the incorporated
document into an agreement between the parties to the second contract,” unless there is “an
indication of a contrary intention” to do so. Scarlett Harbor I, 109 Md. App. at 292. In
the instant case, there is no indication of such a “contrary intention.”
Moreover, as in Scarlett Harbor I, the performance bond, in the instant case,
“actually indicates an intention to litigate disputes.” 109 Md. App. at 293. Paragraph 9 of
the bond states:
Any proceeding, legal or equitable, under this Bond may be
instituted in any court of competent jurisdiction in the
location in which the work or part of the work is located and
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shall be instituted within two years after Contractor default
or within two years after the Contractor ceased working or
within two years after the Surety refuses or fails to perform its
obligations under this Bond, whichever occurs first. If the
provisions of this Paragraph are void or prohibited by law, the
minimum period of limitation available to sureties as a defense
in the jurisdiction of the suit shall be applicable.
(Emphasis added.)
In rejecting the argument made, in Scarlett Harbor I, that an
incorporation-by-reference clause in a performance bond must be construed as providing
that the surety and the parties to the construction contract all agreed to be bound to an
arbitration clause in that construction contract, we declared that such a reading of the bond
would, in effect, read out of it a provision, which provided that “[a]ny suit under the bond
must be instituted before the expiration of two years from the date on which final payment
under the subcontract falls due.” Scarlett Harbor I, 109 Md. App. at 293. And, that is
precisely what would occur here were we to hold that, notwithstanding paragraph 9’s
express direction that relief must be sought in the courts of this State, mandatory arbitration
of disputes arising under the performance bond was required.
Finally, we note that Schneider Electric’s contention that we should follow the
majority of courts in other jurisdictions, holding that a surety, which has agreed to the
incorporation by reference of a prior contract, containing an arbitration clause, into a bond
at issue is thereby bound to arbitrate any disputes with the bond’s obligee, is unpersuasive.
First of all, the analysis in those cases, as the Court of Appeals observed in Scarlett Harbor
II, “does not go beyond the fact that the contract containing an arbitration provision has
been incorporated into the bond.” Scarlett Harbor II, 346 Md. at 129 n.7. Indeed, the first
25
two of the cases, cited by the Court of Appeals as lacking any substantive analysis under
the law of contracts, United States Fidelity & Guar. Co. v. West Point Constr. Co., supra,
837 F.2d 1507 (11th Cir.1988) (per curiam), and Exchange Mut. Ins. Co. v. Haskell Co.,
supra, 742 F.2d 274, 275-76 (6th Cir.1984) (per curiam), are two of the principal cases
upon which Schneider Electric relies in this appeal. Those and the other cases,12 cited by
Schneider Electric, are not only short on substance, but shy of analysis. Indeed, had we
not been provided, by Scarlett Harbor I, with the analytic framework we now employ and,
consequently, forced to look outside of Maryland for persuasive authority, we would rely
upon the decisions of the United States Court of Appeals for the Eighth Circuit, in AgGrow
Oils, LLC v. Nat. Union Fire Ins. Co., 242 F.3d 777 (8th Cir 2001), and Liberty Mut. Ins.
Co. v. Mandaree Pub. Sch. Dist. #36, 503 F.3d 709 (8th Cir 2007),13 which are the only
federal decisions (out of all of the cases cited by the parties) to correctly apply state contract
law to the question of whether an agreement to arbitrate exists and also, in our view,
correctly held that, under the circumstances, a bond’s mere incorporation by reference of a
12
Commercial Union Ins. Co. v. Gilbane Building Co., 992 F.2d 386, 388-89 (1st
Cir. 1993); Tower Ins. Co. of N.Y. v. Davis/Gilford, 967 F. Supp. 2d 72 (D.D.C. 2013);
Developers Sur. and Indem. Co. v. Resurrection Baptist Church, 759 F. Supp. 2d 665
(D.Md 2010); U.S. Surety Co. v. Hanover R.S. Ltd. P’ship, 543 F. Supp. 2d 492 (W.D.N.C.
2008); Transamerica Premier Ins. Co. v. Collins & Co., Gen. Contractors, Inc., 735 F.
Supp. 1050 (N.D.Ga. 1990); Hoffman v. Fid. and Deposit Co. of Md., 734 F. Supp. 192
(D.N.J.1990); Cianbro Corp. v. Empresa Nacional de Ingenieria y Technologia, S.A., 697
F. Supp. 15 (D.Me. 1988).
13
The performance bond at issue in Liberty Mut. Ins. Co. v. Mandaree Pub. Sch.
Dist. #36, 503 F.3d 709 (8th Cir 2007), like the one at issue here, was an AIA form A312
bond. See Liberty Mut. Ins. Co. v. Mandaree Pub. Sch. Dist. #36, 459 F. Supp. 2d 866,
868 (D.N.D. 2006), aff’d, 503 F.3d 709.
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contract, containing an arbitration clause, did not obligate the issuer of that bond to
arbitrate.
MOTION TO DISMISS DENIED.
JUDGMENT OF THE CIRCUIT COURT
FOR HARFORD COUNTY AFFIRMED.
CASE REMANDED TO THAT COURT
FOR FURTHER PROCEEDINGS NOT
INCONSISTENT WITH THIS OPINION.
COSTS TO BE PAID BY APPELLANT.
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