Tuesday, August 8, 2017

Schneider Electric Buildings Critical Systems v. Western Surety (Ct. of Appeals)

Filed: July 28, 2017

Opinion by: Judge Adkins

Holding:

A surety company that guarantees performance of a construction subcontract with a performance bond is not bound by the subcontract’s mandatory arbitration clause when the subcontract is incorporated by reference into the bond and the clause refers only to the subcontract’s parties and the bond allows for dispute resolution in court.

Facts:

In May 2009, Plaintiff, a construction contractor, signed a Master Subcontract Agreement (“MSA”) with NCS, an electrical subcontractor, to cover future projects.  The MSA included a mandatory arbitration clause (the “Clause”).  In October 2009, Plaintiff was hired by another construction contractor to help build a medical research facility.  Plaintiff in turn hired NCS to help with the project.  Plaintiff and NCS signed a subcontract (“NCS Subcontract”) that incorporated the MSA by reference.  The NCS Subcontract required NCS to furnish a performance bond (“Bond”), which it obtained from Defendant.  The Bond made NCS and Defendant jointly and severally liable to Plaintiff for performance of the NCS Subcontract.

During construction, a dispute arose, NCS abandoned the site and Plaintiff terminated the contract.  In February 2014, Plaintiff filed a demand for arbitration with NCS.  In April 2014, Plaintiff amended the demand to include Defendant.  Defendant filed a petition in Howard County Circuit Court in which it requested a declaratory judgment that it was not bound by the Clause.

The case was transferred to a more proper venue, Harford County Circuit Court, which granted partial summary judgment for Defendant.  That court explained that the Bond is only insuring that Defendant is liable for any construction that has not been performed, and found no evidence of an intention that Defendant should be bound to dispute resolution provisions of the MSA.  

The Court of Special Appeals affirmed, holding that “the ‘joint and several’ obligation clause in the (Bond) does not evince (Defendant’s) assent to be bound by the (Clause) in the incorporated-by-reference chain of documents.”  Schneider Elec. Bldgs. Critical Sys., v. Western Sur. Co., 231 Md. App. 27, 46 (2016).  The Court of Appeals granted Plaintiff’s petition for a writ of certiorari.

Analysis:

The Court of Appeals applied Maryland contract law to determine if Defendant is bound by the Clause.  Precedent in Maryland requires courts to look at the intention of the parties as expressed in the language of the contracts.  The Court of Appeals explained in Hartford Accident & Indem. Co. v. Scarlett Harbor Assocs., 346 Md. 122, 127 (1997) that “arbitration is a process whereby parties voluntarily agree to substitute a private tribunal for the public tribunal otherwise available to them” and an arbitration clause “cannot impose obligations on persons who are not a party to it and do not agree to its terms.” 

The Court of Appeals interpreted the Bond by “constru(ing) (the Bond, NCS Subcontract, and MSA) as a whole…not (by) read(ing) each clause or provision (of each contract) separately.”  Owens-Illinois v. Cook, 386 Md. 468, 497 (2005).

Here, the Court of Appeals agreed with the lower courts because the Clause refers to the “parties” to the NCS Subcontract (which are Plaintiff and NCS) and the Bond permits court actions to resolve disputes between NCS and Defendant.  Since Defendant was not a “party” to the NCS Subcontract, the Clause does not apply to Defendant.  The Court of Appeals found support in its holding in Liberty Mutual Insurance v. Mandaree Public School District #36, 503 F.3d 709 (8th Cir. 2007), whose facts are similar to this case.

The full opinion is available PDF.

Tuesday, August 1, 2017

Hanover Investments, Inc. v. Volkman (Ct. of Appeals)

Filed: July 31, 2017

Opinion: Judge McDonald

Holding: A declaratory judgment action should be stayed or dismissed while a separate action is pending in another state that involves the same parties and that raises essentially the same issues presented in the declaratory judgment action in Maryland. The fact that the Maryland court had previously dismissed an earlier related action did not create “unusual and compelling circumstances” that would justify an exception to the principle that a court should not entertain a declaratory judgment action when there is a pending lawsuit in another state involving the same issues.

Facts: Volkman was subject to two agreements with Hanover, a Maryland corporation [or related companies], an employment agreement dated January 1, 1993, and a separate shareholder agreement entered into in 2007. The genesis of the lawsuit was Ms. Volkman’s termination in 2010. The legal proceedings related to the matter can be divided into four actions: (i) an employment agreement action; (ii) an arbitration proceeding; (iii) a shareholders' agreement action; and (iv) a declaratory judgment action (which is the subject of this opinion).

The employment agreement action - More than two years after her termination, on April 17, 2012, Volkman filed a lawsuit based on the employment agreement. On March 22, 2013, after the court dismissed several of her tort claims, Volkman voluntarily dismissed the employment agreement action with prejudice by stipulation of counsel pursuant to Maryland Rule 2- 506(a).

The arbitration proceeding - On October 10, 2012, while the employment agreement action was pending, Hanover invoked the arbitration provision in the shareholders’ agreement to determine what it was required to pay Volkman when it redeemed her stock. On August 1, 2014, Hanover successfully obtained a default judgment in Montgomery County Circut Court confirming the award. Ms. Volkman did not appeal that judgment.

The shareholders' agreement action - On December 17, 2012, Volkman served Hanover with a complaint that she filed in a state trial court in Minnesota which named Hanover as the lone defendant, alleging that it had violated its contract with her and sought  specific performance – the return of her Hanover stock – a remedy explicitly provided for in the shareholders’ agreement. Hanover moved to dismiss the complaint, asserting that the Minnesota court lacked
in personam jurisdiction of Hanover, but the Minnesota Court of Appeals affirmed the trial court decision. Contemporaneously with its defense in the shareholders' agreement action, Hanover filed a declaratory judgment action in Maryland (discussed below) involving the same issues and Hanover prevailed in the Circuit Court with Volkman appealing that decision. As a result, on January 19, 2015, the Minnesota trial court dismissed Volkman's shareholders’ agreement action, but explicitly reserved
jurisdiction to reopen the case depending on the resolution of the Maryland appeal.

The declaratory judgment action - On June 26, 2013 – two months after the Minnesota trial court denied Hanover’s motion to dismiss, and while that decision was on appeal – Hanover filed a declaratory judgment action against Volkman in the Circuit Court for Montgomery County.  Volkman noted the pendency of the shareholders’ agreement action in Minnesota and asked the Circuit Court to either decline jurisdiction or stay the proceedings in the declaratory judgment action pending a final judgment in the shareholders' agreement action. The Circuit Court declined to do so, citing Marriott Corp. v. Village Realty & Inv. Corp., 58 Md. App. 145 (1984), for the proposition that a declaratory judgment action could be filed “defensively” even if there was similar litigation “pending or impending” in another court and rendered a decision in favor of Hanover. Volkman appealed to the Court of Special Appeals arguing that the Circuit Court should not have heard the case while the shareholders’ agreement action involving the same issues was pending and the Court of Special Appeals held that the Circuit Court erred in issuing a declaratory judgment while the shareholders’ agreement action was pending. 225 Md. App. 602 (2015). Hanover petitioned the Court of Appeals for a writ of certiorari, which it granted.

Analysis: Pertinent to this case, a court should not entertain a declaratory judgment action when there is already a pending action “involving the same parties and in which the identical issues that are involved in the declaratory action may be adjudicated.” Sprenger v. Public Service Comm’n, 400 Md. 1, at 27-28 (2007). The court reasoned that in this case, the shareholders’ agreement action qualifies as an earlier-filed, pending action that would, under customary analysis, operate as a bar to the later-filed declaratory judgment action. The court further reasoned that the two actions involve essentially the same parties and both actions concern the identical issue – the propriety of Hanover’s redemption of Volkman’s Hanover stock under the shareholders’ agreement.

Accordingly, the Court of Appeals affirmed the Court of Special Appeals' decision.

The full opinion is available in pdf.