Schneider Elec. Bldgs. Critical Sys. v. W. Sur. Co. (Ct. of Special Appeals)

Filed: November 30, 2016

Opinion by: Chief Judge Peter B. Krauser

Holding:  Under Maryland law, a construction surety was not bound by an arbitration clause contained in a subcontractor’s contract with a third party, where, although the contract was incorporated by reference into the bond at issue, the language of the bond did not imply an intent to make the arbitration provision binding on the surety.

Facts:  An electrical contractor (the “Contractor”) engaged a subcontractor (the “Subcontractor”) to perform certain construction work pursuant to a Master Subcontract Agreement (the “Contract”) and a related subcontract (the “Subcontract”).  In accordance with the Subcontract, Subcontractor obtained a performance bond (the “Bond”) from a surety (the “Surety”).  Pursuant to the Bond, the Subcontractor and Surety agreed to be jointly and severally bound to the Contractor for performance of the Subcontract.  The Subcontract was incorporated by reference into the Bond.  In turn, the Subcontract incorporated by reference the Contract, which contained a provision requiring arbitration of disputes between the parties to the Contract (i.e., the Contractor and Subcontractor).

A dispute eventually arose between the Contractor and the Subcontractor, and the Subcontractor ceased performing work under the Subcontract.  The Contractor terminated the Subcontractor, engaged substitute services, and filed a demand for arbitration with the American Arbitration Association, naming the Subcontractor as the sole respondent and seeking damages.  The Contractor later amended the arbitration demand to include the Surety as a named respondent.  In response, the Surety filed an action in the Circuit Court, seeking a stay of arbitration and a declaratory judgment.  The Surety moved for partial summary judgment in the Circuit Court action, asserting that because there was no agreement to arbitrate between the Surety and the Contractor, the Surety was entitled to judgment as a matter of law on its request for a stay of arbitration.  The Circuit Court granted the Surety’s motion, and the Contractor appealed to the Court of Special Appeals.

Analysis:  Maryland adheres to the objective rule of contract interpretation, pursuant to which courts must first “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 Indem. Co. v. Scarlett Harbor Assocs. Ltd. P’ship, 109 Md. App. 217, 291 (“Scarlett Harbor”), aff’d, 346 Md. 122 (1997); see Nationwide Mut. Ins. Co. v. Regency Furniture, Inc., 183 Md. App. 710, 722 (2009) (“Maryland follows the objective theory of contract interpretation.”).  “Where 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)).  Further, “a contract should not be interpreted in a manner in which a meaningful part of the agreement is disregarded.”  Scarlett Harbor, 109 Md. App. at 293.

Here, the contract was comprised of three documents—the Bond, the Subcontract, and the Contract.  The Contractor argued that the Surety was bound by the arbitration provision in the Contract because (i) the Bond made the Surety jointly and severally liable with the Subcontractor for “performance” of the Subcontract and Contract; and (ii) the Bond incorporated by reference the Subcontract which incorporated by reference the Contract (and its arbitration provision).

As to the first argument, the Court reviewed the language of the Contract and the Bond to determine the meaning of the term “performance”, and concluded that the term referred “to the performance of the work [the Subcontractor] agreed to complete and not to every contractual provision in the incorporation-by-reference chain.”  As to the second argument, the Court looked to its prior decision in Scarlett Harbor for guidance, which addressed the question of whether a non-signatory surety on a performance bond, which incorporated by reference a construction contract (containing an arbitration clause) between a developer and a subcontractor, could compel the developer to arbitrate its dispute with the surety.  Quoting Scarlett Harbor, the Court held that “‘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.”  The Court found no language in the Bond indicating a contrary intent and instead found that the Bond contained a provision expressly requiring disputes to be litigated in Maryland State court.  Accordingly, to give effect to the “express direction that relief must be sought in the courts of this State,” the Court rejected the argument that the Surety was bound by the arbitration provision through incorporation by reference.

The full opinion is available in PDF.

Yang v. G&C Gulf Inc. (Cir. Ct. Mont. Cnty)

Filed: November 14, 2016

Opinion by: Ronald B. Rubin

Holding:

A putative class of defendant parking lot owners merited certification under Md. Rule 2-231 because it met the necessary requirements under sections (a) and (b) of the rule, given that the parking lot owners executed nearly identical contracts with the Defendant towing company to tow vehicles from their lots without their prior permission and with the discretion to demand up-front payment in exchange for the return of a vehicle, under the same broad grant of authority. Moreover, two named Plaintiffs’ vehicles were towed from the named Defendant lot owner.

Facts:

The original Plaintiff sued the Defendant towing company and its owner alleging that the Defendant towing company (1) engaged in “sweep” or “trespass” towing without obtaining the permission of the lot owner in advance of each tow and (2) improperly asserted a possessory lien on the towed vehicles, essentially holding them for ransom until the vehicle owner paid the towing fees in exchange for the vehicle’s release.

The parties reached a settlement, and the court severed claims against the owner. The court also certified a plaintiffs’ class, consisting of all persons whose vehicles were non-consensually towed by the Defendant towing company from a private parking lot from April 16, 2012, to January 7, 2016, and implicated 24,023 tows.

Plaintiffs then filed a second amended class complaint naming as an additional Defendant an owner of several Montgomery County parking lots who entered into a towing contract with the Defendant towing company and seeking to establish a defendants’ class, consisting of the 500 or more parking lot owners who entered into contracts allowing the Defendant towing company to patrol and “trespass tow” vehicles at will. They claimed that the Defendant towing company towed more than 26,000 vehicles from the lots of those in the putative class. Soon after, Plaintiffs filed another amended class complaint and a motion to add two additional named Plaintiffs who owned cars parking in lots owned by the Defendant lot owner, which was granted.

Analysis:

Certification of a class is governed by Md. Rule 2-231. Proponents must show that a putative class meets the four requirements of section (a) and one of the alternatives under section (b). The Court held, rather summarily, that the putative class met both requirements of sub-section (b)(1), regarding the risk that separate prosecutions would (1) result in inconsistent adjudications with respect to individual members of the class that would establish incompatible standards of conduct for the opponents or (2) result in adjudications of individual members that would be dispositive of the interests of other non-party members, or substantially impair or impede their ability to protect their interests.

The Court also held that the putative class met the requirements of section (a).  The first requirement, that the class is so numerous that joinder of all members is impracticable, was met because at least 573 lot owners entered into standardized, substantially similar written agreements with the Defendant towing company that granted general authority to tow vehicles from their lots. The second requirement, of common questions of law or fact, was met because common questions included: whether the lot owners owed a duty to the Plaintiffs by virtue of the contract; whether the lot owners had a duty to permit the vehicle owners to retake their vehicles without up-front payment; whether a possessory or storage lien and credit card fees were improperly imposed; and the conformity of the towing receipts to applicable laws.

The third requirement, of whether the representative’s claims or defenses are typical of the class, was met because each car was towed from the lot by the Defendant towing company pursuant to a contract with the lot owner. That the contracts are not identical is irrelevant because each contained a grant of authority to “tow at will” without specific, prior authorization of the lot owner. Thus, the claims arise from the same alleged practice or course of conduct by the Defendant towing company, which was expressly authorized by members of the putative class.

The fourth requirement, whether the representative parties will fairly and adequately represent the class interests, was met because the Defendant lot owner rarely specifically authorized a tow, but rather, relied on the Defendant towing company’s discretion and allowed it to require full, up-front payment in exchange for return of a vehicle. The Defendant lot owner's reluctance to represent the class was irrelevant, given his interest and ability in doing so.

The Court then highlighted two special issues with the putative defendant class: the Plaintiffs’ standing to sue and whether the putative defendant class would survive a more rigorous analysis for typicality and commonality, the third and second requirements of section (a), respectively.

The Court examined federal case law interpreting Federal Rule 23 and noted that, generally, a plaintiff representative must possess a claim against each member of the putative class; in other words, every named plaintiff must possess a claim against every putative class defendant in order to be certified.  This is a difficult standard for private parties, and a common regulatory scheme, without more, is typically insufficient.

The Court then cited Master Financial, Inc. v. Crowder, 409 Md. 51 (2009), regarding plaintiffs who obtained home loans from lenders and wanted to sue entities that purchased the loans from the lenders. The Master court posed the question as one of standing or availability of a juridical link, and noted that the purchasers did not purchase the loans of the named plaintiffs, but rather those of unnamed class members. The argument for certification was that by violating the statutory rights of these unnamed members, the purchasers are juridically linked to the named plaintiffs or the other defendants. Ultimately, the Master court did not adopt a juridical link theory.

The Court factually distinguished Master from this case. The Court noted that the plaintiffs in Master, unlike Plaintiffs here, were not yet certified as a class. Moreover, the Plaintiffs, whose cars were towed by the Defendant towing company and two named Plaintiffs’ cars were towed from a lot owned and operated by the Defendant lot owner. The Plaintiffs were certified before the Defendant lot owner was added as a defendant. Unlike the purchasers in Master, the Defendant lot owner in this case is well-representative of his class. He has every incentive to defend against the claims that are legally and factually identical to those of the putative class members, and hinge on the nearly-identical contracts with the Defendant towing company. The members have a right to intervene if they are dissatisfied with the Defendant lot owner’s representation.  

In support, the Court cited a Massachusetts opinion holding that plaintiffs who sued a drug store and the pharmaceutical manufacturers whom the plaintiffs had not dealt with directly were entitled to class certification because, as the contracts between the drug store and the pharmaceuticals were largely identical and the administration of the program contracted-for was substantially similar across the board, there was a sufficient link among the defendants.  

The Court also cited a Missouri case stating that class certification is logically antecedent to questions of standing, and that once a class is properly certified, standing requirements must be assessed with reference to the class as a whole, not merely the named plaintiffs.

The Court concluded that the contracts and common regulatory scheme created a juridical link; the link is consistent with Master; and the Plaintiff class has standing to sue the Defendant class.

This opinion is available by PDF.