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.