SCHNEIDER ELECTRIC BUILDINGS CRITICAL SYSTEMS, INC.
WESTERN SURETY COMPANY
Argued: June 2, 2017
Court for Harford County Case No.: 12-C-14-002396
Barbera, C.J., Greene, Adkins, McDonald, Watts, Hotten,
case asks us to define the scope of a mandatory arbitration
clause incorporated by reference into a web of construction
contracts. It presents the question of whether a surety who
issued a performance bond on a subcontract is bound by that
contract's arbitration clause when the surety is jointly
and severally liable for the "performance of" the
subcontract and the entire subcontract is incorporated into
the bond by reference.
AND LEGAL PROCEEDINGS
2009, Petitioner Schneider Electric Buildings Critical
Systems, Inc. ("Schneider") entered into a contract
with National Control Services, Inc. ("NCS"), an
electrical subcontractor, for the "labor, material,
equipment and services necessary to perform work in
connection with construction projects, from time to
time" ("Master Subcontract
Agreement"). The Master Subcontract Agreement included
the following mandatory arbitration clause, which provided
that disputes between the contractor and subcontractor would
be subject to arbitration in accordance with the Construction
Industry Arbitration Rules of the American Arbitration
19.2 Disputes between Contractor and Subcontractor.
In the event that the provisions for dispute resolution
between the Contractor and its customer under the
Contractor's Contract do not permit consolidation or
joinder with disputes of third parties, such as the
Subcontractor, or in the absence of a disputes resolution
procedure in such Contract or if such dispute is only between
the Contractor and Subcontractor, except for claims which
have been waived by the making or acceptance of final payment
and except for intellectual property issues which shall be
settle[d] by litigation, then the parties shall resolve the
dispute following procedures set forth below.
19.2.1 Any dispute or controversy between the parties shall
be submitted by one party to the other in writing and the
parties shall attempt to resolve the dispute through good
faith negotiations and settlement.
19.2.2 If the parties are unable to resolve the dispute
through good faith negotiations and settlement, then the
dispute shall be submitted to binding arbitration within
thirty (30) days after demand for arbitration and conducted
in the locale of the project before a single arbitrator,
unless the parties mutually agree otherwise . . . .
October, Schneider was hired by Clark Construction Group,
LLC, to help construct a medical research facility at
Aberdeen Proving Ground in Harford County, Maryland. Pursuant
to the Master Subcontract Agreement, Schneider entered into a
subcontract with NCS to perform work on that project
("NCS Subcontract"). The NCS Subcontract
incorporated the entire Master Subcontract Agreement,
including the arbitration clause, by reference. It also
required NCS to furnish a performance bond for 100 percent of
the NCS Subcontract value, which was $2, 050, 000. NCS
obtained a performance bond ("the Bond") from
Respondent Western Surety Company ("Western").
Referring to the NCS Subcontract, the Bond stated that the
"Contractor and the Surety, jointly and severally, bind
themselves . . . to the Owner for the performance of the
Construction Contract, which is incorporated herein by
reference." By incorporating the NCS Subcontract, the
Bond also incorporated the Master Subcontract Agreement,
including the arbitration clause.
construction, a dispute arose between Schneider and NCS, and
NCS abandoned the job site. After sending the required
default notices, Schneider terminated the NCS Subcontract for
refusal to perform the agreed-upon work. It claims
approximately $1, 500, 000 in damages from this breach of
contract. In February 2014, Schneider filed a demand for
arbitration with NCS. Two months later, it amended the demand
to include Western.
April 2014, Western filed a petition in the Circuit Court for
Howard County seeking a stay of arbitration pursuant to
Maryland Code (1957, 2013 Repl. Vol.), § 3-208 of the
Courts and Judicial Proceedings Article. Western also
requested that the court issue a declaratory judgment
stating, in part, that Western was not bound by the
arbitration clause. Schneider moved to dismiss the action for
improper venue. When Western agreed to a change of venue, the
case was transferred to Harford County.
Circuit Court for Harford County, Western filed a motion for
partial summary judgment asking the court to stay the
arbitration proceedings. In a memorandum opinion, the Circuit
Court granted partial summary judgment in favor of Western,
holding that it could not be compelled to participate in the
pending arbitration proceedings between Schneider and NCS.
Western Sur. Co. v. Schneider Elec. Bldgs. Critical Sys.,
Inc., No. 12-C-14-2396, slip op. at 12 (Cir. Ct. Harford
Cty. Feb. 20, 2015). It explained that the Bond "is only
insuring that Western is liable for any construction that has
not been performed, and the court can find no
evidence of an intention that Western should be bound to
dispute resolution provisions of the construction
contract." Id. at 8 (emphasis in original).
Court of Special Appeals affirmed. It held that "the
'joint and several' obligation clause in . . . 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."
Schneider Elec. Bldgs. Critical Sys., Inc. v. Western
Sur. Co., 231 Md.App. 27, 46 (2016). Additionally, the
intermediate appellate court held that Western "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." Id.
at 49. Schneider filed a petition for a writ of certiorari,
which we granted.
presented the following question for our review:
[Is] the surety on a performance bond issued for a
subcontract [ ] bound by an arbitration clause set forth in
the subcontract where the bond expressly incorporates, and
states that the surety is jointly and ...