Surety must arbitrate disputes based on contract incorporated by reference in bonds
January 19th, 2011
In Developers Surety and Indemnity Co. v. Resurrection Baptist Church, Case No. RWT 10cv1224 (D. Md. Dec. 1, 2010), the Court held that the surety must arbitrate disputes related to performance bonds where the performance bonds specifically incorporated by reference construction contracts containing an arbitration clause. In so holding, the district court followed precedent in the First, Second, Fifth, Sixth and Eleventh Circuits.
In addition, the Court found that the surety is equitably estopped from refusing to arbitrate its disputes with the co-obligees under the performance bonds. The Fourth Circuit has held in a non-surety context that a nonsignatory is estopped from refusing to comply with an arbitration clause when it receives a direct benefit from a contract containing an arbitration clause. Here, the surety asserted claims against the co-obligors for breach of the building contract, but simultaneously sought to avoid enforcement of the arbitration clause in the same contract.
The Court also rejected the surety's argument that arbitration was waived because the opposing parties had filed their answers, asserted crossclaim and counter-claims, and engaged in some discovery. The Court, following Fourth Circuit precedent, observed that absent a showing of prejudice, a court will not find waiver where the parties seeking to arbitrate merely answered pleadings and engaged in minimal discovery. Thus, the Court held that defendants did not waive their right to insist upon arbitration of this dispute.
In addition, the Court found that the surety is equitably estopped from refusing to arbitrate its disputes with the co-obligees under the performance bonds. The Fourth Circuit has held in a non-surety context that a nonsignatory is estopped from refusing to comply with an arbitration clause when it receives a direct benefit from a contract containing an arbitration clause. Here, the surety asserted claims against the co-obligors for breach of the building contract, but simultaneously sought to avoid enforcement of the arbitration clause in the same contract.
The Court also rejected the surety's argument that arbitration was waived because the opposing parties had filed their answers, asserted crossclaim and counter-claims, and engaged in some discovery. The Court, following Fourth Circuit precedent, observed that absent a showing of prejudice, a court will not find waiver where the parties seeking to arbitrate merely answered pleadings and engaged in minimal discovery. Thus, the Court held that defendants did not waive their right to insist upon arbitration of this dispute.
