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Surety Not Bound by Subcontract’s Arbitration Provision, D.C. Federal Judge Rules

WASHINGTON, D.C. — A surety company is not bound by an arbitration provision in a subcontract because the provision clearly only encompassed claims between the engineering company and its subcontractor, a District of Columbia federal judge has ruled.

In applying a heightened standard of “clear and unmistakable evidence,” Judge Tanya S. Chutkan of the U.S. District Court for the District of Columbia concluded in the Sept. 30 order that the surety company did not agree to arbitrate.

On January 25, 2012, Turner Construction retained U.S. Engineering to perform construction and renovation work at the South African Embassy in Washington, D.C. In turn, U.S. Engineering awarded a subcontract for sheet metal work on the project to United Sheet Metal Inc. The subcontract included an arbitration clause.

After entering into the subcontract with U.S. Engineering, United Sheet Metal negotiated with Western Surety Co. to issue a surety bond for $585,000. The surety bond provided that “the contractor [United Sheet Metal] and surety bind themselves, their heirs, executors, administrators, successors and assigns to the owner [U.S. Engineering] for the performance of the construction contract, which is incorporated herein by reference.” In addition, the surety bond stated that “any proceeding, legal or equitable, under this Bond may be instituted in any court of competent jurisdiction in the location in which the work or part of the work is located.”

In early 2013, a dispute over the performance of the subcontract arose between U.S. Engineering and United Sheet Metal, which led to U.S. Engineering terminating the subcontract. U.S. Engineering hired a replacement subcontractor to finish the sheet metal work, and United Sheet Metal sought to compel arbitration, seeking $331,242 in damages. U.S. Engineering filed a counterclaim for $417,379 in damages. That arbitration is currently ongoing.

On June 9, 2014, Western Surety received a letter from U.S. Engineering stating that it had terminated United Sheet Metal’s performance of the subcontract, and that U.S. Engineering intended to make a claim under the surety bond.

U.S. Engineering subsequently sought to join Western Surety as a party in U.S. Engineering’s arbitration proceedings with United Sheet Metal. Western Surety refused to consent to the joinder, however, and filed the instant action, seeking to enjoin U.S. Engineering from compelling arbitration.

U.S. Engineering moved to dismiss the action, arguing that the parties are bound by the subcontract’s arbitration clause to arbitrate their dispute over the bond. In response, Western Surety moved for partial summary judgment on the issue of whether it must arbitrate its dispute with U.S. Engineering.

Judge Chutkan concluded that Western Surety is not bound by the subcontract’s arbitration clause, which provides that “any controversy or claim of Contractor [U.S. Engineering] against Subcontractor [United Sheet Metal] or Subcontractor against Contractor shall be resolved by arbitration.”

The judge agreed with Western Surety that the “of Contractor against Subcontractor” language is a limiting clause that means only those two parties are bound by the arbitration agreement, and not outside parties.

“Not only are the cases cited by U.S. Engineering unpersuasive because they contained broad arbitration clauses, they are also unpersuasive because the parties objecting to arbitration in both cases only challenged whether their contracts incorporated by reference the terms of the contracts that contained the arbitration clauses,” Judge Chutkan ruled. “None of the parties who challenged arbitration contested whether the actual language of the arbitration clause was broad enough to include their particular type of dispute.”

Moreover, the law is clear that “when a contract incorporates another writing, the two must be read together as the contract between the parties,” the judge added. The bond agreement includes a judicial resolution provision stating that “any proceeding, legal or equitable, under this Bond may be instituted in any court of competent jurisdiction,” Judge Chutkan noted.

“While the judicial resolution clause in a vacuum could be construed as merely declaring ‘ground rules’ under which any formal litigation in a judicial forum must proceed, if the court is to give every provision in the surety agreement meaning, it cannot ignore that there is a provision which calls for filing suit, not merely accepting arbitration as the sole avenue of recourse,” the judge reasoned.

Finally, to the extent there is any uncertainty about the scope of the arbitration clause, the clause must be interpreted against the drafter, U.S. Engineering, Judge Chutkan held.

Counsel for Western Surety are Thomas Moran and Richard Pledger of Setliff & Holland in Glen Allen, Va.

U.S. Engineering is represented by Adam Caldwell of Davis Wright Tremaine in Washington, D.C., and Matt R. Hubbard and Stephen Sutton of Lathrop & Gage in Kansas City.

Western Surety Co. v. U.S. Engineering Co., No. 15-327 (D. D.C.)

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