Schneider Elec. Buildings Critical Sys., Inc. v. W. Sur. Co.

454 Md. 698

165 A.3d 485

SCHNEIDER ELECTRIC BUILDINGS CRITICAL SYSTEMS, INC.

v.WESTERN SURETY COMPANY

No. 96, Sept. Term, 2016

Court of Appeals of Maryland.

July 28, 2017

Argued by Mark S. Dachille (Kevin B. Mattingly, Huddles Jones Sorteberg & Dachille, P.C., Columbia, MD), on brief, for Petitioner.

Argued by Patrick J. Madigan (Patrick M. Pike, Pike & Gilliss, LLC, Towson, MD), on brief, for Respondent.

Argued before Barbera, C.J., Greene, Adkins, McDonald, Watts, Hotten, Getty, JJ.

Adkins, J.

This 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.

FACTS AND LEGAL PROCEEDINGS

In May 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").¹ 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 Association:

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 ....

That 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.

During 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.

In 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.² 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.

In the 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 492 (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). Schneider appealed.³

The 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, 149 A.3d 778 (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, 149 A.3d 778. Schneider filed a petition for a writ of certiorari, which we granted.

Schneider 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 severally bound for the performance of[ ] the subcontract?

Because we answer no to this question, we affirm the decision of the Court of Special Appeals.

STANDARD OF REVIEW

Schneider appeals from the Circuit Court's grant of partial summary judgment. A court may grant summary judgment in favor of the moving party "if the motion and response show that there is no genuine dispute as to any material fact and that the party in whose favor judgment is entered is entitled to judgment as a matter of law." Md. Rule 2–501(f). Because the grant of summary judgment is a question of law, it is "subject to a non-deferential review on appeal." Tyler v. City of Coll. Park , 415 Md. 475, 498, 3 A.3d 421 (2010) (citations omitted). In conducting this de novo review, we evaluate "the record in the light most favorable to the non-moving party and construe any reasonable inferences that may be drawn from the well-plead facts against the moving party." Id. at 499, 3 A.3d 421 (citations omitted).

DISCUSSION

Schneider contends that Western is bound by the NCS Subcontract's arbitration clause because (1) Western is jointly and severally liable "for the performance of the Construction Contract," which includes the arbitration clause, and (2) the arbitration clause is incorporated into the Bond by reference. Additionally, it argues that the presumption in favor of arbitration under the Federal Arbitration Act ("FAA") requires us to compel Western to arbitrate. Western argues that the arbitration clause is not part of the "performance of the Construction Contract" and that its incorporation by reference does not bind Western. It contends that we should apply state contract law to interpret its obligations under the Bond. Without an enforceable arbitration clause between the parties, Western argues, the FAA is inapplicable. We first address the parties' contentions regarding the FAA.

The Effect of the Federal Arbitration Act

Schneider argues that the FAA governs this case because the Bond "contains an agreement in writing providing for arbitration"—it incorporates the NCS Subcontract's arbitration clause by reference—and "evidences a transaction involving interstate commerce." Therefore, Schneider contends, we must apply a presumption in favor of arbitration. Western urges us to apply state contract law to determine whether an agreement to arbitrate exists between the parties.

The question before us is whether the Bond contains an agreement between Western and Schneider to arbitrate their disputes. The Supreme Court has explained, "When deciding whether the parties agreed to arbitrate a certain matter ... courts generally ... should apply ordinary state-law principles that govern the formation of contracts." First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). We have also recently held that "contract-based challenges to the enforcement of an arbitration clause ... are governed by applicable state law." Cain v. Midland Funding, LLC , 452 Md. 141, 154, 156 A.3d 807 (2017) (citation and internal quotation marks omitted). Accordingly, we apply Maryland law to determine whether Western has agreed to arbitrate its dispute with Schneider.

Maryland Contract Law

In Maryland, the "fundamental rule in the construction and interpretation of contracts is that the intention of the parties as expressed in the language of the contract...