Boys Club of San Fernando Valley, Inc. v. Fidelity & Deposit Co.

• Decision Date: 27 May 1992
• Citation: 8 Cal.Rptr.2d 587,6 Cal.App.4th 1266
• Court: California Court of Appeals Court of Appeals
• Parties: BOYS CLUB OF SAN FERNANDO VALLEY, INC., Plaintiff and Appellant, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendant and Respondent. B058473.

Page 587

8 Cal.Rptr.2d 587

6 Cal.App.4th 1266

BOYS CLUB OF SAN FERNANDO VALLEY, INC., Plaintiff and Appellant, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendant and Respondent.

B058473.

Court of Appeal, Second District, Division 7, California.

May 27, 1992.

[6 Cal.App.4th 1269] John R. Fuchs, Santa Monica, for plaintiff and appellant.

Peterson & Ross and Steven Ray Garcia, Los Angeles, for defendant and respondent.

LILLIE, Associate Presiding Justice.

Boys Club of San Fernando Valley, Inc. (Boys Club) appeals from an order denying its petition to compel Fidelity and Deposit Company of Maryland (Fidelity) to take part in an arbitration between Boys Club and McLaughlin Construction, Inc. (McLaughlin). ¹

FACTUAL AND PROCEDURAL BACKGROUND

In January 1985 Boys Club and McLaughlin entered into a written contract whereby McLaughlin agreed to construct a recreation facility for Boys Club for $1,268,980 (the contract). The contract contained an arbitration clause requiring the parties to arbitrate "[a]ll claims, disputes and other matters in question between the Contractor and the Owner arising out of, or relating to, the Contract Documents or the breach thereof...."

In February 1985, pursuant to the contract, McLaughlin obtained a performance After the facility was completed Boys Club complained of defects in construction and withheld final payment on the ground McLaughlin had failed to perform the contract in a workmanlike manner. In March 1988 Boys Club filed a demand for arbitration against McLaughlin. In January 1991 Boys Club filed an amended demand for arbitration naming Fidelity as an additional party to the arbitration and defining the dispute to be arbitrated as "breach of contract, negligence, professional negligence and claim against Bond No. 61-06-492 [the performance bond]." Fidelity filed in the arbitration proceeding its limited response to the amended demand wherein Fidelity alleged that it was not a party to the contract and did not sign an agreement to arbitrate. In the limited response Fidelity reserved its right to continue to resist Boys Club's attempt to make it a party to the arbitration.

bond in the sum of $1,268,980 from Fidelity with McLaughlin as principal, Fidelity as surety and Boys Club as obligee. The bond referred to the contract and made it a part of the bond by reference. The bond provided that if McLaughlin were declared by Boys Club to be in default under the contract Fidelity could remedy the default, complete the contract itself, or have the work done by someone else.

In February 1991 Boys Club petitioned the superior court for an order compelling Fidelity to join the ongoing arbitration between Boys Club and McLaughlin. The petition alleged that Fidelity agreed to arbitrate with Boys Club disputes regarding the performance bond by reason of incorporation of the contract, including the arbitration clause, into the bond. Fidelity opposed the petition arguing: (1) it is not a party to the contract which contains the arbitration provision; and (2) Boys Club's right to make Fidelity a party to the arbitration is barred by time limits contained in both the arbitration provision and the performance bond.

The trial court denied the petition to compel arbitration "pursuant to the responding points and authorities." Boys Club appeals from the order denying the petition.

DISCUSSION

I

The right to arbitration depends on a contract. (Fontana Teachers Assn. v. Fontana Unified School Dist. (1988) 201 Cal.App.3d 1517, 1521, 247 Cal.Rptr. 761; Code Civ.Proc., § 1281.2.) ² Accordingly, a party can be compelled to submit a dispute to arbitration only where he has agreed in writing to do so. (Berman v. Renart Sportswear Corp. (1963) 222 Cal.App.2d 385, 388, 35 Cal.Rptr. 218.) While arbitration is a favored method of resolving disputes, the policy favoring arbitration cannot displace the necessity for an agreement to arbitrate (Victoria v. Superior Court (1985) 40 Cal.3d 734, 738-739, 222 Cal.Rptr. 1, 710 P.2d 833) and does not extend to those who are not parties to such an agreement. (Rhodes v. California Hospital Medical Center (1978) 76 Cal.App.3d 606, 609, 143 Cal.Rptr. 59.) Whether or not an arbitration agreement is operative against a person who has not signed it involves a question of "substantive arbitrability" which is to be determined by the court. (Unimart v. Superior Court (1969) 1 Cal.App.3d 1039, 1045, 82 Cal.Rptr. 249.)

An agreement need not expressly provide for arbitration, but may do so in a secondary document which is incorporated by reference. (Chan v. Drexel Burnham Lambert, Inc. (1986) 178 Cal.App.3d 632, 639, 223 Cal.Rptr. 838.) A contract performance bond will be read with the contract because " '... when a party enters into a contract to do certain work on certain terms, and procures a surety to guarantee Our research discloses no California authority which combines the foregoing principles to hold that the surety in a performance bond is bound by an agreement to arbitrate contained in a construction contract or subcontract to which the surety was not a party but which is incorporated into the bond by reference. However, several federal cases so hold. (E.g., USF & G v. West Point Const. Co., Inc. (11th Cir.1988) 837 F.2d 1507; Exchange Mut. Ins. Co. v. Haskell Co. (6th Cir.1984) 742 F.2d 274; Transamerica Premier Ins. v. Collins & Co. (N.D.Ga.1990) 735 F.Supp. 1050; Hoffman v. Fidelity and Deposit Co. of Maryland (D.N.J.1990) 734 F.Supp. 192; Cianbro Corp. v. Empresa Nacional de Ingenieria (D.Me.1988) 697 F.Supp. 15.) The rationale of these cases is exemplified in USF & G v. West Point Const. Co., Inc., supra, 837 F.2d 1507: "The subcontract was referred to and made a part of the bond. Disputes arising under the contract, including disputes concerning the adequacy of Pruett's [subcontractor] performance, were subject to arbitration pursuant to the arbitration provisions of the subcontract. We conclude that the incorporation of the subcontract into the bond expresses an intention of the parties, including USF & G [surety], to arbitrate disputes. Our conclusion is supported by the strong policy favoring arbitration expressed by Congress in the Federal Arbitration Act [9 U.S.C. § 1 et seq.]." (Id., at p. 1508; fn. omitted.)

the faithful performance of the work, the surety necessarily contracts with reference to the contract as made; otherwise it would not know what obligation it was assuming. And this is particularly so where the bond expressly declares that the contract is [6 Cal.App.4th 1272] made a part of the bond and the terms of the contract are incorporated into the bond....' " (Pacific Employers Ins. Co. v. City of Berkeley (1984) 158 Cal.App.3d 145, 150, 204 Cal.Rptr. 387.)

California, likewise, has a strong public policy in favor of arbitration as a speedy and relatively inexpensive method of resolving disputes. (Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street (1983) 35 Cal.3d 312, 322, 197 Cal.Rptr. 581, 673 P.2d 251.) Further, "arbitration, as defined both in the federal statute and our state statute, is a procedure for resolving disputes which arises from contract; it only comes into play when the parties to the dispute have agreed to submit to it." (Herman Feil, Inc. v. Design Center of Los Angeles (1988) 204 Cal.App.3d 1406, 1414, 251 Cal.Rptr. 895.) Under the arbitration provision in the contract the parties are required to arbitrate disputes regarding the sufficiency of McLaughlin's performance under the contract. The performance bond obligates Fidelity to complete the contract, or procure a contractor to do so, if McLaughlin is declared to be in default under the contract. Accordingly, Fidelity's duty to perform under its bond is contingent on the outcome of the arbitration instituted by Boys Club against McLaughlin. Indeed, the nature of the dispute to be arbitrated is defined in the amended demand for arbitration to include breach of contract and claim against the performance bond. Under these circumstances, we conclude that by the language in its bond incorporating the contract Fidelity intended, and agreed, to be bound by the arbitration provision in the contract even though it was not a party to the contract.

Fidelity cites the following cases in support of its contention that it did not agree to arbitrate by incorporating the contract into its performance bond by reference: Transamerica Ins. Co. v. Yonkers Contracting Co. (1966) 49 Misc.2d 512, 267 N.Y.S.2d 669; Fidelity and Deposit Co. of Maryland v. Parsons & Whittemore Contractors Corp. (1979) 48 N.Y.2d 127, 421 N.Y.S.2d 869, 397 N.E.2d 380; and Windowmaster Corp. v. B.G. Danis Co. (S.D.Ohio 1981) 511 F.Supp. 157.

In Transamerica Ins. Co. v. Yonkers Contracting Co., supra, 267 N.Y.S.2d 669, it was held that the surety in a contract performance bond was not obligated to arbitrate its liability under the bond because of incorporation by reference in the bonding agreement of a subcontract between the surety's principal and the obligee containing an arbitration clause. Fidelity and Deposit Co. of Maryland v. Parsons &amp We choose not to follow the Parsons & Whittemore case. Because of the nature of Fidelity's obligations under its performance bond, it is logical to assume that the parties (including Fidelity) intended not merely that Fidelity would be bound by the result of arbitration between Boys Club and McLaughlin, but that Fidelity would join in arbitration of disputes between the parties to the contract in view of the fact that such disputes necessarily affect its liability under the bond. We agree with the dissent in Parsons & Whittemore wherein it is stated: "The arbitration clause in the subcontract provides that '[a]ll disputes arising out of this Contract, its interpretation, performance or breach, shall be submitted to arbitration.' Parsons and Central [general contractor and subcontractor, respectively] thereby agreed to submit to...