Rashid v. Schenck Const. Co., Inc.

• Decision Date: 23 April 1993
• Docket Number: No. 21300,21300
• Citation: 438 S.E.2d 543,190 W.Va. 363
• Court: West Virginia Supreme Court
• Parties: Leroy M. RASHID and Richard C. Rashid, Plaintiffs Below, Appellants, v. SCHENCK CONSTRUCTION COMPANY, INC., and Schenck & Associates, Inc., a Kentucky corporation, Defendants Below, Appellees. United States Fidelity & Guaranty Company, Intervenor.

Page 543

438 S.E.2d 543

190 W.Va. 363

Leroy M. RASHID and Richard C. Rashid, Plaintiffs Below, Appellants, v. SCHENCK CONSTRUCTION COMPANY, INC., and Schenck &

Associates, Inc., a Kentucky corporation,

Defendants Below, Appellees.

United States Fidelity & Guaranty Company, Intervenor.

No. 21300.

Supreme Court of Appeals of

West Virginia.

Submitted Jan. 19, 1993.

Decided April 23, 1993.

Syllabus by the Court

1. "When a commercial contract sets forth a particular method for arriving at a decision by an arbitrator, the parties are entitled only to the procedure for which they bargained and courts will not impose upon arbitrators concepts of "due process" developed in the courts in the face of explicit contractual provisions that provide other less time consuming and less expensive methods of dispute resolution." Syllabus point 1, Barber v. Union Carbide Corp., 172 W.Va. 199, 304 S.E.2d 353 (1983).

2. Under the Federal Arbitration Act, an arbitration agreement can be incorporated into a subcontract by reference in a general contract. Likewise, an agreement to arbitrate, when it is a part of a general contract, can be incorporated into a bond, by reference, to the general contract.

3. A suggestion action may be a proper method to collect on a performance bond obligation, if the surety is liable or indebted to the judgment debtor.

William S. Druckman, Preiser Law Firm, Charleston, for appellants.

Gary D. Phillips, Greenbaum, Boone, Treitz, Maggiolo & Brown, Louisville, KY, for appellees.

James R. Watson, Steptoe & Johnson, Charleston, for intervenor.

BROTHERTON, Justice:

This case involves an appeal from the dismissal of a suggestion action in the Kanawha County Circuit Court, brought by the plaintiffs below, the Rashids, against United States Fidelity & Guaranty Company (USF & G). The case below concerned the default of a construction contract by Schenck Construction Company, Inc., on a project being developed by the Rashids, and USF & G's refusal as surety to pay off on the performance bond. The issue of the default on the construction contract between the Rashids and Schenck Construction Company, Inc., the contractor, went before the American Arbitration Association on June 3, 1991. The arbitrators found in favor of the Rashids in the amount of $763,730.00. The Rashids then filed a civil action in the Circuit Court of Kanawha County to enforce the arbitration award. A judgment was entered by the Circuit Court of Kanawha County in the amount of $775,185.99, plus 10% interest from that date. Thereafter, the Rashids filed a suggestion against USF & G to enforce the judgment, on the theory that USF & G's issuance of a performance bond to the Rashids for the construction of a grocery store by Schenck Construction rendered USF & G liable to the judgment debtors, Schenck Construction Co. and Schenck & Associates, by default. On June 24, 1992, Judge Canady dismissed the suggestion.

The facts are as follows: On February 8, 1989, the Rashids entered into a construction contract with Schenck Construction Company for the design and construction of a grocery store in St. Albans, West Virginia. The contract specified a guaranteed maximum price of $911,706.00 and a completion date in mid-September, 1989. Schenck was to furnish all the architectural work, labor, and materials necessary to build and complete the store. The architectural services were included in the guaranteed maximum price and were supplied under the contract by Schenck & Associates. The contract was bonded by USF & G in a performance bond dated February 8, 1989, to the full maximum contract price of $911,706.00. The contract was incorporated, by reference, into the bond. With USF & G as underwriter, the Rashids paid for (1) a Labor and Material Payment Bond in the amount of $911,706.00, and (2) a Performance Bond in the amount of $911,706.00.

The performance bond provided that in the event of Schenck's default under the contract, USF & G was obligated to remedy the default or take other steps to complete the contract. It also stated, "[t]he surety hereby waives notice of any alteration or extension of time by the owner." The bond also required that USF & G be jointly and severally bound with Schenck to the Rashids against losses resulting from Schenck's defaulting on the contract. The obligation could be fulfilled in two ways: (1) The surety could enter the construction site and complete the construction in accordance with the original terms and condition of the contract, or (2) the surety could obtain bids for completion of the contract and, upon determination of the lowest bid, arrange for a contract between the bidder and the Rashids. The bond also stated that any suits under the bond be brought within two years. The Rashid-Schenck contract provided a two-step process for dispute resolution: (1) The claim/dispute was first sent to an architect, who could notify the surety of claims or the possibility of contractor's default. (2) Claims not resolved by an architect were to be settled by binding arbitration. Those with a substantial interest in a common question of law or fact in the proceeding should be a party to the arbitration, with the agreement of the owner and the contractor. ¹

Work on the project began in March, 1989. It ceased in November, 1989, when Schenck abandoned the construction site and refused to perform any additional work. Prior to that time, several underground gasoline storage tanks were discovered during excavation. By written change order, Schenck agreed with the Rashids to arrange and oversee the environmental remediation work involving the gasoline storage tanks. Schenck then contracted with two environmental remediation companies, ERM-Midwest, Inc., and Landmark Corp., to perform the work. The cleanup proceeded for some time, until August of 1989, when it became obvious that various subcontractors had not been paid for work performed. ² Schenck Construction terminated the contract by letter dated January 11, 1990, complaining that the Rashids had failed to make progress payments and that they refused to adequately address the environmental problems of the storage tanks at the site. On January 30, 1990, the Rashids notified USF & G of Schenck's default and demanded compliance with the performance bond. In accordance with the contract, the Rashids began binding arbitration against Schenck on February 28, 1990, claiming that Schenck had defaulted on the contract.

The arbitration took place on June 3, 4, and 5, 1991. During arbitration, Schenck offered two defenses for its refusal to complete the project. First, it claimed that residue from underground storage tanks had been discovered on the site, which prevented the project from being completed. Second, Schenck stated that the Rashids' failure to make payment under the November 30, 1989, application and certificate for payment represented a breach of contract that justified work stoppage.

The Rashids countered that the storage tanks discovered on the site would not prevent completion of the project. They claimed that the November 30, 1989, certificate for payment was invalid because it was not certified by the project architect as required by contract. They also argued that they had already made payments sufficient to cover the November 30, 1989, application and certificate for payment, because Schenck had improperly advanced on its prior payment request by filing materially false certifications that work not performed had been performed, and that subcontractors who had gone unpaid had been fully paid. Thus, the Rashids claim that the reasons given by Schenck for extension of its default was nothing but a fiction designed to disguise Schenck's true reasons for abandonment of the project. The Rashids claim that by late 1989, Schenck found itself in a precarious financial condition as a result of problems with several of its construction projects, and Schenck engaged in overbilling, advancement, misrepresentation, and nonpayment of subcontractors on the Rashid project in an attempt to keep its business afloat. Thus, the Rashids state that Schenck ultimately became unable to complete the project because of their financial problems.

USF & G was put on notice of the default on January 30, 1990. From that point on, the Rashids claim that USF & G did nothing but attempt to obstruct their claim against Schenck by failing to conduct a proper and timely investigation of the Rashids' claim under USF & G's performance bond. ³ On February 28, 1990, the Rashids initiated arbitration proceedings before the American Arbitration Association, as provided in the contract. Schenck & Associates participated in the arbitration with the Rashids. USF & G was not a party, although it paid for Schenck's defense due to the fact that Schenck was financially unable to do so.

On February 8, 1991, while the arbitration was still pending, the Rashids brought an action against USF & G in the United States District Court for the Southern District of West Virginia for breach of contract, fraud, bad faith, and violation of the West Virginia Unfair Trade Practices Act. (Case No. 2:91-0141.) On April 22, 1991, USF & G filed a motion for a stay of all proceedings, pending the decision of the American Arbitration Association. On December 9, 1991, the court ordered that the breach of contract, bad faith, and unfair practices claims be stayed.

On June 15, 1991, the arbitrators found for the Rashids in the amount of $763,730.00. The Rashids filed a civil action in the Circuit Court of Kanawha County against Schenck to enforce the arbitration award. Schenck did not appear, and on August 8, 1991, judgment was entered in favor of the Rashids in the amount of $775,185.99. USF & G acknowledges that Schenck is incapable of making payment on this judgment. Thereafter, on August 27, 1991, the Rashids filed a suggestion and writ of execution against USF & G and Schenck with the Kanawha County Circuit Court,...