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

• Decision Date: 30 November 2016
• Docket Number: No. 20, Sept. Term, 2015,20, Sept. Term, 2015
• Citation: 149 A.3d 778,231 Md.App. 27
• Parties: Schneider Electric Buildings Critical Systems, Inc. v. Western Surety Company
• Court: Court of Special Appeals of Maryland

231 Md.App. 27

149 A.3d 778

Schneider Electric Buildings Critical Systems, Inc.

v.Western Surety Company

No. 20, Sept. Term, 2015

Court of Special Appeals of Maryland.

November 30, 2016

Mark S. Dachille (Nicole L. Campbell, Huddles, Jones, Sorteberg & Dachille, PC, on the brief) Columbia, MD, for Appellant.

Patrick J. Madigan (Patrick M. Pike, Pike & Gilliss, LLC, on the brief) Timonium, MD, for Appellee.

Krauser, C.J., Berger, Robert A. Zarnoch (Senior Judge, Specially Assigned), JJ.

Krauser, C.J.

The issue before us is whether Western Surety Company, the appellee, is bound by the mandatory arbitration clause of an agreement between Schneider Electric Buildings Critical Systems, Inc., the appellant, and National Control Services, Inc. (“NCS”), as that agreement was later incorporated by reference into a subcontract between Schneider Electric and NCS, which was thereafter incorporated by reference into a performance bond issued by Western Surety on behalf of NCS for work it was to perform for Schneider Electric.

The aforementioned agreement between Schneider Electric and NCS, containing the arbitration clause at issue, in this appeal, was entitled the “Master Subcontract Agreement.” Its purpose was to enable Schneider Electric, “from time to time,” to “engage the services of [NCS] to provide labor, material, equipment and services ... in connection with construction projects,” and its terms were to cover all future subcontracts between them. Of particular relevance to the issue before us, the Master Subcontract Agreement provided that any disputes that might arise between those two corporate entities, which could not be resolved by “good faith negotiations,” must be submitted to arbitration.

One year later, Schneider Electric was retained to assist in the building of a facility at Aberdeen Proving Ground, whereupon it entered into a subcontract agreement with NCS, in accordance with the parties' Master Subcontract Agreement, providing that NCS was to perform certain work at the construction site of that facility. The subcontract required NCS to furnish a performance bond, which it did. The issuer of that bond was Western Surety. And, significantly, the bond incorporated by reference the subcontract between Schneider Electric and NCS, which had incorporated by reference the Master Subcontract Agreement between those two parties, with its mandatory arbitration clause.

When NCS thereafter declined to perform the construction required by the subcontract, as a result of a payment dispute, Schneider Electric filed, as provided by the parties' Master Subcontract Agreement, a demand for arbitration. Although that demand, initially, named only NCS as a respondent, it was subsequently amended to include Western Surety, as a co-respondent, on the grounds that the performance bond, issued by Western Surety, incorporated by reference the subcontract, which, in turn, had incorporated by reference the Master Subcontract Agreement, with its mandatory arbitration clause, and thereby purportedly bound Western Surety to that clause.

In response to its belated inclusion into Schneider Electric's demand for arbitration, Western Surety filed a petition, in the Circuit Court for Howard County, to stay that arbitration and for a declaratory judgment, avowing, among other things, that it was not a party to Schneider Electric's and NCS' agreement to arbitrate their disputes and therefore could not be compelled to participate in the arbitration proceeding pending between them; it asserted, moreover, that Schneider Electric had breached the performance bond and that that breach had relieved Western Surety of any liability under that instrument. Then, following the transfer of this dispute from Howard County to Harford County, the Circuit Court for Harford County granted partial summary judgment in favor of Western Surety, concluding that, under either federal or state law, Western Surety was not subject to the arbitration provision of the incorporated Master Subcontract Agreement and therefore could not be compelled to participate in the pending arbitration proceeding between Schneider Electric and NCS.

In so ruling, the Harford County circuit court cited three grounds for its decision: first, the words of the performance bond evinced an intent by Western Surety to guarantee the performance of all construction work to be performed by NCS, but not all contractual obligations undertaken by NCS, pursuant to the subcontract; second, the arbitration clause of the Master Subcontract Agreement, even if ultimately incorporated by reference into the performance bond, mandated arbitration only as to disputes between Schneider Electric and NCS; and, third, to rule otherwise, would, in effect, read out of the performance bond language expressly providing for a judicial resolution of any dispute, involving the bond, that might arise.

Schneider Electric then noted this appeal, contending that the Harford County circuit court's ruling was in error for two reasons: first, by agreeing, in the performance bond, to “jointly and severally” bind themselves to the performance of the subcontract between Schneider Electric and NCS, both Western Surety and NCS were thereby bound to comply with the arbitration clause incorporated by reference into that subcontract; and, second, because the performance bond incorporated by reference that subcontract, Western Surety was rendered subject to the arbitration clause. Finding no merit to either claim of error, we shall affirm the judgment of the circuit court.

I.

In May 2009, Schneider Electric¹ and NCS entered into a “Master Subcontract Agreement,” in which the parties agreed, as noted, that NCS would “provide labor, material, equipment and services necessary to perform work in connection with construction projects, from time to time[.]” The Master Subcontract Agreement set forth, among other things, the terms and conditions that would apply to all future subcontracts between the two companies. It also included a provision, which is the crux of this appeal, that any dispute between them would be subject to arbitration, if they were unable to negotiate a resolution of that dispute.

Several months later, on August 14, 2009, Clark Construction Group, LLC, which is not a party to this matter, entered into a contract with the United States Army Corps of Engineers to build a replacement facility for medical research at Aberdeen Proving Ground in Harford County, Maryland. The following October, Clark Construction, now the general contractor for that construction project, contractually retained the services of Schneider Electric to assist in the construction of that facility.

Seven months after Schneider Electric was engaged, by Clark Construction, as a subcontractor for the construction project, Schneider Electric, pursuant to its Master Subcontract Agreement with NCS, entered into a subcontract with NCS, to perform work for that project. The subcontract incorporated by reference the Master Subcontract Agreement, which contained the arbitration clause at issue.

Specifically, the subcontract provided that NCS would perform “electrical and pneumatic installation” work at the Aberdeen facility. For that work, NCS was to be paid $2,050,000, “in installments as the Work progresses.”

The subcontract also required NCS to furnish a performance bond, designating Schneider Electric as the obligee, for 100 per cent of the “Subcontract value,” that is, $2,050,000.² NCS subsequently obtained that bond from Western Surety. The performance bond, issued by Western Surety, at NCS' request, was an American Institute of Architects (“AIA”) form A312³ and bound Western Surety and NCS to Schneider Electric “for the performance of the Construction Contract,” which was incorporated by reference into the performance bond. The term “Construction Contract,” as defined by the performance bond, included the subcontract, between Schneider Electric and NCS, and thereby the Master Subcontract Agreement between those two entities, with its mandatory arbitration clause, which had been incorporated by reference into the subcontract.

The subcontract specified that NCS' work would begin on May 25, 2010 and conclude by May 31, 2013. As the work progressed, numerous change orders eventually increased the amount to be paid NCS, by Schneider Electric, from $2,050,000 to $2,309,883, and extended the date that NCS was to complete its work from May 31, 2013 to February 28, 2014.⁴

In the summer of 2013, a dispute arose between Schneider Electric and NCS concerning payment for work NCS had purportedly performed. NCS claimed it was owed approximately $410,000, by Schneider Electric, for various progress payments, claims, and change orders. When Schneider Electric rejected NCS' demand for payment, the parties attempted, as required by their Master Subcontract Agreement, which had been incorporated by reference into their subcontract, to resolve their dispute “through good faith negotiations and settlement.” When those efforts proved unavailing, NCS, on August 30, 2013, abandoned the job site, notwithstanding a provision in the Master Subcontract Agreement requiring it to “continue to diligently perform the Work and maintain the progress schedule (without waiving its claims) despite the pendency of any dispute or any arbitration or litigation proceeding[.]”

Upon learning of NCS' cessation of work, Schneider Electric promptly sent an initial notice of default to both NCS and Western Surety, advising them of what Schneider Electric believed to be a breach of contract by NCS. After two months had passed and NCS had still not resumed its work at the job site, Schneider Electric, on October 25, 2013, sent a final notice of default to both NCS and Western Surety, declaring that Schneider Electric intended to “terminate for cause” the subcontract between it and NCS, that Schneider Electric would “proceed to complete NCS' work in an expeditious manner using manpower supplied by other electrical...