Surety Case Law Note: Surety Compels Arbitration
April 23, 2024
In this Surety Today: The Blog post we consider a Case Law Note addressing the issue of a surety’s motion to compel arbitration under California law. The case is:
SWINERTON BUILDERS, INC. v. ARGONAUT INS. CO., NO. 23-CV-04158-DMR,
2024 WL 1057473 (N.D. CAL. MAR. 11, 2024)
In this case, Swinerton Builders, Inc. (“Swinerton”) filed an action against Argonaut Insurance Company (“Argonaut”) alleging breach of contract and related claims stemming from three construction projects. Argonaut moved to dismiss the complaint for lack of subject matter jurisdiction, arguing that Swinerton’s claims were subject to arbitration. The facts are these: Swinerton, a general contractor, entered into a Master Subcontract Agreement or “MSA” with Northern Services, Inc. (“Northern”) as subcontractor. The MSA states that it applies to and governs all projects for which Swinerton engaged Northern. The MSA contains a dispute resolution provision that contains a binding arbitration provision, which requires the arbitration of any “disputes.” A “dispute” is defined as including a disagreement arising from the Subcontract Documents.
Three separate work orders under the MSA were entered into between Swinerton and Northern and each work order incorporated the MSA. As a condition of executing the work orders, Swinerton required Northern to furnish performance and payment bonds, which Argonaut provided. The three performance bonds incorporated the work orders. Subsequently, Argonaut notified Swinerton that it was aware of circumstances and events that may be exposing Argonaut to losses connected to one of the projects. Shortly thereafter, Northern’s owner and license qualifier passed away, which meant that Northern was no longer capable of completing the remainder of its work on any of the Projects. Swinerton then notified Argonaut of Northern’s defaults on the three projects and ultimately filed suit alleging ten claims against Argonaut.
In its motion to dismiss, Argonaut argued that the court lacked subject matter jurisdiction over the complaint because Swinerton’s claims were subject to the MSA’s binding arbitration provision. Because, the Federal Arbitration Act (“FAA”) directs that a court stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, the court here elected to construe Argonaut’s motion to dismiss as a motion to compel arbitration under the FAA.
The court noted that “[i]n deciding whether to compel arbitration under the FAA, a court’s inquiry is limited to two ‘gateway’ issues: ‘(1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.’” Lim v. TForce Logistics, LLC, 8 F.4th 992, 999 (9th Cir. 2021) (quoting Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000)).
Swinerton argued that only it and Northern were parties to the MSA and that the disputes between Swinerton and Argonaut do not fall within the MSA arbitration provision because its claims arose out of conduct wholly independent of disputes governed by the MSA. In other words, Swinerton disputed the existence of an agreement to arbitrate disputes between Swinerton and Argonaut. In California, as elsewhere, “[g]enerally, the contractual right to compel arbitration may not be invoked by one who is not a party to the agreement and does not otherwise possess the right to compel arbitration.” Kramer v. Toyota Motor Corp., 705 F.3d 1122, 1126 (9th Cir. 2013) (quotation and citation omitted). However, the court noted that courts have held that where a surety bond incorporates an underlying contract that contains an arbitration provision, the surety can be bound by the arbitration provision of the underlying contract even if it was not a party to that contract. See Boys Club of San Fernando Valley, Inc. v. Fidelity & Deposit Co., 6 Cal. App. 4th 1266, 1274 (1992); Allied World Ins. Co. v. New Paradigm Prop. Mgmt., LLC, No. 2:16-CV-02992-MCE-GGH, 2017 WL 4310673, at *3 (E.D. Cal. Sept. 28, 2017). Argonaut argued that under this authority, “[a]n arbitration agreement in an incorporated bonded contract may be used to compel arbitration of disputes involving that incorporated bonded contract.” Boys Club, 6 Cal. App. 4th at 1274). Swinerton sought to distinguish the Boys Club case on its facts arguing that “[i]n this case, there is no dispute that the bonded contractor was in default” and “[t]he only dispute is the failure of Argonaut to honor the bonds” or acknowledge Swinerton’s claims. The court rejected this contention.
Addressing Swinerton’s dispute as to whether the arbitration agreement applies to its claims in this litigation, the court noted that the arbitration clause delegated that gateway issue to the arbitrator when it incorporated by reference the rules of the Construction Industry Arbitration Rules of the American Arbitration Association. Portland Gen. Elec. Co. v. Liberty Mut. Ins. Co., 862 F.3d 981, 985 (9th Cir. 2017) (noting that “parties may delegate the adjudication of gateway issues to the arbitrator if they ‘clearly and unmistakably’ agree to do so” and stating, “[w]e have found such delegation when the parties have incorporated by reference the rules of the American Arbitration Association”). Accordingly, the court held that it must enforce the agreement according to its terms and compel the issue of arbitrability of Swinerton’s claims to arbitration. See Mohamed v. Uber Techs., Inc., 848 F.3d 1201, 1209 (9th Cir. 2016).
The court granted Argonaut’s reconstituted motion to compel arbitration and stayed the case pending the final resolution of the arbitration.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.
