Arbitration vs. Courthouse: Contractor Bond Claim Lawsuits May Come in Second to Subcontract Arbitration

Construction and Procurement Law News, Q1 2019

Firm Alert

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In CIP Construction Company v. Western Surety Company, a Maryland federal court stayed a contractor’s performance bond lawsuit pending arbitration between the contractor and subcontractor. The subcontract contained an arbitration agreement that applied to “a dispute between the parties,” i.e., the contractor and subcontractor. The subcontractor’s performance bond incorporated the subcontract by reference, but also stated that a bond claimant “may” bring a lawsuit on the bond in court. The subcontractor filed an arbitration demand against the contractor, and while that action was pending, the contractor filed a complaint against the performance bond surety (and not the subcontractor) in court pursuant to the payment bond disputes clause.

The surety moved to dismiss or stay the lawsuit pursuant to the arbitration clause in the subcontract, claiming that the performance bond claim was also subject to arbitration. The court refused to dismiss the case, holding that the subcontract arbitration agreement did not divest the court of jurisdiction over the bond claim. The subcontract arbitration clause was narrow and expressly applied to the parties to that agreement, and the performance bond disputes clause clearly contemplated a lawsuit in court. Nevertheless, the court stayed the case because the surety represented that its liability on the bond was contingent on the determination of the subcontractor’s liability in the arbitration. Thus, the court reasoned that the interests of judicial economy and avoiding inconsistent results weighed heavily in favor of a stay.

The CIP court’s discretionary stay – which is consistent with other federal courts’ decisions in similar cases – demonstrates that courts consider the language of contracts and bonds, as well as the practical implications of each dispute resolution mechanism. When a subcontract contains an arbitration agreement, contractors should be mindful that courts may place a bond claim lawsuit on hold in order to determine the parties’ liability in arbitration.