|
A surety is not required to arbitrate, even when the performance bond agreement purports to incorporate an arbitration agreement in the underlying contract, a federal court in North Dakota held.
In Liberty Mutual Insurance Co. v. Mandaree Public School District # 36, No. 4:06-cv-56, 2006 WL 3030136 (D. N.D. Oct. 23, 2006), Mandaree entered into a contract with Tooz Construction for repairs and additions to a school. Liberty Mutual was a surety who issued a performance bond on the project.
The construction contract between Tooz and Mandaree contained an arbitration provision, which the surety agreement between Mandaree and Liberty Mutual purported to incorporate. When a dispute arose, Tooz Construction filed a demand for arbitration. Mandaree counterclaimed, alleging a variety of claims including defective construction and breach of contract.
Mandaree then amended its arbitration claim to include Liberty Mutual as a party because Liberty Mutual refused to fulfill its obligations under the performance bond. Liberty Mutual argued that it was not bound to arbitrate.
The Court considered whether a performance bond incorporating an arbitration agreement requires that the bond owner and the surety arbitrate their dispute. Noting the Eighth Circuit’s decision in Agrow Oils, LLC v. National Union Fire Ins. Co., 242 F.3d 777 (8th Cir. 2001), the Court held that Liberty Mutual was not required to submit to arbitration.
In Agrow, the court held that a performance bond containing the same language as the bond in this case did not mandate arbitration between the party to the underlying contract and the surety. Mandating arbitration would allow a party to the underlying contract to compel arbitration of a surety’s unique defenses or allow a surety to compel arbitration of a claim on a bond when the parties to the underlying contract do not wish to arbitrate performance issues.
Allowing such disputes to go to arbitration would go against the rule that parties are only required to arbitrate those disputes that they agree to submit to arbitration.
Subscribe to a free weekly update on ADR case law and
legislation
|