Title: Hartford v. Scarlett Harbo

State: maryland

Issuer: Maryland Supreme Court

Document:

Hartford Accident & Indemnity Company v. Scarlett Harbor Associates
Limited Partnership, No. 65, September Term, 1996.
[Arbitration - Construction management process of building - In
contract between owner/developer and framing-sheathing contractor
parties agreed to arbitrate all disputes between them.  That
contract was incorporated by reference into the contractor's
performance bond.  Held:  Owner/developer did not agree to
arbitrate with surety on latter's demand.]
Circuit Court for Baltimore
County Case # J 93 CV 408
IN THE COURT OF APPEALS OF MARYLAND
No. 65
September Term, 1996
____________________________________
HARTFORD ACCIDENT &
INDEMNITY COMPANY
v.
SCARLETT HARBOR ASSOCIATES
LIMITED PARTNERSHIP
____________________________________
Bell, C.J.
Eldridge
Rodowsky
Chasanow
Karwacki
Raker
Wilner, 
JJ. 
____________________________________
Opinion by Rodowsky, J.
____________________________________
Filed:  June 18, 1997
     The original general partners of the limited partnership were
1
William Meyers, II and Leo J. DUAleo, who were also joined as
defendants to the complaint in the circuit court.  The legal
consequences of the arrangement between the persons comprising the
former and current general partners are not relevant to the issue
on this certiorari review.
We granted certiorari to review the holding concerning
arbitrability made by the Court of Special Appeals in Hartford
Accident & Indem. Co. v. Scarlett Harbor Assocs. Ltd. Partnership,
109 Md. App. 217, 674 A.2d 106 (1996).  A condominium developerUs
agreement with a construction contractor included a provision for
arbitration between those parties.  The contract containing the
arbitration provision had been incorporated by reference into the
contractorUs performance bond.  The court held that the developer
had not agreed to arbitrate its claim against the bond with the
surety.  As explained below, we agree with the holding by the Court
of Special Appeals.
This dispute involves the large residential condominium in the
Scarlett Place complex in the Inner Harbor area of Baltimore City.
For purposes of this opinion we shall consider that Scarlett Place
was developed by the respondents, Scarlett Harbor Associates
Limited Partnership and its general partners,  Leroy Merritt and
Merritt Operations Corporation (collectively, SHALP).   The
1
construction with which we are concerned utilized the construction
manager process.  Leonard A. Kraus Co., Inc. (Kraus) was engaged by
SHALP to furnish and install metal framing and Gypsum sheathing and
-2-
     The printed form utilized by the parties, with extensive
2
special typewritten provisions, was the 1980 edition of AIA
Document A201/CM, the Construction Management Edition of the
Standard Form of Agreement between Owner and Contractor, where the
basis of payment is a stipulated sum.  
     General Conditions ¶ 7.9.1 of the SHALP-Kraus contract reads,
3
more fully, as follows:
"All claims, disputes and other matters in question
between the Contractor and the Owner arising out of or
relating to the Contract Documents or the breach thereof
... shall be decided by arbitration in accordance with
the Construction Industry Arbitration Rules of the
American Arbitration Association then obtaining unless
the parties mutually agree otherwise.  No arbitration
arising out of or relating to the Contract Documents
shall include, by consolidation, joinder or in any other
manner, the Architect, the Construction Manager, their
employees or consultants except by written consent
containing a specific reference to the Owner-Contractor
Agreement and signed by the Architect, the Construction
Manager, the Owner, the Contractor and any other person
sought to be joined.  No arbitration shall include by
consolidation, joinder or in any other manner, parties
other than the Owner, the Contractor and any other
persons substantially involved in a common question of
fact or law, whose presence is required if complete
relief is to be accorded in the arbitration.  No person
other than the Owner or the Contractor shall be included
as an original third party or additional third party to
(continued...)
to perform other work.  Their August 1986 contract refers to SHALP
as "Owner" and to Kraus as "Contractor."   
2
General Conditions ¶ 7.9.1 of the SHALP-Kraus contract
provided in part for arbitration under the American Arbitration
Association Construction Industry Rules of "[a]ll claims, disputes
and other matters in question between the Contractor and the Owner
arising out of or relating to the Contract Documents or the breach
thereof ...."3
-3-
(...continued)
an arbitration whose interest or responsibility is
insubstantial.  Any consent to arbitration involving an
additional person or persons shall not constitute consent
to arbitration of any dispute not described therein or
with any person not named or described therein.  The
foregoing agreement to arbitrate and any other agreement
to arbitrate with an additional person or persons duly
consented to by the parties to the Owner-Contractor
Agreement shall be specifically enforceable under the
prevailing arbitration law.  The award rendered by the
arbitrators shall be final, and judgment may be entered
upon it in accordance with applicable law in any court
having jurisdiction thereof."
     The bond in fact reads that Kraus, as principal, and The
4
Hartford, as surety, "are held and firmly bound unto Transcon
Construction Co. Inc., as Obligee."  The construction manager
identified in the August 1986 SHALP-Kraus contract was "TransCon
Construction Company, Inc."  
The contract required Kraus to obtain a performance bond in
the amount of 100% of the contract price.  Petitioner, Hartford
Accident & Indemnity Company (The Hartford), issued the bond to
Kraus on its "Subcontract Performance Bond Form A."  All parties to
this certiorari review have treated SHALP as the obligee of the
bond, and we shall do the same.   The bond contains, in relevant
4
part, the following recital:
"Whereas, Principal has by written agreement ... entered
into a subcontract with Obligee for Renovation and
addition to Scarlett Seed Building--Light Gauge Metal
Framing (Scarlett Place Phase II & III) ... which
subcontract is by reference made a part hereof, and is
hereinafter referred to as the subcontract."  
(Emphasis added).
In January 1993 the action out of which the issue before us
arose was brought against SHALP and others in the Circuit Court for
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     The circuit court certified as a final judgment under
5
Maryland Rule 2-602 its order denying The HartfordUs claim to compel
SHALP to arbitrate with it.  An order denying a claim that
arbitration should be compelled in an action in which that is the
sole claim asserted is an appealable judgment.  Litton Bionetics,
Inc. v. Glen Constr. Co., 292 Md. 34, 437 A.2d 208 (1981). 
Baltimore County by Scarlett Place Residential Condominium, Inc.,
the council of unit owners of the residential condominium.  SHALP
impleaded a number of third-party defendants, including Kraus and
The Hartford.  Both moved to compel SHALP to arbitrate its claims
against them while proceedings in the circuit court on the third-
party claims against them were stayed.  The circuit court ordered
arbitration between SHALP and Kraus, but the court denied The
HartfordUs motion to compel arbitration on the third-party claim
against it.  The Hartford appealed from that denial to the Court of
Special Appeals.   
5
The HartfordUs appeal was consolidated with the appeals from
the final judgment disposing of the remaining claims in the action.
Hartford Accident & Indem. Co., 109 Md. App. 217, 674 A.2d 106.
The Hartford contended that incorporating by reference the SHALP-
Kraus contract into the bond "UclearlyU shows that the parties
intended that claims under the bond would be decided in
arbitration."  Id. at 292, 674 A.2d at 143.  The Court of Special
Appeals disagreed, taking the view that "KrausUs subcontract was
incorporated simply to establish the primary obligation on which
HartfordUs secondary obligation would depend."  Id.  Although
-5-
recognizing that a majority of decisions from other jurisdictions
had reached a different result, the court was not persuaded by
either the number or the rationale of those decisions and affirmed
the circuit court.  Id. at 295-96, 674 A.2d at 144.
We granted The HartfordUs petition for certiorari which
presents the following question:
"May a surety that issued a performance bond which
incorporated by reference a mandatory arbitration
provision from a subcontract between the obligee and the
principal enforce the arbitration agreement against the
obligee in an action on the bond?"
The question presented is answered by a return to the
fundamentals recently restated for the Court by Judge Chasanow in
Curtis G. Testerman Co. v. Buck, 340 Md. 569, 667 A.2d 649 (1995).
There we said:
"Arbitration is a Uprocess whereby parties voluntarily
agree to substitute a private tribunal for the public
tribunal otherwise available to them.  * * * A party
cannot be required to submit any dispute to arbitration
that it has not agreed to submit.U  Gold Coast Mall v.
Larmar Corp., 298 Md. 96, 103, 468 A.2d 91, 95 (1983)
(emphasis added).  Accord United Steelworkers of America
v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83,
80 S. Ct. 1347, 1353, 4 L. Ed. 2d 1409, 1417 (1960).
Arbitration is Uconsensual; a creature of contract.  As
such, only those who consent are bound.  * * * In the
absence of an express arbitration agreement, no party may
be compelled to submit to arbitration in contravention of
its right to legal process.U  Thomas J. Stipanowich,
Arbitration and the Multiparty Dispute:  The Search for
Workable Solutions, 72 IOWA L. REV. 473, 476 (1987)
(citing Martin K. Eby Constr. Co. v. City of Arvada, 522
F. Supp. 449, 451 (D. Colo. 1981)).  Accord Messersmith,
Inc. v. Barclay Townhouse, 313 Md. 652, 658, 547 A.2d
1048, 1051 (1988) (U"No one is under a duty to resort to
... 
[arbitral] 
tribunals, 
however 
helpful 
their
processes, except to the extent that he has signified his
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     Under General Conditions ¶ 7.2.1 of the SHALP-Kraus contract,
6
the covenants of one party inure to the benefit of "successors" to
the other party.  The Hartford makes no argument that it is a
successor to Kraus.  We point out that the instant matter is not a
case in which the surety took over completion of the work promised
to be performed by its principal.
willingness."U) (citation omitted).  An arbitration
agreement cannot impose obligations on persons who are
not a party to it and do not agree to its terms.  See
A.B. Engineering Co. v. RSH Intern, Inc., 626 F. Supp.
1259, 1263 (D. Md. 1986)."  
Id. at 579-80, 667 A.2d at 654 (footnote omitted).  In Testerman we
held that an individual who had signed, as agent for a fully
disclosed corporate principal, a contract containing an arbitration
provision had not promised to arbitrate in his individual capacity.
Id. at 578, 667 A.2d at 653.
In the instant matter the SHALP-Kraus contract contains a
provision whereby those two parties agree to arbitrate with each
other, and that is the agreement that the circuit court enforced.
There is no provision in the SHALP-Kraus contract requiring
inclusion of an arbitration provision in any bond that Kraus is to
furnish.   Rather, The HartfordUs submission that SHALP covenanted
6
to arbitrate claims on the performance bond with the surety rests
exclusively on the incorporation by reference in the bond prepared
by The Hartford.  That bond necessarily refers to the SHALP-Kraus
contract inasmuch as the condition of the bond was that, if Kraus
"shall promptly and faithfully perform [the SHALP-Kraus contract],
then this obligation shall be null and void; otherwise it shall
-7-
     By drafting the bond to incorporate, and not simply refer to,
7
the SHALP-Kraus contract, The HartfordUs conduct might be construed
as a continuing offer to the obligee to arbitrate claims on the
bond.  That is not the issue before us, and we express no opinion
thereon.  
We note that there are many cases holding that a surety which
has incorporated into its bond a contract containing an arbitration
provision may be compelled to arbitrate with the obligee.  The
analysis, however, in the cases cited below does not go beyond the
fact that the contract containing an arbitration provision has been
incorporated into the bond.   See, e.g., United States Fidelity &
Guar. Co. v. West Point Constr. Co., 837 F.2d 1507 (11th Cir.
1988); Exchange Mut. Ins. Co. v. Haskell Co., 742 F.2d  274, 275-76
(6th Cir. 1984); Transamerica Premier Ins. Co. v. Collins & Co.,
Gen. Contractors, Inc., 735 F. Supp. 1050 (N.D. Ga. 1990); Hoffman
v. Fidelity & Deposit Co., 734 F. Supp 192, 194-95 (D.N.J. 1990);
(continued...)
remain in full force and effect."  But, in addition to identifying
the SHALP-Kraus contract, The Hartford bond states that that
contract "is by reference made a part hereof ...."
One leading writer on insurance law concludes, in effect, that
reference in a performance bond to the contract to be performed,
coupled with incorporation of that contract into the bond, is a
belt and suspenders approach to interpretation of the bond.  13
G.J. Couch, Couch Cyclopedia of Insurance Law § 47:24, at 244 (2d
ed. 1982).  The author states
"that the incorporation by reference merely gives express
declaration to what would be followed ordinarily in any
event as a matter of general construction.  That is,
ordinarily the surety bond will be interpreted in the
light of the contract, the performance of which is
secured by the bond.  The use of an express incorporation
by reference clause is therefore more a matter of caution
to make certain that the bond will be so construed."
Id. (footnote omitted).7
-8-
(...continued)
Cianbro Corp. v. Empresa Nacional De Ingenieria Y Technologia,
S.A., 697 F. Supp. 15 (D. Me. 1988); Boys Club of San Fernando
Valley, Inc. v. Fidelity & Deposit Co., 6 Cal. App. 4th 1266, 1274,
8 Cal. Rptr. 2d 587 (1992); St. Paul Fire & Marine Ins. Co. v.
Woolley/Sweeney Hotel #5 and Hometels Constr. Corp., 545 So. 2d 958
(Fla. App. 1989); Massachusetts Elec. Sys., Inc. v. R.W. Granger &
Sons, Inc., 594 N.E.2d 545 (Mass. App. Ct. 1992).
By incorporating into the bond in the instant matter the
contract that contains SHALPUs promise to arbitrate with Kraus, The
Hartford literally has incorporated as to SHALP only SHALPUs promise
to arbitrate with Kraus.  The bond does not, by its terms, express
any enlargement of the obligations of the obligee, and, even if The
Hartford, acting unilaterally, or The Hartford and Kraus, acting by
agreement, undertook to enlarge the obligations of SHALP under its
contract with Kraus, that attempted enlargement ordinarily would be
ineffective.  
Milske v. Steiner Mantel Co., 103 Md. 235, 63 A. 471 (1906),
illustrates the point.  In that case a partially erected building
was blown down during a windstorm.  The contract under which the
builder agreed to construct the house made its completion an
absolute and unconditional undertaking, but the performance bond
furnished by the builder provided that neither the builder nor the
surety would be liable "Ufor any damage resulting from an act of
God.U"  Id. at 245, 63 A. at 472.  When the builder sued the owner
for an unpaid progress payment and for the value of materials that
could be used in reconstruction, basing the claim upon the
-9-
provision in the bond, the claim did not survive demurrer.
Affirming judgment for the owner, this Court said:
"The bond was given, not to vary, or change in any
particular the obligations of the [builder] under the
contract, but to secure the faithful performance by him
of all the duties assumed by him thereunder.  Its object
was to protect the [owner] from loss ... and cannot be
construed to add to, or change any of the terms of the
contract, or to be taken as a part thereof [i.e., the
contract did not include the force majeure provision of
the bond]."
Id. at 247, 63 A. at 473.  Accordingly, in the instant matter the
bond did not enlarge SHALPUs arbitration undertaking.  
It is important to point out that The HartfordUs argument is
devoid of any element of a consensual modification by SHALP of the
scope of its promise to arbitrate with Kraus.  SHALP cannot be
considered to have promised to arbitrate with The Hartford by
accepting, as conforming to the SHALP-Kraus contract, the
performance bond in the form issued by The Hartford on the theory
that then settled law treated acceptance of the bond as an
acceptance by the obligee of an offer by the surety to effect an
arbitration agreement on the same terms as the obligee-principal
agreement to arbitrate.  There are three incorporation-by-reference
cases that The Hartford has cited to us in which the obligee was
compelled to arbitrate with the surety, but only one of them was
decided prior to the issuance in 1986 of the bond involved here,
i.e., J & S Constr. Co. v. Travelers Indem. Co., 520 F.2d 809 (1st
Cir. 1975).  
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Commercial Union Ins. Co. v. Gilbane Bldg. Co., 992 F.2d 386
(1st Cir. 1993), and Henderson Inv. Corp. v. International Fidelity
Ins. Co., 575 So. 2d 770 (Fla. App. 1991), together with J & S
Constr. Co., support The HartfordUs argument.  Each of these cases
concludes that the obligee, whose contract with the principal
contains an arbitration clause, is obliged to arbitrate at the
instance of the surety because the surety has drafted the bond to
incorporate the obligee-principal contract into the bond.  As
explained above, we do not believe that that result can be reached
by contract analysis.  Thus, as desirable as the result reached in
the cases relied upon by The Hartford might be, we are unable to
join those courts in reaching that result.
Undoubtedly there is a strong policy favoring arbitration and
a strong policy to avoid repetitious hearings.  Indeed, in Litton
Bionetics, Inc. v. Glen Constr. Co., 292 Md. 34, 437 A.2d 208
(1981), this Court construed the Maryland arbitration statute as
empowering a court to order the consolidation of two separate
arbitrations.  The agreement between a building owner and its
contractor for a project provided for arbitration, and the
agreement between the same building owner and its architect for the
same project provided for arbitration, but both contracts were
silent as to consolidation.  There was no conflict in the scope of
the arbitration provisions in the two contracts involved in Litton
Bionetics, and the procedure for arranging and conducting the
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     The circuit court, of course, has the power to stay further
8
court proceedings by SHALP against The Hartford, pending the
outcome of the arbitration between SHALP and Kraus, if under all of
the circumstances a stay would be appropriate. 
arbitration was the same under both contracts.  This Court
"emphasize[d] that a court would improperly exercise its power to
direct consolidated proceedings if that consolidation deprives any
objecting party of a contractual right under the arbitration
agreement."  Id. at 53, 437 A.2d at 218.  Three members of the
Court dissented, reasoning that the consolidation did infringe on
the contract rights of the parties opposing arbitration because the
then practice of the American Arbitration Association, under whose
rules relating to the construction industry the arbitration was to
be conducted, was to consolidate arbitrations only upon unanimous
consent.  Id. at 58, 437 A.2d at 220.  The minority believed that
the associationUs practice was an implied term of the agreement to
arbitrate, while the Court held that the statute, as construed,
overrode the practice that was not expressed in the associationUs
rules.  
Here the juP to arbitrate with The Hartford.8
JUDGMENT 
OF 
THE 
COURT 
OF
SPECIAL 
APPEALS 
AFFIRMED.
COSTS 
TO 
BE 
PAID 
BY 
THE
PETITIONER, HARTFORD ACCIDENT &
INDEMNITY COMPANY.
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