Opinion ID: 1436064
Heading Depth: 1
Heading Rank: 17

Heading: Three Surety Cases in Which General Incorporation Provisions Effectively Incorporate Arbitration Agreements

Text: Lloyd's argues that because the retrocessional agreements provide that all terms and provisions of the reinsurance treaties apply to the retrocessional agreements, the parties must have provided for all of the treaties' terms, including the arbitration clause, to apply to the retrocessional agreements. In support of this contention Lloyd's relies for the most part on a set of surety cases in the federal courts to argue that a contract's general incorporation clause effectively can incorporate the underlying contract's provisions, including its arbitration clause. United States Fidelity & Guaranty Co. v. West Point Constr. Co., 837 F.2d 1507 (11th Cir. 1988) (per curiam); Exchange Mut. Ins. Co. v. Haskell Co., 742 F.2d 274 (6th Cir.1984) (per curiam); Commercial Union Ins. Co. v. Gilbane Bldg. Co., 992 F.2d 386 (1st Cir.1993). Lloyd's contends that we should follow these cases to hold that a party to a contract containing an arbitration clause, such as the reinsurance treaties in this case, may be compelled pursuant to that contract's arbitration clause to arbitrate a dispute with a third party arising under a second contract, such as the retrocessional agreements in this case, where the second contract incorporated the first contract's terms through a general incorporation-by-reference clause. In West Point Construction the general contractor sought to compel a subcontractor's surety to arbitrate a dispute pursuant to a performance bond that incorporated by reference a subcontract between the general contractor and a subcontractor. There were three relevant agreements. The first agreement was the general contract between a county as the owner and the general contractor to build a county justice center. This general contract contained an arbitration clause. The second agreement was the subcontract between the general contractor and the subcontractor. This subcontract contained its own arbitration clause as well as a separate provision modifying that clause by referring to the general contract's arbitration clause. The third agreement was the performance bond that the surety issued to the general contractor on behalf of the subcontractor. This performance bond incorporated the subcontract by reference and made the subcontractor's performance under the subcontract a condition of the bond. After the subcontractor defaulted, the general contractor sought to recover against the surety and moved to compel arbitration. The surety argued that the performance bond's incorporation-by-reference clause did not incorporate the arbitration clause from either the subcontract or the general contract. The Court of Appeals for the Eleventh Circuit disagreed, holding that because the subcontract was referred to in and made part of the bond, disputes arising under the bondincluding disputes concerning the adequacy of the subcontractor's performance under the subcontract, a condition of the performance bondwere subject to arbitration pursuant to the arbitration provisions of the subcontract. West Point Constr., 837 F.2d at 1508. The court found that, in these circumstances, the incorporation of the subcontract into the bond expresses an intention of the parties, including [the surety], to arbitrate disputes. Id. Similarly, in Haskell, a case involving the construction of a shopping center, the Court of Appeals for the Sixth Circuit considered whether to enjoin arbitration between a surety and the prime contractor. One of the relevant agreements was the general contract between the general contractor and the owner-developer to build the shopping center. The general contract contained an arbitration clause stating: All claims, disputes and other matters in question arising out of, or relating to this contract or the breach thereof . . . which cannot be settled by negotiation between the Contractor and the Owner, shall be decided in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association. Haskell, 742 F.2d at 275. The second agreement was the subcontract between the general contractor and the subcontractor, pursuant to which the subcontractor was to install the parking lot. This subcontract incorporated by reference the general contract's obligations and responsibilities: Subcontractor hereby assumes the same obligations and responsibilities with respect to his performance under this Subcontract, that Contractor assumes towards Owner with respect to his performance on the General Contract. If the General Contract, which is hereby incorporated by reference, fails or conflicts with any provision of this Subcontract, or any modification hereof, this Subcontract shall govern. Id. The third agreement was the performance bond that an insurance company as surety to the subcontractor issued in favor of the general contractor. The performance bond referred to the general contract, was conditioned on the subcontractor's performance under the subcontract, indemnified the general contractor for losses sustained due to the subcontractor's failure to perform, and incorporated the subcontract: KNOW ALL MEN BY THESE PRESENTS, That [the subcontractor], as principal and [the insurance company] as Surety, are . . . bound unto [the general contractor], in the sum of . . . ($108,000) Dollars . . ., jointly and severally, firmly by these presents. WHEREAS, [the general contractor] has been awarded [the General Contract] by [the owner-developer] for [the shopping center], and; WHEREAS, the principal has entered into a written Subcontract with [the general contractor] to perform . . . certain portions of the work in connection with said [General Contract], consisting of. . . as stated in Subcontract No. 4234-06. . . which Subcontract is hereby referred to and made a part hereof. Id. at 276. When a dispute arose over the subcontractor's performance, the general contractor made a claim under the performance bond against the surety and sought to arbitrate the claim. The surety resisted and sought an injunction precluding the arbitration. The district court, however, compelled arbitration, and the Court of Appeals for the Sixth Circuit affirmed the district court on appeal. The court of appeals held that even though the performance bond did not contain an arbitration clause, a court nevertheless could compel the surety to arbitrate by reason of the arbitration clause contained in the general contract because the performance bond specifically incorporated by reference the terms of the subcontract, and the subcontract in turn incorporated the general contract's obligations, including the general contract's duty to arbitrate. Id. at 276-77. The court of appeals explained that a party does not have to be a signatory to the contract [containing the arbitration clause] when the contract is specifically incorporated by reference in the surety bond. Id. at 276. Finally, in Gilbane Building the Court of Appeals for the First Circuit also compelled arbitration based on an incorporated arbitration clause. In that case, a surety sought to compel arbitration of a dispute over one of several separate but related construction projects. The particular dispute that the surety sought to arbitrate involved three agreements structured in a column similar to those in West Point Construction and Haskell: a prime contract, a subcontract, and a performance bond. The prime contract between the general contractor and the project's owner contained an arbitration clause stating that [a]ll claims, disputes and other matters in question arising out of, or relating to this Agreement or the breach thereof, . . . shall be decided by arbitration . . . unless the parties mutually agree otherwise. Gilbane Bldg., 992 F.2d at 388. The subcontract between the general contractor and a structural-steel subcontractor incorporated the terms of the prime contract: [The general contractor] shall be bound to [the subcontractor] by the terms of this agreement, to the extent that the provisions of the contract documents between the owner and [the general contractor] apply to the work of [the subcontractor] as defined in this agreement[.] [The general contractor] shall assume toward [the subcontractor] all the obligations and responsibilities that the owner, by those documents, assumes toward [the general contractor]. [The general contractor] shall have the benefit of all rights, remedies, and redress against [the subcontractor] which the owner, by those documents, has against [the general contractor]. Id. The subcontract defined the contract documents as the prime contract, the conditions of that contract, and several other related conditions. Id. at 388 n. 2. The performance bond incorporated the subcontract by reference: Whereas, [the subcontractor] has by written agreement . . . entered into a Subcontract with [the general contractor] . . . which Subcontract is by reference made a part hereof. Id. at 388. After the subcontractor ceased operations and defaulted on its subcontracts, litigation ensued in which the surety sought to compel arbitration of claims pursuant to the arbitration clause contained in the prime contract. Though the surety was not a signatory to the prime contract, it relied on the incorporation-by-reference theory to justify its action in seeking arbitration. Citing Haskell, the court of appeals agreed with the surety and upheld the district court's order compelling arbitration. Id. at 388-89. Because the subcontract incorporated the prime contract's obligationswith the general contractor assuming towards the subcontractor all obligations that the owner had assumed towards the general contractor under the prime contract, and the subcontractor likewise assuming towards the general contractor all obligations that the general contractor had assumed towards the owner under the prime contractincluding the obligation to arbitrate disputes arising from the contract, the court of appeals held that the subcontract obligated the general contractor to arbitrate disputes with the subcontractor arising from the subcontract. Id. And because the performance bond had referred explicitly to the terms of the subcontract, the contractor was bound to arbitrate its claim against the surety under the performance bond as well. Id.