Opinion ID: 202473
Heading Depth: 2
Heading Rank: 3

Heading: Application of the Agreement of Indemnity

Text: Several weeks after issuance of the bond by AIICO to CAG, AIICO and C&M entered into a separate Agreement of Indemnity, which provided that The Principals and Indemnitors [C&M] shall exonerate, indemnify, and keep indemnified the Surety [AIICO] from and against any and all liability for losses and/or expenses of whatsoever kind or nature (including, but not limited to, interest, court costs, and counsel fees) and from and against any and all such losses and/or expenses which the Surety may sustain and incur: (1) By reason of having executed or procured execution of the Bonds. . . . Payment by reason of the aforesaid causes shall be made to the surety by the Principals and Indemnitors as soon as liability exists or is asserted against the Surety whether or not the Surety shall have made payment therefor. . . . In the event of any payment by the Surety the Principals and Indemnitors further agree that in any accounting between the Surety and the Principals, . . . the Surety shall be entitled to charge for any and all disbursements made by it in good faith in and about the matters herein contemplated by this Agreement under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed . . . . -11- (Appellant’s App. at 138.) Because the bond obligated AIICO to pay the aforementioned amount on first demand by CAG (id. at 165), the Agreement of Indemnity further required C&M as the Indemnitor to: immediately and upon the Surety's first written or simple demand (which shall be conclusive evidence that such sum is due and payable) pay to the Surety or place with the Surety (subject to the Bond amount) the sum required to make such payment without any question or delay and whether or not such demand is in the Indemnitor's opinion a proper demand. (Id. at 140.) Puerto Rico law recognizes the relationship between a surety and a debtor and requires a debtor to indemnify a surety even when the security is paid without the debtor's knowledge. See 31 P.R. Laws Ann. § 4911. Furthermore, Puerto Rico law implicitly allows for a surety to compromise a debt. U.S. Fid. & Guar. Co. v. PR Enters., No. 03-1338, 2005 WL 2244283, at  (D.P.R. Sept. 15, 2005) (relying on 31 P.R. Laws Ann. §§ 4911-13). Generally, when an indemnity agreement gives a surety broad discretion to pay claims triggering the indemnity agreement, the only defense an indemnitor may raise against a claim by the surety for indemnification is that the surety committed fraud or collusion, or otherwise acted in bad faith in paying the claim. See Fireman's Ins. Co. of Newark, N.J. v. Todesca Equip. Co., 310 F.3d 32, 35-36 & n.6 (1st Cir. 2002) (discussing Rhode Island law and noting -12- slight variations in other jurisdictions).3 Although we lack jurisdiction to disturb the district court's ruling that the bond was in actuality an unconditional guarantee, C&M argues that the district court's alleged error in that ruling makes the Agreement of Indemnity inapplicable. In other words, according to C&M, there should have been, and there is, nothing to indemnify because AIICO should not have been required to pay CAG on the bond. In limited circumstances third-party defendants may raise on appeal claims of error based in the main action, where the third-party liability . . . is entirely derivative of the [underlying] judgment . . ., and will cease to exist if that judgment is defeated. United States v. Lumbermens Mut. Cas. Co., 917 F.2d 654, 658 n.5 (1st Cir. 1990) (reversing third-party judgment against insurance agent in favor of insurer based on erroneous ruling that insurance policy provided coverage in underlying suit and refusing to disturb judgment holding insurer liable where insurer did not appeal underlying judgment). Separate and apart from appealing the underlying ruling, a third-party defendant may assert, as the basis for appealing the ruling against it on the third-party claim, that the underlying judgment was erroneous. Id. Thus, while we will not disturb (for 3 Puerto Rico law allows a debtor to use against the surety those defenses it would have against the creditor, but only when the surety pays on a debt without informing the debtor. See 31 P.R. Laws Ann. § 4913. C&M does not rely on this defense, and we do not address it. -13- jurisdictional reasons) the district court's judgment holding that the bond was an unconditional guarantee by AIICO, we can review the correctness of that ruling as a defense to C&M's liability under the indemnity agreement if C&M's liability is entirely derivative of CAG's judgment against AIICO. Id. In this case, C&M's liability to AIICO is not entirely derivative of CAG's judgment against AIICO. In fact, its liability is not derivative of the underlying judgment at all. Even if AIICO had paid on CAG's demand before CAG filed suit, C&M would have been liable to indemnify AIICO under the very broad terms of the separate Agreement of Indemnification upon AIICO's good faith payment on the demand. The sweeping language can be reduced to five words: If we pay -- you pay. Regardless of the correctness of the district court's underlying decision, the fact remains that AIICO did in fact pay on the bond. Even if we now found that ruling to be incorrect, it would not change the fact of payment or alter the judgment as between AIICO and CAG, which is now final as to those parties. See id. at 662 (refusing to grant relief from an erroneous judgment to a nonappealing party); Marin Piazza v. Aponte Roque, 909 F.2d 35, 39 (1st Cir. 1990) (dismissing as untimely an appeal brought by four defendants following the fifth defendant's successful appeal and noting that the inescapable consequence of failure to appeal a judgment within the time allowed is that the judgment becomes final as to the nonappealing party). AIICO would -14- still be out its payment on the bond. The Agreement of Indemnity clearly and unequivocally required C&M to indemnify AIICO upon AIICO's good faith payment on the bond based on AIICO's belief that it was liable on the claim, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed. (Appellant's App. at 138.) Thus, we need not, and do not, decide the correctness of the underlying judgment in favor of CAG against AIICO; either way, C&M is liable to AIICO under the Agreement of Indemnity because AIICO paid on CAG's demand. We note that in ruling on the underlying claim between CAG and AIICO, the district court found the bond to be an unconditional letter of credit and that the two conditions precedent to liability on the letter of credit had been met, namely that (1) CAG provided written notice to AIICO prior to the expiration date of the bond, and (2) the written notification contained the amount to be paid and stated that C&M had not performed its contractual obligations. The district court did not address the defenses raised by C&M to justify its failure to pay on the Letter Agreement, nor did it need to, given its conclusion that the bond was an unconditional guarantee. See generally 38A C.J.S. Guaranty § 17 (2006) (The general rule that where the principal contract is invalid the guaranty is rendered invalid does not apply where the contract of guaranty is an entirely separate and independent contract, such as -15- an absolute guaranty. (internal footnotes omitted)). The judgment granted to CAG against AIICO has no effect on the underlying disputes between CAG and C&M concerning C&M's liability (or lack thereof or defenses thereto) on the Letter Agreement. C&M did not argue in its briefs that AIICO's payment on the bond was made in bad faith, but relied solely on its claim that the district court erred in holding that the AIICO bond was an unconditional guarantee. During oral argument, counsel for C&M argued that AIICO settled the CAG-AIICO appeal in bad faith because it did not first consult C&M before paying the settlement. We generally do not address arguments made for the first time during oral argument, especially when the arguments are contrary to the arguments made in the briefs. See United States v. Pizarro-Berríos, 448 F.3d 1, 4 (1st Cir. 2006) (We have consistently held that, except in extraordinary circumstances, arguments not raised in a party's initial brief and instead raised for the first time at oral argument are considered waived.). AIICO was not aware until oral argument that the issue of its good faith settlement of the appeal was at issue. Even if we were to reach the merits of the bad faith argument, we could not agree that AIICO's settlement was made in bad faith. AIICO vigorously disputed its liability on the bond in the district court and filed an appeal of the final judgment against it. Whatever its reason for settling after filing its notice of appeal, -16- we cannot say that compliance with a judgment duly entered by a United States District Court evidences bad faith on the part of the losing party. The district court properly granted summary judgment in favor of AIICO and against C&M based on the unambiguous and entirely separate Agreement of Indemnity. See Plaza Athénée, S.E. v. U.S. Fid. and Guar. Co., No. 01-2597, 2005 WL 1114368, at -10 (D.P.R. May 9, 2005) (granting partial summary judgment in favor of surety where surety settled claim with creditor without consulting debtor; nothing in the surety agreement limited surety's discretion or ability to respond to the creditor's claim). IV. Cross-Claims Dismissed as Subject to Mandatory Arbitration Finally, C&M challenges the district court's dismissal of its cross-claims against CAG, in which C&M claimed that CAG had breached the Joint Venture Agreement. The Joint Venture Agreement between C&M and CAG included an arbitration clause, which stated: Any difference related to the interpretation or the execution of the present agreement will be settled in accordance with the Rules of Reconciliation and Arbitration of the International Chamber of Commerce, by a referee designated under the conditions provided by said rule. The arbitration will take place at Genéve, Switzerland, the applicable law being used i[s] the Canton of Genéve. (Appellant's App. at 105.) C&M recognizes the enforceability of mandatory arbitration agreements, but argues that CAG waived its right to enforce arbitration by bringing the action against AIICO -17- on the bond in federal court, relying on Jones Motor Co. v. Chauffeurs, Teamsters, & Helpers Local Union No. 633 of N.H., 671 F.2d 38, 42 (1st Cir.) ([P]arties are free to waive their rights to arbitration under a contract and proceed to present their contractual dispute to a court.), cert. denied, 459 U.S. 943 (1982). The importance of arbitration agreements in the commercial world, particularly related to international agreements, is indisputable. Congress enacted the Federal Arbitration Act (FAA) to promote[] a liberal federal policy favoring arbitration and [to] guarantee[] that [a] written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. Campbell v. Gen. Dynamics Gov't Sys. Corp., 407 F.3d 546, 551-52 (1st Cir. 2005) (quoting 9 U.S.C. § 2) (alterations within internal quotation in original). The district court determined that the bond was in actuality an unconditional guarantee, a determination that permitted the district court to avoid deciding whether C&M had breached either the Joint Venture Agreement or the Letter Agreement before it ordered AIICO to pay on the bond. Even if the district court was wrong in holding that the bond's character was independent of the Joint Venture Agreement, an issue we do not decide today, the fact -18- remains that the district court interpreted only the bond. It did not construe the Joint Venture Agreement or related amendments in holding AIICO liable on the bond. In bringing its original action against AIICO on the bond then, CAG did not invoke federal jurisdiction to decide issues related to the Joint Venture Agreement, and it did not waive its right to enforce the arbitration clause. Accordingly, the district court properly dismissed C&M's cross-claims because they are subject to mandatory arbitration.