Court Opinion

ID: 6463130
Source: CourtListenerOpinion
Date Created: 2022-06-25 12:50:12.957041+00
Date Added: 2024-06-11T15:53:34.494041
License: Public Domain

Brown, J.
(dissenting). If the same counsel had not represented the general contractor and the surety,1 this case could easily be *664decided under the succinct colloquial rubric — “you snooze, you lose.” In this case, Travelers implicitly agreed to be bound by the result of the arbitration proceedings against its principal. Travelers also had actual notice of the arbitration proceedings, the opportunity to defend, and notice of the punitive damages sought by C & I against its principal.2 As no allegations of fraud or collusion are raised, Travelers was therefore bound by the result.3 I thus conclude that in these particular circumstances Travelers should not be able to tout the efficiency and reliability of arbitration, and cleverly back away from it, and then be afforded an opportunity to seek judicial relief because it does not like the arbitral result.4 Counsel who formulated this strategy was “too smart by half.”5
In applying principles of estoppel here to bind Travelers to the full amount of the arbitration award, the judge refused to look behind the amount of the award in order to determine whether Travelers undertook a contractual obligation to pay for punitive damages.6 See Peerless Ins. Co. v. South Boston Storage & Warehouse, Inc., 397 Mass. 325, 327 (1986). I think *665this approach was right. This is a classic reason for imposing estoppel.7
The question here boils down to whether Travelers was entitled to sit out the arbitration and to select the Superior Court as the forum to litigate its bond defenses, if any. See Fidelity & Deposit Co. of Md. v. Parsons & Whittemore Contrs. Corp., 48 N.Y.2d 127, 131-132 (1979) (finding no agreement to arbitrate “separate and distinct” controversies arising as to rights and obligations under the terms of the surety bond). There is no governing Massachusetts law on point.
Courts have split on this issue. In the majority of jurisdictions that have considered this issue, courts, applying an expansive view of incorporation by reference, have compelled sureties to arbitrate their personal defenses to liability under both the underlying construction contract and the surety bond.8 See Shreves & Lybeck, Arbitration of Performance Bond Disputes in Suretyship 378-386 (2d ed. 2000); Hoffman v. Fidelity & Deposit Co. of Md., 734 F. Supp. 192, 194-195 (D.N.J. 1990). Like these courts, Massachusetts has taken an expansive view of the incorporation by reference clauses contained in surety bonds.9 See, e.g., Massachusetts Elec. Sys., Inc. v. R.W. Granger & Sons, Inc., 32 Mass. App. Ct. 982, 982-983 (1992) (concluding that surety can be forced into arbitration through incorporation by reference clause in bond); Travelers Cas. & Sur. Co. of Am., Inc. v. Long Bay Mgmt. Co., 58 Mass. App. Ct. 786, 788-792 (2003) (holding that the incorporation by reference clause gave to the surety the right to compel arbitration). I agree with these jurisdictions and would hold that where, as *666here, the incorporation clause in the surety bond contains no restrictive language, the surety agrees to arbitrate not only the disputes relating to the construction contract, but also all disputes relating to its liability under the bond.10
This holding promotes our “strong public policy favoring arbitration as an expeditious alternative to litigation for settling commercial disputes,” Miller v. Cotter, 448 Mass. 671, 676 (2007), quoting from Home Gas Corp. of Mass., Inc. v. Walter’s of Hadley, Inc., 403 Mass. 772, 774 (1989). It conserves scarce judicial resources (rather than imposing more work on the courts) and furthers the important goal of the payment bond statute to get the money into the hands of deserving, uncompensated subcontractors like C & I as quickly as possible. See Floors, Inc. v. B.G. Danis of New England, Inc., 380 Mass. 91, 93 (1980). Any challenge to liability for punitive damages as exceeding the scope of its obligations under the bond (or other personal defenses), I think, should have been raised at the arbitration proceedings.11
In sum, I take the view, as did the Superior Court judge, that Travelers was not without recourse to have avoided an arbitral assessment of punitive damages. For instance, it could have expressly disclaimed coverage for punitive damages in the payment bond. It also could, by careful drafting of the bond, have set limits on the scope of arbitral claims in the underlying construction contracts as a condition of bonding. See Drywall Sys., Inc. v. ZVI Constr. Co., 435 Mass. 664, 671 n.5 (2002).

I do not pause to discuss the potential conflict of interest. I do note, however, that the relationship between the principal and the surety is one of *664privity. See Mestek, Inc. v. United Pac. Ins. Co., 40 Mass. App. Ct. 729, 732 (1996).

Although the complaint has not been made part of the record, the answers (which were included) dispute any bad faith conduct.

Under Massachusetts law, the preferred procedural vehicle for establishing the liability of a surety would seem to be a motion for summary judgment on the bond claim in the Superior Court. See Floors, Inc. v. B.G. Danis of New England, 380 Mass. 91, 93-95 (1980); Kearsage Metallurgical Corp. v. Peerless Ins. Co., 383 Mass. 162, 170-171 (1980).

In passing, I note that there is authority for a surety to seek declaratory relief when faced with such a dilemma as is presented here. See, e.g., Pensacola Constr. Co. v. St. Paul Fire & Marine Ins. Co., 705 F. Supp. 306 (W.D. La. 1988).

“Judges don’t like slick.” Britt v. Rosenberg, 40 Mass. App. Ct. 552, 554 (1996), quoting from Commonwealth v. McMiller, 29 Mass. App. Ct. 392, 410 (1990) (Brown, L, concurring). Traveler’s strategy may be easily surmised: Travelers relied upon the arbitration context (and the agreement to arbitrate) to avoid attorney’s fees. Under the Supreme Judicial Court precedent, C & I would be entitled to fees on a successful G. L. c. 149, § 29, claim decided in Superior Court, but not if that claim was arbitrated. It would seem fair to say that Travelers favors arbitration when it “helps,” but dislikes it when it might “hurt.”

I agree with Travelers that the judge seemed to confuse the limit of liability with the scope of liability under the bond. Any error here was harmless.

Travelers monitored the arbitration, watched Peabody do an “inadequate” job on its own contract defenses (since Peabody was in financial distress), did not intervene, and then reversed course, stepped in, and argued that it should be entitled to relitigate Peabody’s defenses in the Superior Court because they were “not actually litigated.”

One leading commentator has noted that because most payment bonds incorporate the terms of the underlying contract, “it is increasingly likely that a surety will be deemed to have agreed to be bound by an arbitration award.” Gallagher, Payment Bond Manual 70 (2d ed. 1995). The commentator also noted the trend in more recent case law not to distinguish between contractual and bond defenses and to compel the arbitration of both. See id. at 72.

Here, however, Travelers never disputed the incorporation of the arbitration clause into the bond; in fact, it conceded that it had agreed to arbitrate.

I also note in passing that shared counsel in his dual role may have gleaned from tea leaves the “trickling negativity of an impending disaster” (or perhaps tardily reviewed the law) when he filed an emergency motion to withdraw immediately after receiving notice of the adverse arbitration award. The two most relevant Massachusetts cases, Kearsage, supra, and Powers Regulator Co. v. United States Fid. & Guar. Co., 7 Mass. App. Ct. 913 (1979), are conspicuously absent from Travelers’ brief and reply brief.

Travelers did move to stay the Superior Court proceedings.