Hartford Accident & Indemnity Co. v. Scarlett Harbor Associates Ltd. Partnership

RODOWSKY, Judge. 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 developer’s 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 contractor’s 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. ¹²⁴ 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). 1 The 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 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____” 3 ¹²⁵ 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. 4 The bond contains, in relevant 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 Baltimore County by Scarlett Place Residential ¹²⁶ 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 Hartford’s 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 Hartford’s 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 “ ‘clearly’ 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 “Kraus’s subcontract was incorporated simply to establish the primary obligation on which Hartford’s secondary obligation would depend.” Id. Although 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 Hartford’s 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 ¹²⁷ 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 ‘process 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.’ 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 ‘consensual; 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.’ 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) (‘ “No one is under a duty to resort to ... [arbitral] tribunals, however helpful their processes, except to the extent that he has signified his willingness.” ’) (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 Tester-man 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 . ¹²⁸ 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. 6 Rather, The Hartford’s submission that SHALP covenanted 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 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 bond into the contract, 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.” ¹²⁹ Id. (footnote omitted). 7 By incorporating into the bond in the instant matter the contract that contains SHALP’s promise to arbitrate with Kraus, The Hartford literally has incorporated as to SHALP only SHALP’s 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 “ ‘for any damage resulting from an act of God.’ ” 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 ¹³⁰ reconstruction, basing the claim upon the provision in the bond, the claim did not survive demurrer. Affirming judgment for the owner, this Court said: “The bond was given, not to