Schneider Electric Buildings Critical Systems, Inc. v. Western Surety Co.

Krauser, C.J. The issue before us is whether Western Surety Company, the appellee, is bound by the mandatory arbitration clause of an agreement between Schneider Electric Buildings Critical Systems, Inc., the appellant, and National Control Services, Inc. (“NCS”), as that agreement was later incorporated by reference into a subcontract between Schneider Electric and NCS, which was thereafter incorporated by reference into a performance bond issued by Western Surety on behalf of NCS for work it was to perform for Schneider Electric. The aforementioned agreement between Schneider Electric and NCS, containing the arbitration clause at issue, in this appeal, was entitled the “Master Subcontract Agreement.” Its purpose was to enable Schneider Electric, “from time to time,” to “engage the services of [NCS] to provide labor, material, ³¹ equipment and services ... in connection with construction projects,” and its terms were to cover all future subcontracts between them. Of particular relevance to the issue before us, the Master Subcontract Agreement provided that any disputes that might arise between those two corporate entities, which could not be resolved by “good faith negotiations,” must be submitted to arbitration. One year later, Schneider Electric was retained to assist in the building of a facility at Aberdeen Proving Ground, whereupon it entered into a subcontract agreement with NCS, in accordance with the parties’ Master Subcontract Agreement, providing that NCS was to perform certain work at the construction site of that facility.

The subcontract required NCS to furnish a performance bond, which it did. The issuer of that bond was Western Surety. And, significantly, the bond incorporated by reference the subcontract between Schneider Electric and NCS, which had incorporated by reference the Master Subcontract Agreement between those two parties, with its mandatory arbitration clause. When NCS thereafter declined to perform the construction required by the subcontract, as a result of a payment dispute, Schneider Electric filed, as provided by the parties’ Master Subcontract Agreement, a demand for arbitration.

Although that demand, initially, named only NCS as a respondent, it was subsequently amended to include Western Surety, as a corespondent, on the grounds that the performance bond, issued by Western Surety, incorporated by reference the subcontract, which, in turn, had incorporated by reference the Master Subcontract Agreement, with its mandatory arbitration clause, and thereby purportedly bound Western Surety to that clause. In response to its belated inclusion into Schneider Electric’s demand for arbitration, Western Surety filed a petition, in the Circuit Court for Howard County, to stay that arbitration and for a declaratory judgment, avowing, among other things, that it was not a party to Schneider Electric’s and NCS’ agreement to arbitrate their disputes and therefore could not be com ³² pelled to participate in the arbitration proceeding pending between them; it asserted, moreover, that Schneider Electric had breached the performance bond and that that breach had relieved Western Surety of any liability under that instrument. Then, following the transfer of this dispute from Howard County to Harford County, the Circuit Court for Harford County granted partial summary judgment in favor of Western Surety, concluding that, under either federal or state law, Western Surety was not subject to the arbitration provision of the incorporated Master Subcontract Agreement and therefore could not be compelled to participate in the pending arbitration proceeding between Schneider Electric and NCS. In so ruling, the Harford County circuit court cited three grounds for its decision: first, the words of the performance bond evinced an intent by Western Surety to guarantee the performance of all construction work to be performed by NCS, but not all contractual obligations undertaken by NCS, pursuant to the subcontract; second, the arbitration clause of the Master Subcontract Agreement, even if ultimately incorporated by reference into the performance bond, mandated arbitration only as to disputes between Schneider Electric and NCS; and, third, to rule otherwise, would, in effect, read out of the performance bond language expressly providing for a judicial resolution of any dispute, involving the bond, that might arise.

Schneider Electric then noted this appeal, contending that the Harford County circuit court’s ruling was in error for two reasons: first, by agreeing, in the performance bond, to “jointly and severally” bind themselves to the performance of the subcontract between Schneider Electric and NCS, both Western Surety and NCS were thereby bound to comply with the arbitration clause incorporated by reference into that subcontract; and, second, because the performance bond incorporated by reference that subcontract, Western Surety was rendered subject to the arbitration clause. Finding no merit to either claim of error, we shall affirm the judgment of the circuit court. ³³ I In May 2009, Schneider Electric 1 and NCS entered into a “Master Subcontract Agreement,” in which the parties agreed, as noted, that NCS would “provide labor, material, equipment and services necessary to perform work in connection with construction projects, from time to time[.]” The Master Subcontract Agreement set forth, among other things, the terms and conditions that would apply to all future subcontracts between the two companies. It also included a provision, which is the crux of this appeal, that any dispute between them would be subject to arbitration, if they were unable to negotiate a resolution of that dispute. Several months later, on August 14, 2009, Clark Construction Group, LLC, which is not a party to this matter, entered into a contract with the United States Army Corps of Engineers to build a replacement facility for medical research at Aberdeen Proving Ground in Harford County, Maryland.

The following October, Clark Construction, now the general contractor for that construction project, contractually retained the services of Schneider Electric to assist in the construction of that facility. Seven months after Schneider Electric was engaged, by Clark Construction, as a subcontractor for the construction project, Schneider Electric, pursuant to its Master Subcontract Agreement with NCS, entered into a subcontract with NCS, to perform work for that project. The subcontract incorporated by reference the Master Subcontract Agreement, which contained the arbitration clause at issue. Specifically, the subcontract provided that NCS would perform “electrical and pneumatic installation” work at the Aberdeen facility.

For that work, NCS was to be paid $2,050,000, “in installments as the Work progresses.” ³⁴ The subcontract also required NCS to furnish a performance bond, designating Schneider Electric as the obligee, for 100 per cent of the “Subcontract value,” that is, $2,050,000. 2 NCS subsequently obtained that bond from Western Surety. The performance bond, issued by Western Surety, at NCS’ request, was an American Institute of Architects (“AIA”) form A312 3 and bound Western Surety and NCS to Schneider Electric “for the performance of the Construction Contract,” which was incorporated by reference into the performance bond. The term “Construction Contract,” as defined by the performance bond, included the subcontract, between Schneider Electric and NCS, and thereby the Master Subcontract Agreement between those two entities, with its mandatory arbitration clause, which had been incorporated by reference into the subcontract. The subcontract specified that NCS’ work would begin on May 25, 2010 and conclude by May 31, 2013.

As the work progressed, numerous change orders eventually increased the amount to be paid NCS, by Schneider Electric, from $2,050,000 to $2,309,883, and extended the date that NCS was to complete its work from May 31, 2013 to February 28, 2014. 4 In the summer of 2013, a dispute arose between Schneider Electric and NCS concerning payment for work NCS had purportedly performed. NCS claimed it was owed approximately $410,000, by Schneider Electric, for various progress ³⁵ payments, claims, and change orders. When Schneider Electric rejected NCS’ demand for payment, the parties attempted, as required by their Master Subcontract Agreement, which had been incorporated by reference into their subcontract, to resolve their dispute “through good faith negotiations and settlement.” When those efforts proved unavailing, NCS, on August 30, 2013, abandoned the job site, notwithstanding a provision in the Master Subcontract Agreement requiring it to “continue to diligently perform the Work and maintain the progress schedule (without waiving its claims) despite the pendency of any dispute or any arbitration or litigation proceeding!;.]” Upon learning of NCS’ cessation of work, Schneider Electric promptly sent an initial notice of default to both NCS and Western Surety, advising them of what Schneider Electric believed to be a breach of contract by NCS. After two months had passed and NCS had still not resumed its work at the job site, Schneider Electric, on October 25, 2013, sent a final notice of default to both NCS and Western Surety, declaring that Schneider Electric intended to “terminate for cause” the subcontract between it and NCS, that Schneider Electric would “proceed to complete NCS’ work in an expeditious manner using manpower supplied by other electrical subcontractors,” and that NCS and Western Surety would “remain liable for all costs and expenses incurred” by Schneider Electric to complete NCS’ work.

Schneider Electric then, on November 12, 2013, notified both NCS and Western Surety that the NCS subcontract had “been terminated for cause pursuant to Section 18.3” of the Master Subcontract Agreement, which permitted it to do so if NCS abandoned the work it was contractually required to perform. Because NCS, as of August 30, 2013 (the date it left the job site), had performed only 70 per cent of the work required under the subcontract, Schneider Electric hired other electrical subcontractors to complete the remaining work. It, ultimately, paid those subcontractors approximately $2,000,000 to fulfil NCS’ contractual obligations, which further fueled the dispute between the parties, as that amount substantially ³⁶ exceeded the amount that NCS was to be paid upon the completion of the work it had not yet performed, when it ceased any further activity at the construction site. In fact, according to Schneider Electric, NCS’ breach of the subcontract had caused it to suffer nearly $1,500,000 in damages, which was the difference between the approximately $2,000,000 it paid others to complete the work NCS was to perform under the subcontract and the approximately $500,000 NCS was to be paid had it fulfilled its contractual obligations.

In February 2014, Schneider Electric filed a demand for arbitration, with the American Arbitration Association, naming NCS as the sole respondent and claiming damages in the amount of $1,473,100 as well as attorneys’ fees, interest, and costs. Then, two months later, it amended that demand, to include Western Surety as a co-respondent. Finding, itself, now a party to the arbitration demanded by Schneider Electric, Western Surety filed, in response to that demand, a petition, in the Circuit Court for Howard County, seeking both a stay of arbitration and a declaratory judgment. Specifically, Western Surety requested, invoking Courts and Judicial Proceedings Article (“CJ”), § 3-208, 5 that the circuit court stay arbitration “with respect to any claims asserted by” Schneider Electric against it because it was not, it averred, a party to any arbitration agreement with Schneider Electric or ³⁷ NCS or to any agreement between them.

Western Surety further requested that the court “issue a declaratory judgment with respect to the legal relations between” it and Schneider Electric and, in so doing, to specify the reasons that it, Western Surety, could not be required to participate in the arbitration currently pending between Schneider Electric and NCS, as well as to specify any “suretyship defenses” Western Surety could invoke, were Schneider Electric to bring a claim against it under the performance bond, should it prevail in the pending arbitration proceeding with NCS. In reply, Schneider Electric filed a motion to dismiss the state court action, brought by Western Surety, on the grounds of improper venue. Although Western Surety opposed that motion, it did agree to Schneider Electric’s request for a change of venue, which led the Howard County court to subsequently transfer this matter to the Circuit Court for Harford County. See Md. Rule 2-327(b) (authorizing a circuit court, upon sustaining defense of improper venue but determining that “in the interest of justice the action should not be dismissed,” to transfer that action” to any county in which it could have been brought”).

At the same time that Schneider Electric moved to dismiss the state court proceedings, it filed a petition, in the United States District Court for the District of Maryland, seeking to compel Western Surety to arbitrate their dispute. The federal district court dismissed that petition, citing the “abstention doctrine,” promulgated by the Supreme Court, in Colorado River Water Conservation District v. United States, 424 U.S. 800 , 96 S.Ct. 1236 , 47 L.Ed.2d 483 (1976), which permits a federal district court to dismiss a federal action, when “the parallel state-court litigation will be an adequate vehicle for the complete and prompt resolution of the issues between the parties.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 28 , 103 S.Ct. 927 , 74 L.Ed.2d 765 (1983). Later that year, following the transfer of the case to the Harford County circuit court, Western Surety, in September 2014, filed, in that court, a motion for partial summary judg ³⁸ ment, asserting that, because there was no agreement to arbitrate between it and Schneider Electric, it was entitled to judgment as a matter of law as to its request for a stay of arbitration.

The granting of that motion by the Harford County circuit court prompted the filing of this interlocutory appeal 6 by Schneider Electric. [[Image here]] Having not been stayed during the pendency of this appeal, arbitration proceedings, to which only Schneider Electric and NCS were parties, continued without interruption. In fact, shortly after the parties’ presentation of oral argument, before this Court, those proceedings concluded with a determination, by the arbitrator, that NCS had breached its subcontract with Schneider Electric, whereupon Schneider Electric was awarded, by the arbitrator, a total of $1,658,924.21 in damages, attorneys’ fees, arbitrator’s fees, and costs that Schneider Electric had incurred. Following that decision, Western Surety promptly filed a motion to dismiss this appeal, contending that, because the dispute between Schneider Electric and Western Surety was, principally, whether Western Surety was contractually obligated to submit to arbitration and, as that arbitration had concluded, the instant appeal is now moot and warrants dismissal. “A question is moot if, at the time it is before the court, there is no longer an existing controversy between the parties, so that there is no longer any effective remedy which the court can provide.” Falik v. Hornage, 413 Md. 163, 186 , 991 A.2d 1234 (2010) (citation and quotation omitted). Although the arbitration between Schneider Electric and NCS has, indeed, ended, the issue of whether Schneider Electric may seek payment of that award from Western Surety via arbitration is still before us.

That issue was understandably ³⁹ neither addressed nor resolved during the arbitration proceedings between Schneider Electric and NCS. It therefore remains an “existing controversy” between the parties and, in fact, lies at the heart of this appeal. Accordingly, we shall deny Western Surety’s motion to dismiss and proceed to the merits of the issue presently before us. III Under Maryland Rule 2-501(f), a circuit court may grant summary judgment, if there is “no genuine dispute as to any material fact,” and “the party in whose favor judgment is entered is entitled to judgment as a matter of law.” “Because a grant of summary judgment is predicated upon a ruling on a question of law and not a dispute of fact, our review is de novo ” Stein v. Pfizer Inc., 228 Md.App. 72, 85 , 137 A.3d 279 (2016) (citation omitted), cert. denied, 450 Md. 129 , 146 A.3d 476 (2016).

Keeping that standard of review in mind, we turn now to the first issue we have been asked to decide and, that is, whether we must apply federal law, specifically, the Federal Arbitration Act and its attendant presumption in favor of arbitration, in determining whether Western Surety is bound contractually to arbitrate, as Schneider Electric contends, or state contract law, as Western Surety claims. Preliminarily, we note that the court below did not address whether the contracts at issue, in this appeal, involved interstate commerce and, consequently, it never determined whether the Federal Arbitration Act applied to the instant controversy. See 9 U.S.C. § 1 (defining “commerce,” for purposes of the Federal Arbitration Act, as including “commerce among the several States”). Nor was it necessary that it do so, given that it found that, under either federal or state law, Western Surety was not contractually bound to arbitrate any disputes arising from the performance bond it had issued because, regardless of which Act, federal or state, applies, state law governs the issue of contract formation.

We agree. The Supreme Court first annunciated this principle in Perry v. Thomas, 482 U.S. 483 , 107 S.Ct. 2520 , 96 L.Ed.2d 426 ⁴⁰ (1987), and then later reiterated it, in Arthur Andersen LLP v. Carlisle, 556 U.S. 624 , 129 S.Ct. 1896 , 173 L.Ed.2d 832 (2009), to clear up an apparent misreading of Section 2 of the Federal Arbitration Act by a number of federal and state courts. Section 2 of that federal Act states that a written arbitration provision “in any ... contract evidencing a transaction involving commerce ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,” 9 U.S.C. § 2 (emphasis added), an ambiguous clause, to be sure. Then, in Perry v. Thomas, 482 U.S. 483 , 107 S.Ct. 2520 , 96 L.Ed.2d 426 , the Supreme Court indicated, apparently not plainly enough, that, while the former clause—“in any ... contract evidencing a transaction involving commerce ... shall be valid, irrevocable, and enforceable”—generally provides that “[a]n agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law,” the language that follows—“save upon such grounds as exist at law or in equity for the revocation of any contract”—provides that “state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.” Id. at 492-93 n.9, 107 S.Ct. 2520 .

Nonetheless, a significant number of federal and state courts, in addressing whether non-signatories to contracts containing arbitration clauses may either compel a signatory or be compelled by a signatory to arbitrate disputes arising under those contracts, have misconstrued Section 2 and mistakenly concluded that it provides that enforceability of an arbitration clause by or against a non-signatory is to be resolved, in accordance with federal common law. See, e.g., R.J. Griffin & Co. v. Beach Club II Homeowners Assoc., 384 F.3d 157 , 160 n.1 (4th Cir. 2004); Int’l Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411 , 417 n.4 (4th Cir. 2000); MS Dealer Service Corp. v. Franklin, 177 F.3d 942, 947-48 (11th Cir. 1999); Grundstad v. Ritt, 106 F.3d 201, 204-05 (7th Cir. 1997); Commercial Union Ins. Co. v. ⁴¹ Gilbane Building Co., 992 F.2d 386, 388-89 (1st Cir. 1993); United States Fidelity & Guaranty Co. v. West Point Constr. Co., 837 F.2d 1507, 1508 (11th Cir. 1988) (per curiam); Exchange Mut.

Ins. Co. v. Haskell Co., 742 F.2d 274, 275-76 (6th Cir. 1984) (per curiam); Rashid v. Schenck Const. Co., Inc., 190 W.Va. 363 , 438 S.E.2d 543, 547 (1993); St. Paul Fire & Marine Ins. Co. v. Woolley/Sweeney Hotel No. 5, 545 So.2d 958 (Fla.

Dist. Ct. App. 1989) (per curiam). This misreading of Section 2 has engendered much confusion among many state courts, including Maryland’s Court of Special Appeals. See, e.g., Thompson v. Witherspoon, 197 Md.App. 69, 81 , 12 A.3d 685 (2011) (“Under the [Federal Arbitration Act], courts look to substantive provisions of state law regarding threshold issues of the validity, revocability, or enforceability of contracts, but to federal law to resolve issues as to whether a non-signatory to a contract can enforce, or be bound by, an arbitration provision in a contract signed by other parties.”) (citation omitted); Case Handyman and Remodeling Servs., LLC v. Schuele, 183 Md.App. 44, 57 , 959 A.2d 833 (2008) (“To resolve the issue whether a non-signatory can enforce a contract’s arbitration provision under the doctrine of equitable estoppel, courts look to the federal substantive law of arbitrability.”), vacated on other grounds, 412 Md. 555 , 989 A.2d 210 (2010).

In 2009, the Supreme Court laid to rest this misinterpretation of that section of the Federal Arbitration Act, in Arthur Andersen LLP v. Carlisle, supra, 556 U.S. 624 , 129 S.Ct. 1896 . There, it explained that when, as in this case, a question arises as to whether an arbitration clause may be enforced by or against non-parties to a contract containing such a clause, “ ‘traditional principles’ of state law,” which “allow a contract to be enforced by or against non[-]parties ... through ‘assumption, piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel,’ ” provide the answer to that question. Id. at 631 , 129 S.Ct. 1896 (quoting 21 R. Lord, Williston on Contracts ⁴² § 57:19, at 183 (4th ed. 2001)). 7 Moreover, in the past few years, several federal courts of appeals, consistent with the Carlisle Court’s relatively recent admonition, have candidly conceded their mistaken impression that federal common law controls in such situations. See, e.g., Crawford Prof.

Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249 , 255 (5th Cir. 2014) (recognizing that “prior decisions applying federal common law, rather than state contract law, to decide” whether an arbitration clause may be enforced by or against nonparties to the contract were in error); Lawson v. Life of the South Ins. Co., 648 F.3d 1166, 1170-71 (11th Cir. 2011) (declaring that many of that circuit’s prior “decisions involving the question of whether a non-party can enforce an arbitration clause against a party have not made clear that the applicable state law provides the rule of decision for that question”). We now join those courts in stressing that, under the Federal Arbitration Act, as interpreted by the Supreme Court, the question of whether an agreement to arbitrate binds a non-signatory is a question of state contract law. Arthur Andersen LLP v. Carlisle, 556 U.S. at 631 , 129 S.Ct.