Incorporating Arbitration Agreements into Bonds

Bond companies (and all other contracting parties) should determine their preferred dispute resolution method, and tailor the terms of your bond accordingly.

Do not incorporate construction agreements by reference unless you are comfortable with the dispute resolution provision in the construction agreement.  The dispute resolution provision  may be broad enough to include non-signatories.

It is common to incorporate another document by reference.  This is a classic way to bind parties to the incorporated terms.  A performance bond surety recently learned that the rule is little different when the terms of a commercial agreement containing an arbitration clause are incorporated by reference into the terms of a bond.  The surety may become subject to the arbitration agreement as well.  See, Federal Ins. Co. v. Metropolitan Transp. Authority, No. 18-3664, 2019 U.S. App. LEXIS 26361 (2d Cir. Aug. 30, 2019).

Lanmark Group contracted with New York’s Metropolitan Transportation Authority (“MTA”) (acting by and through the New York City Transit Authority (“NYCTA”)) in December 2014, renovate NYCTA’s headquarters in Brooklyn (the “Contract”).  See Fed. Ins. Co. v. Metro. Transp. Auth., 2018 U.S. Dist. LEXIS 183352 (S.D.N.Y. Oct. 25, 2018) at *2.  The surety, Federal Insurance, provided a performance bond on behalf of Lanmark in favor of NYCTA/MTA (the “Bond”).  The Bond “attached a copy of the Contract and incorporated it ‘as though herein set forth in full.’”  Id. at *3.

The District Court found that the Contract arbitration provision had clearly been incorporated by reference in the Bond, but that a non-signatory like Federal “still cannot be compelled to arbitrate unless the arbitration clause itself contains language broad enough to allow nonsignatories’ disputes to be brought within its terms.”  2018 U.S. Dist. LEXIS 183352 at *10 (emphasis omitted).  The court held that an arbitration agreement restricted to disputes among the immediate parties does not bind a non-signatory notwithstanding the incorporation by reference of such an arbitration clause in a contract by which the non-signatory is bound, but a broadly worded arbitration clause “which is not restricted to the immediate parties” may be effectively incorporated by reference into another agreement.  See id. at *10.  In the case at bar, the Contract arbitration provision was the only means provided to resolve “all Disputes arising out of, under, or in connection with, the Contract.”  See id. at *11.  That was sufficient, and Federal Insurance was thus subject to the Contract arbitration clause.

Angela Madathil is happy to assist project owners with projects in Nebraska, Kansas, or Missouri review their bonds and construction agreement.

Angela Madathil is a Nebraska Construction Attorney and provides legal assistance to Contractors, Roofing Companies, Siding Companies, Architects, and Engineers in Nebraska, Missouri, and Kansas.   This can involve contract review and negotiation, ongoing contract guidance during a project, and risk mitigation when issues arise.  The Goosmann Law Firm team advises Contractors, Architects, and Engineers throughout the Midwest and has attorneys licensed in Iowa, Kansas, Minnesota, Missouri, Nebraska, South Dakota, and other states.