By: Richard E. Guttentag, Esq. and Alexander S. Beck, Esq., Stearns, Roberts & Guttentag, LLC
Florida courts have discretion to stay (i.e. suspend) a civil action between a subcontractor and surety involving a claim against a payment bond pending the resolution of an arbitration proceeding between the same subcontractor and a general contractor arising out of the subcontractor’s claim for non-payment against the general contractor, who is the principal on the bond.
The case of Hofer, Inc. v. Fidelity and Deposit Company of Maryland, 2013WL 644598 (N.D. Fla. 2014) dealt with this issue on a surety’s motion to stay the subcontractor’s action against a payment bond pending the resolution of the payment dispute between the subcontractor and general contractor. InHofer, Inc. v Fidelity and Deposit Company of Maryland, the dispute arose out of the general contractor’s alleged failure to pay the full amount due the Subcontractor. The subcontract contained an arbitration clause, and the general contractor and subcontractor commenced arbitration proceedings in connection with the dispute. Prior to the General Contractor demanding arbitration, the Subcontractor filed a lawsuit against the Surety that consisted of a claim against the conditional payment bond obtained by the General Contractor. The conditional payment bond did not include an arbitration clause nor incorporated the subcontract’s arbitration clause into the bond. Thus, the Subcontractor was not obligated to arbitrate with the Surety. However, the Surety moved to stay the lawsuit pending the resolution of the arbitration proceeding between the Subcontractor and General Contractor.
In analyzing the Surety’s motion to stay, the Court noted that there was disagreement among courts whether issuance of a stay was mandatory under similar circumstances. The Court explained that although there was a “heavy presumption” that litigation and arbitration can proceed jointly, if arbitrable claims predominate over nonarbitrable claims, or if arbitrable issues are crucial for the determination of nonarbitrable claims, then the court has the discretion to the stay the litigation.
In opposition to the Surety’s Motion, the Subcontractor argued that the arbitration proceeding was not dispositive in its suit with the Surety because the terms of the conditional bond obligated the Surety to pay the Subcontractor only “to the extent [the General Contractor] has been paid for labor, services, and materials provided by” the Subcontractor, and there was nothing in the record to suggest the General Contractor was paid for the Subcontractor’s work would be an issue in the arbitration proceeding. To counter this point, the Surety stated that it would not assert a defense to the Subcontractor’s claim based on this payment bond clause. In light of the Surety waiving its defense on this claim, the Court reasoned that the dispositive issue on the Subcontractor’s claim against the Surety was whether the General Contractor failed to pay the Subcontractor under the subcontract, which was the same issue in the ongoing arbitration proceeding.
The Court further explained that the Surety’s obligation to the Subcontractor did not extend further than the General Contractor’s obligation to the Subcontractor. Thus, if the General Contractor was not liable to the Subcontractor, then neither was the Surety. Accordingly, the Court reasoned that because the General Contractor and Subcontractor agreed to arbitrate its disputes under the Subcontract, it made sense for the dispute over whether the General Contractor was liable to the Subcontractor to be determined in the ongoing arbitration proceeding, as the arbitration proceeding may resolve the issue, between the Subcontractor and the Surety. Thus, the Court held that although the Subcontractor did not agree to arbitrate with the Surety, resolution of any remaining dispute with the Surety should await resolution of the underlying dispute with the General Contractor. Therefore, the Surety’s motion to stay the claim against the conditional payment bond pending the resolution of the arbitration proceeding was granted.
This case demonstrates that a party desiring to arbitrate must have the consent of the other party to arbitrate disputes, or an enforceable arbitration agreement between the parties. If an arbitration provision in a subcontract does not provide that the claimant must arbitrate with the surety, the surety generally will not be compelled to arbitrate. Conversely, if a payment bond incorporates a subcontract that contains an arbitration provision, there may be an agreement to arbitrate with the surety.
About the Author: Richard E. Guttentag is a partner with Stearns, Roberts & Guttentag, LLC, and is Board Certified in Construction Law by the Florida Bar. Mr. Guttentag exclusively in construction law including construction lien claims and defense, payment and performance bond claims and defense, bid protests, construction contract preparation and negotiation, and construction and design defect claims and defense. He can be reached for consultation at [email protected].