The Power of Incorporation Compels You: Surety Succeeds in Compelling Contractor to Arbitrate Bond Claims Pursuant to Arbitration Clause in Subcontract

In Swinerton Builders, Inc. v. Argonaut Insurance Co., Swinerton Builders, a contractor, sued a surety on bond claims arising from defaults by its subcontractor on a series of work orders. The owner of Swinerton’s mechanical subcontractor on three projects passed away unexpectedly, and the subcontractor was unable to complete its remaining work on the projects.

Swinerton filed a complaint in August 2023 against Argonaut, the subcontractor’s surety, seeking to recover on the payment and performance bonds issued by Argonaut. The complaint also included claims for breach of the covenant of good faith and fraud. Argonaut responded by moving to dismiss based on the arbitration clause in Swinerton’s subcontract. The bonds at issue incorporated by reference the subcontract, including the arbitration provision. The federal district court converted the motion to dismiss to a motion to stay and compel arbitration based on the requirements of the Federal Arbitration Act.

To compel arbitration, the court noted that Argonaut must show that there was an agreement to arbitrate with Swinerton and that the disputes at issue fell under that agreement. Swinerton argued that it only agreed to arbitrate disputes between Swinerton and the subcontractor and that the arbitration provision did not apply to Argonaut, a non-signatory to the subcontract agreement.

The court disagreed with Swinerton and granted Argonaut’s motion. Relying on precedent holding that a surety may be bound by an arbitration provision where the bond incorporates the underlying contract containing the arbitration clause, the court ruled that the same rationale supported the surety’s motion to compel in this instance. The court also did not find persuasive Swinerton’s argument that it should not be compelled to arbitrate where the bonded subcontractor’s default was not disputed. The court determined the alleged breaches of the subcontract would have to be arbitrated.

It is not clear why Argonaut elected to pursue arbitration as opposed to litigating the bond claims. The surety may have been concerned with the bad faith and fraud claims asserted by Swinerton and concluded that arbitrating such disputes would be preferable to a jury trial on those issues. However, the court did note that the arbitrator would retain authority to determine which of Swinerton’s claims were arbitrable under the arbitration agreement, so there remains a risk that some of the claims will be referred back to the court by the arbitrator. Regardless, for parties choosing whether to arbitrate or litigate under their construction contracts, the expansive application of the arbitration provision by the court in Swinerton Builders is another factor to be considered, especially where performance is secured by third-party bonds, guarantees, and other instruments.