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Flow Down Provisions: Incorporation by Reference of an Arbitration Provision Does Not Obligate a Surety to Arbitrate

In Schneider Electric Building Critical Systems, Inc. v. Western surety Company, 231 Md. App 27 (2016), the Maryland Court of Special Appeals held that a surety whose bond was incorporated by reference into a subcontract containing an arbitration provision did not obligate itself to arbitrate any claims arising from the construction project.  Schneider Electric Buildings Critical Systems, Inc. entered into a subcontract agreement with National Control Services, Inc. (“NCS”), whereby NCS would perform work on a building at Aberdeen Proving Ground.  Pursuant to the subcontract agreement, NCS obtained a performance bond from Western Surety Company, which incorporated by reference the subcontract between NCS and Schneider.  The surety bond contained no language related to arbitration; however, the subcontract agreement required any disputes to be resolved by binding arbitration.

After a dispute arose on the construction project between the two construction companies, Schneider filed a demand for arbitration against NCS and Western Surety.  The Surety, having never entered into an arbitration agreement, moved to dismiss the arbitration proceeding, claiming that it never was a party to any arbitration provision with NCS or Schneider.

The Maryland Court of Special Appeals held that the mere incorporation by reference of a contract containing an arbitration clause did not obligate the surety to arbitrate, stating that the incorporation of one contract into another contract involving different parties does not automatically transform the incorporated document into an agreement between the parties to the second contract, unless there is “an indication of a contrary intention.”  Thus, in certain situations, a surety may be obligated to arbitrate as a result of an incorporation by reference provision, but there must be an indication of the same in the contract language.

From a practical standpoint, contractors and subcontractors in Maryland should review all contract provisions, as well as, any documents that have been incorporated by reference.  These additional documents, even if not provided, will be part of the contract and will affect the rights of all parties.

For additional information on construction contracts in Maryland, contact Michael W. Siri at 410-583-2400 or at siri@bowie-jensen.com.

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