Swinerton Builders v. Argonaut Insurance Company

Background

Swinerton Builders, Inc. sued Argonaut Insurance Company based on three surety performance and payment bonds connected to construction projects. Swinerton had entered a Master Subcontract Agreement with Northern Services, Inc. The agreement governed projects for which Swinerton engaged Northern and included a dispute-resolution provision requiring binding arbitration for disputes not resolved through mediation. The provision stated that arbitration would use the Construction Industry Arbitration Rules of the American Arbitration Association.

Swinerton and Northern later entered three work orders for mechanical work. Each work order stated that it was part of the Master Subcontract Agreement. Swinerton required Northern to obtain performance and payment bonds, and Argonaut issued the bonds. Swinerton alleged that the bonds incorporated the work orders and that the work orders incorporated the Master Subcontract Agreement.

After Northern allegedly became unable to complete its work, Swinerton notified Argonaut of Northern’s defaults and alleged that Argonaut failed to meet its obligations under the bonds. Swinerton asserted ten claims: six bond-breach claims, one claim for breach of the duty of good faith and fair dealing, two fraud claims, and one claim for declaratory relief.

Arguments and legal framework

Argonaut moved under Federal Rule of Civil Procedure 12(b)(1), which concerns challenges to subject-matter jurisdiction, and argued that Swinerton’s claims were subject to arbitration. The court explained that the Federal Arbitration Act generally requires courts to enforce written arbitration agreements according to their terms. The court’s usual inquiry is whether a valid arbitration agreement exists and whether it covers the dispute. An agreement may also clearly and unmistakably assign those gateway questions to the arbitrator.

Swinerton did not dispute that the Master Subcontract Agreement contained a valid arbitration agreement or that the work orders were part of that agreement. It argued instead that Swinerton and Northern were the only parties to the agreement and that Argonaut could not enforce its arbitration provision.

Court’s analysis

The court relied on authority holding that a surety may be bound by an arbitration provision in an underlying contract when the surety bond incorporates that contract, even if the surety did not sign the underlying contract. The court noted that Swinerton admitted in its complaint that the performance bonds incorporated the Master Subcontract Agreement without limitation. It rejected Swinerton’s attempt to distinguish that authority based on its assertion that the only dispute concerned Argonaut’s failure to honor the bonds. The court stated that Argonaut’s liability likely turns on Northern’s breaches of the work orders and that Swinerton did not provide authority supporting its position.

The court also found the Ninth Circuit decision cited by Swinerton distinguishable because that case involved an arbitration clause expressly limited to the parties who signed the relevant agreements. Here, Swinerton did not dispute that the bonds incorporated the work orders, which incorporated the Master Subcontract Agreement and its arbitration provision.

The court further held that the arbitration provision delegated the question of whether Swinerton’s claims were arbitrable to the arbitrator. It reached that conclusion because the provision incorporated the American Arbitration Association’s Construction Industry Arbitration Rules, which the court treated as clear and unmistakable evidence of that delegation.

Disposition

The court converted Argonaut’s motion to dismiss into a motion to compel arbitration and granted Argonaut’s motion to compel arbitration. It stayed the action in its entirety pending final resolution of the arbitration. The clerk was directed to administratively close the case. The parties may reopen it by filing a joint status report within two weeks after the arbitration is completed. The order did not decide the merits of Swinerton’s bond, bad-faith, fraud, or declaratory-relief claims.