Here is an interesting case binding a Miller Act payment bond surety to an arbitration award against its prime contractor (bond principal) that it received sufficient notice of. Notice is the operative word. The surety could have participated in the arbitration, elected not to, and when its prime contractor (bond principal) lost the arbitration, it was NOT given another bite out of the apple to litigate facts already been decided.
In BRC Uluslararasi Taahut VE Ticaret A.S. v. Lexon Ins. Co., 2020 WL 6801933 (D. Maryland 2020), a prime contractor was hired by the federal government to make security upgrades and interior renovations to a United States embassy in the Czech Republic. The prime contractor hired a subcontractor to perform all of the installed contract work. The prime contractor terminated the subcontractor for default during the course of construction.
The subcontractor demanded arbitration in accordance with the subcontract claiming it was wrongfully terminated. The subcontractor also filed a lawsuit asserting a Miller Act payment bond claim against the prime contractor’s surety (as well as a breach of contract action against the prime contractor). The subcontractor made clear it intended to pursue its claims in arbitration and hold the payment bond surety jointly and severally liable. The parties agreed to stay the lawsuit since the facts were identical to those being arbitrated. The arbitration went forward and an award was entered in favor of the subcontractor and against the prime contractor for approximately $2.3 Million.
The subcontractor moved to lift the stay entered in the lawsuit to confirm the arbitration award against the prime contractor and Miller Act payment bond surety. The prime contractor moved to vacate the award.
Beginning with the prime contractor’s motion to vacate the arbitration award, the Federal Arbitration Act gives limited grounds to support vacating an arbitration award. The grounds the prime contractor raised will not be discussed. They were all denied because it is difficult to vacate an arbitrator’s final award and that is the important take-away message. In support of this (and contained in a noteworthy, lengthy discussion by the Court), the Court stated: “The FAA [Federal Arbitration Act] creates a ‘strong presumption in favor of confirming arbitration awards,’ and ‘judicial review’ of such awards ‘must be an extremely narrow exercise.’” BRC Uluslararasi Taahut, supra, at *4.
Of significance here, the subcontractor moved to enforce the arbitration award against the Miller Act payment bond surety, as it should. Even though the surety was not a party to the arbitration, it was on notice of the arbitration, was notified the subcontractor would look to hold it jointly and severally liable, and the surety consented to the stay of the lawsuit pending the outcome of the arbitration. The Court noted, “[s]uch notice is sufficient to bind [the surety] to the arbitration award.” BRC Uluslararasi Taahut, supra, at *9 (citing cases showing that if the surety has notice of the proceedings against its principal, it can be bound by an arbitration award against the principal). Further, the Court intuitively stated:
[The surety] clearly knew that the arbitration would occur. Now dissatisfied with the outcome, [the surety] wishes not to be bound by the very proceeding [the surety] averred would avoid duplicative litigation. The Court suspects that had [the prime contractor] prevailed in arbitration, [the surety] would be singing a different tune. [The surety] will not be afforded a second bite at the litigation apple simply because it must now honor its obligations as the surety on the project.
Remember, if you are arbitrating rights, do not neglect to timely file your Miller Act payment bond lawsuit, or for that matter, any statutory payment bond lawsuit. Give the surety NOTICE that you intend to hold it jointly and severally liable for any arbitration award entered against its prime contractor (bond principal). Whether the surety elects to participate in the arbitration is within its discretion, but the key is to give the surety notice so that if you do prevail, you find yourself in same shoes as the subcontractor discussed in this case—binding the payment bond surety to the award entered against the prime contractor. The prime contractor and its surety should also recognize this likely outcome.
Please contact David Adelstein at firstname.lastname@example.org or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.