Filed: April 23, 1993
William S. Druckman
Preiser Law Firm
Charleston, West Virginia
Attorney for the Appellants
Gary D. Phillips
Greenbaum, Boone, Treitz, Maggiolo & Brown
Attorney for the Appellees
James R. Watson
Steptoe & Johnson
Charleston, West Virginia
Attorney for the Intervenor
JUSTICE BROTHERTON delivered the Opinion of the Court.
SYLLABUS BY THE COURT
1. "When a commercial contract sets forth a particular
method for arriving at a decision by an arbitrator, the parties are
entitled only to the procedure for which they bargained and courts
will not impose upon arbitrators concepts of "due process"
developed in the courts in the face of explicit contractual
provisions that provide other less time consuming and less
expensive methods of dispute resolution." Syllabus point 1, Barber
v. Union Carbide Corp., 172 W.Va. 199, 304 S.E.2d 353 (1983).
2. Under the Federal Arbitration Act, an arbitration
agreement can be incorporated into a subcontract by reference in a
general contract. Likewise, an agreement to arbitrate, when it is
a part of a general contract, can be incorporated into a bond, by
reference, to the general contract.
3. A suggestion action may be a proper method to collect
on a performance bond obligation, if the surety is liable or
indebted to the judgment debtor.
This case involves an appeal from the dismissal of a
suggestion action in the Kanawha County Circuit Court, brought by
the plaintiffs below, the Rashids, against United States Fidelity
& Guaranty Company (USF&G). The case below concerned the default
of a construction contract by Schenck Construction Company, Inc.,
on a project being developed by the Rashids, and USF&G's refusal as
surety to pay off on the performance bond. The issue of the
default on the construction contract between the Rashids and
Schenck Construction Company, Inc., the contractor, went before the
American Arbitration Association on June 3, 1991. The arbitrators
found in favor of the Rashids in the amount of $763,730.00. The
Rashids then filed a civil action in the Circuit Court of Kanawha
County to enforce the arbitration award. A judgment was entered by
the Circuit Court of Kanawha County in the amount of $775,185.99,
plus 10% interest from that date. Thereafter, the Rashids filed a
suggestion against USF&G to enforce the judgment, on the theory
that USF&G's issuance of a performance bond to the Rashids for the
construction of a grocery store by Schenck Construction rendered
USF&G liable to the judgment debtors, Schenck Construction Co. and
Schenck & Associates, by default. On June 24, 1992, Judge Canady
dismissed the suggestion.
The facts are as follows: On February 8, 1989, the
Rashids entered into a construction contract with Schenck
Construction Company for the design and construction of a grocery
store in St. Albans, West Virginia. The contract specified a
guaranteed maximum price of $911,706.00 and a completion date in
mid-September, 1989. Schenck was to furnish all the architectural
work, labor, and materials necessary to build and complete the
store. The architectural services were included in the guaranteed
maximum price and were supplied under the contract by Schenck &
Associates. The contract was bonded by USF&G in a performance bond
dated February 8, 1989, to the full maximum contract price of
$911,706.00. The contract was incorporated, by reference, into the
bond. With USF&G as underwriter, the Rashids paid for (1) a Labor
and Material Payment Bond in the amount of $911,706.00, and (2) a
Performance Bond in the amount of $911,706.00.
The performance bond provided that in the event of
Schenck's default under the contract, USF&G was obligated to remedy
the default or take other steps to complete the contract. It also
stated, "[t]he surety hereby waives notice of any alteration or
extension of time by the owner." The bond also required that USF&G
be jointly and severally bound with Schenck to the Rashids against
losses resulting from Schenck's defaulting on the contract. The
obligation could be fulfilled in two ways: (1) The surety could
enter the construction site and complete the construction in
accordance with the original terms and condition of the contract,
or (2) the surety could obtain bids for completion of the contract
and, upon determination of the lowest bid, arrange for a contract
between the bidder and the Rashids. The bond also stated that any
suits under the bond be brought within two years. The Rashid-Schenck contract provided a two-step process for dispute
resolution: (1) The claim/dispute was first sent to an architect,
who could notify the surety of claims or the possibility of
contractor's default. (2) Claims not resolved by an architect were
to be settled by binding arbitration. Those with a substantial
interest in a common question of law or fact in the proceeding
should be a party to the arbitration, with the agreement of the
owner and the contractor.See footnote 1
Work on the project began in March, 1989. It ceased in November, 1989, when Schenck abandoned the construction site and refused to perform any additional work. Prior to that time, several underground gasoline storage tanks were discovered during excavation. By written change order, Schenck agreed with the Rashids to arrange and oversee the environmental remediation work involving the gasoline storage tanks. Schenck then contracted with two environmental remediation companies, ERM-Midwest, Inc., and Landmark Corp., to perform the work. The cleanup proceeded for some time, until August of 1989, when it became obvious that various subcontractors had not been paid for work performed.See footnote 2
Schenck Construction terminated the contract by letter dated
January 11, 1990, complaining that the Rashids had failed to make
progress payments and that they refused to adequately address the
environmental problems of the storage tanks at the site. On
January 30, 1990, the Rashids notified USF&G of Schenck's default
and demanded compliance with the performance bond. In accordance
with the contract, the Rashids began binding arbitration against
Schenck on February 28, 1990, claiming that Schenck had defaulted
on the contract.
The arbitration took place on June 3, 4, and 5, 1991.
During arbitration, Schenck offered two defenses for its refusal to
complete the project. First, it claimed that residue from
underground storage tanks had been discovered on the site, which
prevented the project from being completed. Second, Schenck stated
that the Rashids' failure to make payment under the November 30,
1989, application and certificate for payment represented a breach
of contract that justified work stoppage.
The Rashids countered that the storage tanks discovered
on the site would not prevent completion of the project. They
claimed that the November 30, 1989, certificate for payment was
invalid because it was not certified by the project architect as
required by contract. They also argued that they had already made
payments sufficient to cover the November 30, 1989, application and
certificate for payment, because Schenck had improperly advanced on
its prior payment request by filing materially false certifications
that work not performed had been performed, and that subcontractors
who had gone unpaid had been fully paid. Thus, the Rashids claim
that the reasons given by Schenck for extension of its default was
nothing but a fiction designed to disguise Schenck's true reasons
for abandonment of the project. The Rashids claim that by late
1989, Schenck found itself in a precarious financial condition as
a result of problems with several of its construction projects, and
Schenck engaged in overbilling, advancement, misrepresentation, and
nonpayment of subcontractors on the Rashid project in an attempt to
keep its business afloat. Thus, the Rashids state that Schenck
ultimately became unable to complete the project because of their
USF&G was put on notice of the default on January 30,
1990. From that point on, the Rashids claim that USF&G did nothing
but attempt to obstruct their claim against Schenck by failing to
conduct a proper and timely investigation of the Rashids' claim
under USF&G's performance bond.See footnote 3 On February 28, 1990, the Rashids
initiated arbitration proceedings before the American Arbitration
Association, as provided in the contract. Schenck & Associates
participated in the arbitration with the Rashids. USF&G was not a
party, although it paid for Schenck's defense due to the fact that
Schenck was financially unable to do so.
On February 8, 1991, while the arbitration was still pending, the Rashids brought an action against USF&G in the United States District Court for the Southern District of West Virginia for breach of contract, fraud, bad faith, and violation of the West Virginia Unfair Trade Practices Act. (Case No. 2:91-0141.) On April 22, 1991, USF&G filed a motion for a stay of all proceedings, pending the decision of the American Arbitration Association. On December 9, 1991, the court ordered that the breach of contract, bad faith, and unfair practices claims be stayed.
On June 15, 1991, the arbitrators found for the Rashids
in the amount of $763,730.00. The Rashids filed a civil action in
the Circuit Court of Kanawha County against Schenck to enforce the
arbitration award. Schenck did not appear, and on August 8, 1991,
judgment was entered in favor of the Rashids in the amount of
$775,185.99. USF&G acknowledges that Schenck is incapable of
making payment on this judgment. Thereafter, on August 27, 1991,
the Rashids filed a suggestion and writ of execution against USF&G
and Schenck with the Kanawha County Circuit Court, pursuant to
W.Va. Code § 38-5-10 (1985). In their motion, the Rashids argued
that USF&G was liable for the Kanawha County Circuit Court judgment
against Schenck based upon the performance bond, which jointly and
severally binds USF&G and Schenck with respect to the contract.
USF&G denied liability, swearing it owed no sums to Schenck, the
judgment debtor, and that the federal court action filed by the
Rashids would deal with this issue.
On June 24, 1992, the suggestion was dismissed by the Circuit Court of Kanawha County. Thus, on July 2, 1992, the Rashids filed this appeal, arguing that USF&G was bound by the arbitration judgment against Schenck.
By memorandum order of September 28, 1992, the United
States District Court for the Southern District of West Virginia
ordered that collateral estoppel effect be given to the arbitration
award. The district court concluded that the principles of
collateral estoppel would preclude USF&G from relitigating the
issues decided in the arbitration. Rashid v. United States
Fidelity & Guaranty Co., No. 2:91-0141, Slip Op. at 36-37
(S.D.W.Va. Sept. 28, 1992).
We agree. In Turner v. Stewart, 51 W.Va. 493, 41 S.E.
924 (1902), the Court noted briefly that an arbitration award
against a principal is not enforceable against a surety who did not
agree to arbitrate the dispute. Id. at 928. That case, however,
is easily distinguishable from the situation in this case. In
1902, arbitration was less common and not as favored a method of
dispute resolution as it is today. A body of West Virginia case
law has evolved over the years that mandates arbitration awards be
recognized as binding and final as to the matters presented. "It
has long been the rule in this State that where parties have
undertaken arbitration, their award is binding and may only be
attacked in the courts on the basis of fraud or on those grounds
set out in W.Va. Code, 55-10-4." Clinton Water Association v.
Farmers Construction Co., 163 W.Va. 85, 254 S.E.2d 692 (1979). In
Barber v. Union Carbide Corp., 172 W.Va. 199, 304 S.E.2d 353
(1983), the Court stated that if a contract calls for arbitration,
then arbitration is all the parties are entitled to receive.
When a commercial contract sets forth a particular method for arriving at a decision by an arbitrator, the parties are entitled only to the procedure for which they bargained and courts will not impose upon arbitrators concepts of "due process" developed in the courts in the face of explicit contractual provisions that provide other less time consuming and less expensive methods of dispute resolution.
Id. at syl. pt. 4. See also Jackson Enterprises, Ltd. v. Procious
Public Service District, 178 W.Va. 574, 363 S.E.2d 460 (1987);
Boomer Coal & Coke Co. v. Osenton, 101 W.Va. 683, 133 S.E. 381
We concur with the federal district court's finding that
USF&G agreed to arbitrate all aspects of disputes related to the
contract and bond. Moreover, the Federal Arbitration Act now
controls this situation. In Moses H. Cone Memorial Hospital v.
Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d
765 (1983), the United States Supreme Court found that the Federal
Arbitration Act evidenced the federal policy which favored
arbitration agreements, "notwithstanding any state substantive or
procedural policies to the contrary." Id. at 24. The Fourth
Circuit has ruled that the Federal Arbitration Act preempts state
law where a contract which deals with a commercial transaction
contains a written provision that provides disputes will be settled
by arbitration. Maxum Foundations, Inc. v. Salus Corp., 779 F.2d
974, 978 (4th Cir. 1985).
Under the Federal Arbitration Act and federal case law,
an arbitration agreement can be incorporated into a subcontract by
reference in a general contract. Id.See footnote 4 Likewise, an agreement to
arbitrate, where it is part of a general contract, can be
incorporated into a bond by reference to the general contract. In
Transamerica Premier Insurance Co. v. Collins & Co., 735 F.Supp
1050 (N.D.Ga. 1990), the federal district court held that a surety
could be forced to arbitrate a dispute where the performance bond
incorporated, by reference, an arbitration clause found in the
subcontract in question. Id. at 1051. This method of
incorporation promotes arbitration as a favored method of dispute
In the case now before us, the contract between Schenck
and the Rashids contains such an arbitration agreement,
incorporated by reference into the bond. Consequently, we concur
with the federal district court that USF&G agreed to arbitrate and
thus, the arbitration award is final and binding, and should be
given collateral estoppel effect.
We next address the propriety of a third party using a
suggestion action to collect a judgment from a surety on a
performance bond. The term surety is defined in W.Va. Code § 33-1-10(f) (1992), which provides:
(f) Surety -- Surety insurance includes:
(2) Insurance guaranteeing the
performance of contracts, other than insurance
policies, and guaranteeing and executing
bonds, undertakings, and contracts of
suretyship: Provided, That surety insurance
does not include the guaranteeing and
executing of bonds by professional bondsmen in
criminal cases, or by individuals not in the
business of becoming a surety for compensation
upon bonds; . . . .
In State ex rel. Copley v. Carey, 141 W.Va. 540, 91
S.E.2d 461 (1956), this Court explained the difference between
contracts of surety and contracts of indemnity:
There is a vital distinction between a contract of suretyship and a contract of indemnity. In a contract of suretyship the obligation of the principal and his surety is original, primary and direct and the surety is liable for the debt, default or miscarriage of his principal. A contract of indemnity is likewise an original undertaking and creates a primary obligation, but the promise of the indemnitor, in a contract of indemnity against loss sustained by the person indemnified, is not to answer for the debt, default or miscarriage of another person but is to make good the loss which results to the person indemnified from such debt, default or miscarriage.
Id. at 467 (citations omitted). In Commercial Bank of Bluefield v.
St. Paul Fire & Marine Ins. Co., 175 W.Va. 588, 336 S.E.2d 552
(1985), this Court affirmed the distinction found in Copley and
pointed to the joint and several liability owed by the surety and
the principal to the third party. Id. at 560. Thus, the
obligation of USF&G, as surety, is primary and direct.
West Virginia Code § 38-5-10 (1985) provides a suggestion
action as a method for a judgment creditor to enforce an existing
Upon a suggestion by the judgment creditor that some person is indebted or liable to the judgment debtor or has in his possession or under his control personal property belonging to the judgment debtor, which debt or liability could be enforced, when due, or which property could be recovered, when it became returnable, by the judgment debtor in a law court, and which debt or liability or property is subject to the judgment creditor's writ of fieri facias, a summons against such person may be sued out of the office of the clerk of the circuit court of the county in which such person so indebted or liable, or so having such personal property, resides, or, if he be a nonresident of the State, in the county in which he may be found, upon an attested copy of such writ of fieri facias being filed with such clerk to be preserved buy him in his office, requiring such person to answer such suggestion in writing and under oath.See footnote 5
After a careful review of the statutory language, we find
that a suggestion action may be a proper method to collect on a
performance bond obligation, if the surety is liable or indebted to
the judgment debtor. The judgment debtor, Schenck, owes a debt to
the judgment creditor, Rashid. The third party, USF&G, is liable
to the judgment debtor, Schenck, through the joint and several
liability they share upon the performance bond. By agreeing to be
jointly and severally liable with Schenck to the Rashids, USF&G has
created a joint liability with Schenck that could be enforced in a
court of law, as required by statute. Because of that joint
liability, a suggestion action is a proper method for the Rashids
to collect a judgment from a surety based upon a performance bond.
See also Newton v. Dailey, 167 W.Va. 347, 280 S.E.2d 91, 94 (1981).
Consequently, because USF&G is jointly liable with Schenck on the
bond, the Kanawha County Circuit Court erred in dismissing the
suggestion action below.
However, USF&G complains that it has defenses that have
not been presented to any trier of fact. In its order, the federal
district court also concluded that USF&G had not arbitrated its
defenses along with Schenck Construction and granted USF&G the
opportunity to present evidence of those defenses which were not
raised before the arbitration. "There being disagreement between
the parties about the issues decided by the arbitrators (USF&G)
will be given an opportunity to present their position on the
matter." Rashid v. United States Fidelity & Guaranty Co., No.
2:91-0141, Slip Op. at 35 (S.D.W.Va. Sept. 28, 1992). See also
United States Fidelity & Guaranty Co. v. Hathaway, 183 W.Va. 165,
394 S.E.2d 764 (1990). Thus, the breach of contract and bad faith
action still pending in district court will provide the surety a
forum to present those defenses.See footnote 6
Accordingly, we reverse the June 24, 1992, order and
remand this case to the Circuit Court of Kanawha County with
directions to reinstate the suggestion action.
Footnote: 1The arbitration agreement provides, in pertinent part:
4.5.1 Controversies and Claims subject to
Arbitration. Any controversy or claim arising
out of or related to the Contract, or the
breach thereof, shall be settled by
arbitration in accordance with the
Construction Industry Arbitration Rules of the
American Arbitration Association, and judgment
upon the award rendered by the arbitrator or
arbitrators may be entered in any court having
4.5.5 Limitation of Consolidation or Joinder. No arbitration arising out of or relating to the Contract Documents shall include, by consolidation or joinder or in any other manner, the Architect, the Architect's employees or consultants, except by written consent containing specific reference to the Agreement and signed by the Architect, Owner, Contractor and any other person or entity sought to be joined. No arbitration shall include, by consolidation or joinder or in any other manner, parties other than the Owner, Contractor, a separate contractor as described
in Article 6 and other persons substantially
involved in a common question of fact or law
whose presence is required if complete relief
is to be accorded in arbitration. No person
or entity other than the Owner, Contractor or
a separate contractor as described in Article
6 shall be included as an original third party
or additional third party to an arbitration
whose interest or responsibility is
4.5.7 Judgment on Final Award. The award rendered by the arbitrator or arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof.
Footnote: 2In addition to this action and the federal suit, the Rashids also have filed a lawsuit (Civil Action No. 90-C-2519) in Kanawha County Circuit Court against the City of St. Albans and the St. Albans Urban Renewal Authority (SAURA), who then filed a third party action against Amoco for the cost of reclaiming the site. The City of St. Albans and the SAURA also filed a third party action against One Valley Bank as trustee of the property owner who leased the land to Amoco.
Footnote: 3Ultimately, USF&G honored the labor and material payment bond, although it has not honored the performance bond.
Footnote: 4See also, United States Fidelity & Guaranty Co. v. West Point Construction Co., 837 F.2d 1507 (11th Cir. 1988); Hoffman v. Fidelity & Deposit Co., 734 F.Supp. 192 (D.N.J. 1990).
Footnote: 5See also Commercial Bank of Bluefield v. St. Paul Fire & Marine Ins. Co., 175 W.Va. 588, 336 S.E.2d 552 (1985); Emmons-Hawkins Hardware Co. v. Sizemore, 106 W.Va. 259, 145 S.E. 438 (1928).
Footnote: 6Specifically, the district court found:
Having concluded in general that USF&G is
bound by the arbitrator's award insofar as it
determined Schenck Construction's liability to
the Rashids under the referenced contract,
practical problems remain. While federal law
would doubtless have required USF&G to
arbitrate its defenses along with those of
Schenck Construction, that scenario did not
occur and USF&G should not be bound by the
award to the extent that it is based in whole
or in part on unbonded obligations. The West
Virginia statute and subsequent case law also
dictate that USF&G be given the opportunity in
this action to present defenses personal to it
that were not raised in the arbitration
proceeding. There being disagreement between
the parties about the issues decided by the
arbitrators, they will be given an opportunity
to present their positions on the matter.
Id. at 35 (footnote omitted).