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Can a Surety be Compelled to Arbitration by an Arbitrator Rather than the Court?

By September 15, 2020September 29th, 2020No Comments
Surety Arbitration

Most sureties are aware depending on the language of the underlying bond, the surety can be compelled to arbitrate when the underlying contract it guarantees contains a valid and enforceable arbitration clause.  However, what happens when the claimant seeking arbitration bypasses the courts, and simply requests that the arbitration provider (such as The American Arbitration Association (AAA)) compel arbitration?  Can AAA, not the courts, compel a surety to arbitrate?   

The answer, probably not.  

Proponents of allowing an arbitrator such power have argued exhaustively that when a surety issues a performance bond to a subcontractor and that bond incorporates a subcontract containing an arbitration provision, that (1) not only is the surety bound by the arbitration provision, but (2) the arbitrator, rather than a court can compel the surety to the arbitration.

The oft-cited California case in support of this contention, Boys Club of San Fernando Valley, Inc. v. Fidelity & Deposit Co., 6 Cal.App.4th 1266 (1992), holds a surety may be compelled to arbitration under the circumstances outlined above.  However, this California Court of Appeals decision does not answer the question of who may compel a surety to arbitration; the arbitrator or the court.  Thus, while the answer to Question 1 above may be yes, the answer to Question 2 is no.

Pursuant to California Code of Civil Procedure section 1281.2, when a party to a written arbitration agreement refuses to arbitrate, the other party can petition the court to order the refusing party to arbitration, “if [the court] determine[s] that an agreement to arbitrate the controversy exists…”

In addition, the United States Supreme Court has held that the courts, not arbitrators, decide particular arbitration-related matters, including certain “gateway matters, such as whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy.”  (Green Tree Financial Corp. v. Bazzle,  539 U.S. 444 (2003).  Under these gateway matters fall questions of arbitrability for which an answer will determine whether the underlying controversy will proceed to arbitration on the merits.  (Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002).)

The Supreme Court has held the phrase ‘question of arbitrability’ applicable in the narrow circumstance where contracting parties would likely have expected a court to have decided the gateway matter, where they are not likely to have thought that they had agreed an arbitrator would do so…”  (Id.)  To that point, courts have consistently held that only if the parties to the underlying arbitration agreement specifically grants the arbitrator with the jurisdiction to decide the arbitrability of the case, the arbitrator can compel a party to arbitration, otherwise, it is squarely an issue for the court.  (Gilbert Street Developers, LLC. v. La Quinta Homes, LLC 174 Cal.App.4th 1185, 1190 (2009).)

Thus, where a party seeking to arbitrate a matter would like to compel a party, allegedly a party to the arbitration clause, that party must petition the court to compel arbitration, not the arbitrator.

For more information about the surety’s obligation to arbitrate a dispute please contact Principal Attorney Colin K. McCarthy, ckmccarthy@lanak-hanna.com.

The information contained herein is not advice and should not be treated as such. 

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