Transamerica Premier Ins. v. Collins & Co.
735 F. Supp. 1050 (1990)
Rule of Law:
When a performance bond incorporates by reference a subcontract, it also incorporates the arbitration clause contained within that subcontract, thereby binding the surety to arbitrate disputes covered by the bond.
Facts:
- Collins & Company, General Contractors, Inc. ('Collins') and Roswell Steel, Inc. ('Roswell') entered into a subcontract for Roswell to provide and install steel for a construction project.
- The subcontract contained a clause requiring all disputes arising from the agreement to be decided by arbitration.
- In connection with this subcontract, Transamerica Premier Insurance Company ('Transamerica') issued a performance bond naming Roswell as the principal and Collins as the obligee.
- The performance bond issued by Transamerica contained a provision stating that the subcontract 'is hereby referred to and made a part hereof.'
- A dispute arose between Collins and Roswell concerning the subcontract.
Procedural Posture:
- Collins and Roswell initiated arbitration proceedings before the American Arbitration Association.
- Collins filed a Demand for Arbitration, seeking to have Transamerica join the proceedings.
- Transamerica filed a Complaint for Declaratory Judgment against Collins in the Superior Court of Cobb County, Georgia (a state trial court), arguing it was not required to arbitrate.
- The state trial court granted Transamerica a temporary restraining order, which stayed the arbitration for one month.
- Collins removed the case from the state trial court to the United States District Court for the Northern District of Georgia.
- In the federal district court, Collins filed a Motion for Judgment on the Pleadings, asking the court to rule in its favor based on the undisputed facts in the legal filings.
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Issue:
Does a performance bond that incorporates a subcontract by reference also incorporate the subcontract's arbitration clause, thereby binding the surety to arbitrate disputes?
Opinions:
Majority - Hall, Robert H.
Yes. A performance bond that incorporates a subcontract by reference also incorporates the subcontract's arbitration clause. The court's reasoning is grounded in both contract law and federal policy. First, it relies on the Eleventh Circuit precedent set in United States Fidelity and Guaranty Co. v. West Point Construction Co., which held that incorporating a subcontract into a bond expresses the parties' intent to arbitrate. Second, the court adheres to the general contract principle that incorporation by reference is effective to accomplish its intended purpose. Third, the decision is heavily influenced by the strong federal policy favoring arbitration, as codified in the Federal Arbitration Act, which governs the dispute. The court also dismisses Transamerica's argument that the bond's use of the word 'suit' contradicts an agreement to arbitrate, finding the term generic enough to include arbitration proceedings.
Analysis:
This decision solidifies the principle that incorporation by reference in a surety bond is comprehensive, binding the surety to all terms of the underlying contract, including procedural ones like arbitration clauses. It reinforces the robust federal policy favoring arbitration under the Federal Arbitration Act, demonstrating that courts will broadly construe such clauses to compel arbitration. The ruling serves as a significant precedent for surety companies, putting them on notice that they cannot selectively adhere to an incorporated contract's terms and must explicitly exclude any provisions, like arbitration, if they do not wish to be bound by them. The case highlights the preference for federal precedent and policy over conflicting out-of-state case law when a federal act is applicable.
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