By Brian M. Streicher
Unless it manifests an intent to the contrary, a surety is bound to the forum selection of the incorporated bonded contract, even where the incorporated contract incorporates another contract containing the forum selection clause. That was the message communicated by a Pennsylvania federal district court in Pioneer Mechanical Services v. HGC Construction Co.[1]
In Pioneer, the surety was named as a third-party defendant in an action filed by the subcontractor (principal) against the contractor (bond oblige) on a performance bond. During construction, the principal allegedly defaulted. The obligee claimed to have incurred costs to complete the principal’s work and made a claim on the bond. The principal asserted that it was not paid what was owed by the obligee.
At issue was the bond’s incorporation of the terms of the subcontract, specifically the venue selection. The bond stated that the Subcontract was “by reference made a part [of the bond].” The subcontract itself was a rider to, and incorporated by reference a certain master subcontract agreement (“MSA”), which in turn contained a mandatory forum selection clause for litigation in the state or federal courts in Hamilton County, Ohio.
The principal filed suit against the obligee in the Western District of Pennsylvania. The obligee moved to change the venue of the lawsuit, including its third-party action against the surety, to the Southern District of Ohio pursuant to the subcontract’s forum selection clause. The surety aggressively opposed the move, arguing that, since it was not a party to the MSA, it was not bound to its terms. The obligee maintained that the bond incorporated all of the provisions of the subcontract, the subcontract incorporated all of the provisions of the MSA, the MSA contained the mandatory forum selection clause and, thus the bond incorporated the mandatory forum selection clause, binding the surety.
The court agreed with the obligee, holding that the bond incorporated the subcontract’s venue selection clause, and transferred the case to the Southern District of Ohio. The court noted that the bond made clear reference to the subcontract, referring to it by contract number. The court reasoned that the surety stepped into the shoes of the principal, who was bound by the clause through traditional principles of incorporation by reference.
The court rejected the surety’s argument that the clause could only bind the original parties to the MSA and that the “multi-layered” nature of the incorporation rendered the clause unenforceable. The court all but chided the surety, stating that it would “declin[e] to assume that a sophisticated party such as the surety here would fail to read past the [R]ider to the [MSA] when agreeing to ensure that all work under the Subcontract would be performed.”
Instead the court suggested that, to avoid this dilemma, the surety can change the language of the bond. Citing other federal cases, the court stated: “[w]here a bond is involved, if the bond places limits on the incorporated agreement, those limits may evidence the intent of a surety not to incorporate all of the terms of the [incorporated] contract.” The court observed that the bond in this case “does not limit which of the terms of the [s]ubcontract was incorporated. Nor does it include its own forum selection clause.”
The decision does not reveal the specific bond form used by the parties. Yet, given that bonds typically do not address dispute resolution or forum choice specifically, results like this suggest it may be time for sureties to consider doing so, at least when bond forms are not designated by the bond obligee and terms can be negotiated. At a minimum, this is a good reminder to sureties and their counsel of the importance of specifically reviewing all bonded contracts for forum and venue selection provisions prior to issuance of the bond, including all documents incorporated by reference into the bonded contract.
End Notes:
[1] 2018 U.S. Dist. LEXIS 209349 (W.D. Pa. Dec. 12, 2018).
Brian M. Streicher is an associate attorney at Ernstrom & Dreste, LLP in Rochester, New York, focusing his practice on construction and surety litigation, complex commercial litigation, real estate and construction finance, alternative dispute resolution, and bankruptcy. Streicher has extensive experience litigating commercial disputes in various state and federal courts in New York and Florida. The Florida Bar Journal has published multiple articles authored or co-authored by Streicher. He holds a Juris Doctor from Case Western Reserve University School of Law and a Bachelor of Arts from the State University of New York, College at Geneseo. He can be reached at bstreicher@ed-llp.com or 585.473.3100.