Sureties may be bound by mandatory arbitration provision in a principal’s contract per a recent ruling by the U.S. District Court for the District of South Carolina.

Surety claim representatives must frequently decide whether to contest or participate in arbitration because of an arbitration provision in a bonded contract. A recent South Carolina opinion sheds light on sureties’ ability to contest mandatory arbitration.

In Developers Surety and Indemnity Company v. Carothers Construction, Inc., the bonded subcontract included a mandatory arbitration provision and an arbitration forum selection clause for the bond principal to perform work on a project at the Marine Corps Air Station Beaufort. The general contractor Obligee filed a demand for arbitration, alleging that the bond principal had defaulted and abandoned the project, and seeking alleged damages of over $4 million on the MCAS Beaufort project, as well as four unrelated projects in as many states.

The U.S. District Court for the District of South Carolina ruled that, under South Carolina law, sureties are bound by a mandatory arbitration provision applying broadly to the bonded contract if the bond incorporates the contract.

The Court ruled that the surety was bound by the mandatory arbitration provision because:

  • the Payment and Performance Bonds incorporated the subcontract by reference;
  • the Obligee’s claims arose from the subcontract, and
  • the subcontract’s arbitration provision was broad enough to include the Obligee’s claim.

As a result of this recent decision, and with broadly drafted arbitration provisions increasingly common in bonded contracts, surety claim representatives should carefully assess their ability to avoid arbitration. To avoid a similar ruling, sureties should distinguish the language of the bond and the bonded contract’s arbitration clause as narrowly drafted to exclude the subject claim.