Florida law generally favors arbitration as a matter of public policy. Although traditional arbitration administered by the American Arbitration Association (AAA) is not always less expensive or time-consuming than litigation, given its flexibility and the use of a knowledgeable trier of fact, arbitration can be well-suited to resolve construction disputes.
Sureties are playing a more prominent role in construction projects as governmental agencies and an increasing number of private project owners are requiring general contractors to obtain surety bonds before they commence work on construction projects.
Can a surety compel construction parties to arbitrate a construction dispute? In Florida, a surety may move to compel arbitration in accordance with an arbitration clause found within the terms of a contractor/subcontractor’s construction contract when the surety bond incorporates the construction contract containing the arbitration clause and the surety binds itself to participate and be bound by the arbitration.
Case in point is Henderson Inv. v. International Fidelity Ins., 575 So. 2d 770 (Fla. 5th DCA 1991). In Henderson, a Florida appellate court affirmed a trial court’s order granting a surety’s motion to compel arbitration based on an arbitration provision in a bonded contract. Henderson Investment Corporation (the property owner) executed a contract with Hinds and Underwood Inc. (the contractor) for the construction of a Goodyear Service Center in Ocala. Under the contract, the owner and the contractor each agreed to bind himself, his partners, successors, assigns and legal representatives to the other party in respect to all covenants, agreements and obligations contained in the contract. The contract also contained an arbitration provision.
After the contract was executed, International Fidelity Insurance Company (the surety) furnished a performance bond in favor of the owner to secure the contractor’s performance under the contract. The performance bond expressly referenced the construction contract making the construction contract “part” of the performance bond agreement.
Thereafter, the owner filed a complaint against the surety alleging that the contractor breached the general contract by constructing a defective roof, installing defective plumbing, and installing a defective air conditioning system. The surety then filed a motion to compel arbitration and stay further proceedings in the lawsuit. The motion was granted by the trial court.
On appeal, the owner argued that the surety could not rely on the arbitration clause in the construction contract because the surety was not an intended third party beneficiary as between the owner and the contractor. The appellate court rejected the owner’s arguments and affirmed the order granting the surety’s motion to compel arbitration. The appellate court reasoned that the performance bind incorporated the construction contract, including the arbitration provision.
The Henderson Court distinguished another Florida appellate decision, Excavating Engineers, Inc. v. National Fire Ins. Co. of Hartford, 524 So. 2d 1112 (Fla. 4th DCA 1988), which held that a surety had no right to arbitrate because the surety was not intended to benefit from subcontract between subcontractor and contractor. The Henderson Court explained that it is not the third party beneficiary status which gives a surety the right to invoke an arbitration clause, but rather a surety’s status as the real party in interest/joint and several obligor, where it has expressly incorporated the terms of a construction contract containing an arbitration clause into a bond.
In Florida, a surety can compel arbitration pursuant to an arbitration clause contained in a construction contract that is incorporated by reference into a surety bond. Therefore, a surety should have full knowledge of the terms of construction contracts relating to its bonds. A surety seeking to ensure that a construction dispute is subject to arbitration can affirmatively address this by including arbitration language in the bond.