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Seaboard Surety Co. v. Board of Chosen Freeholders of County of Warren

Decided: February 2, 1988.

SEABOARD SURETY COMPANY AND FEDERAL INSURANCE COMPANY, PLAINTIFFS-RESPONDENTS,
v.
BOARD OF CHOSEN FREEHOLDERS OF THE COUNTY OF WARREN, DEFENDANT-APPELLANT



On appeal from the Superior Court, Law Division, Warren County.

Pressler, Bilder and Skillman. The opinion of the court was delivered by Pressler, P.J.A.D.

Pressler

This controversy arises out of contracts entered into by defendant County of Warren with a group of eight prime contractors for the construction of a new county correctional facility. A consolidated arbitration proceeding is presently pending to which the County and all prime contractors are named parties. During the pendency of the arbitration proceeding but before the holding of any hearings, two of the contractors against whom the County had asserted claims in arbitration, Roanoke Iron and Bridge Works, Inc. and Universal Tank & Iron Works, Inc., became insolvent and bankruptcy proceedings were commenced. Consequently and by operation of federal law, the further prosecution of the arbitration proceedings against these two contractors was automatically stayed. The underlying issue raised by this appeal is whether plaintiffs, who are their respective sureties and each of whom issued a performance bond to the County as required by state law, can either be compelled to arbitrate in their stead or be bound by the arbitration award without participating in the arbitration proceedings.

The trial court entered judgment declaring that the sureties have a contractual obligation to arbitrate and that each had received "sufficient notice of and opportunity to defend the demands for arbitration served upon them by the county." The judgment, however, stayed performance of the sureties' arbitration obligation until the determination in the bankruptcy proceedings of the obligations of each of the contractors to the county or until entry of an order in the bankruptcy proceedings vacating the automatic stay of the arbitration. The County

appeals from the stay provision of the judgment. Neither surety has cross-appealed.

The critical facts are largely undisputed. On January 12, 1983 the County entered into a contract with Universal Tank & Iron Works, Inc. for the supply and installation of water supply systems for the proposed correctional facility at the bid price of $226,649. On the same day plaintiff Federal Insurance Company issued a performance bond in favor of the County in that amount. On August 31, 1983 the County entered into a contract with Roanoke Iron & Bridge Works, Inc. for the supply and installation of prison and detention equipment at the bid price of $787,000, and on the same day, plaintiff Seaboard Surety Company issued its performance bond in favor of the County in that amount.*fn1 All eight prime contracts, including these two, were in standard American Institute of Architects form and contained a provision binding the parties to arbitration by the American Arbitration Association of all contractual disputes.

In May 1985 one of the other contractors, Soldo Construction Co., Inc., filed a demand for arbitration against the County. The County responded in September 1985 by filing a counter-demand against Soldo and by filing its own demands against the other seven contractors, most of whom, including Universal Tank, then filed a counter-demand. The arbitration proceeding continued through its various prehearing stages, all eight contractors, including Roanoke and Universal Tank, actively participating. In June 1986 all of the various arbitration demands and counter-demands were consolidated by the American Arbitration Association for determination by a single panel of arbitrators. In September 1986 respective counsel for Roanoke and Universal Tank advised the County that their clients had

become debtors in federal bankruptcy proceedings -- Roanoke in Virginia and Universal Tank in Indiana.

During the next two months, the County attempted to obtain the consent of each of the two contractors to the continuation of the arbitration despite the automatic stay of proceedings against them. By mid-November 1986 both had refused to do so. In the meantime, in mid-October 1986, the County wrote to each of the sureties informing it of the pendency of the consolidated arbitration proceeding, advising it of its venue and docket number, and further advising that, "[t]his letter will serve as the County's formal notice to you that a claim has been made by the County against the Principal on the Performance Bond." Seaboard, Roanoke's surety, replied to the County's notice by letter dated November 3, 1986, requesting, "[i]n order that Seaboard may be better apprised of the issues involved in said arbitration," that the County "furnish us with copies of the claims made by the respective parties, the dates these claims were filed, and advise whether any hearings have been held to date in the subject arbitration." The record does not indicate a response to the notice by Federal, Universal Tank's surety. In any event, by mid-November the County was advised by the two insolvent contractors that neither would consent to continued participation in the arbitration proceeding, and the County forthwith filed an arbitration demand against each of the sureties, seeking to have them arbitrate in the place and stead of their principals.

As of the time the County served its arbitration demands on the sureties, no formal hearings had yet taken place in the consolidated arbitration proceedings, which were still at a relatively preliminary stage. According to the County, shortly after the demands were served, a preliminary conference was held for the purpose of fixing a schedule for the submission of written claims by the parties and the tentative setting of hearing dates. The County, pursuant to the schedule, served its ...


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