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An arbitration provision in a contract typically applies only to the contracting parties. Where, however, the contract is incorporated by reference into a second agreement, if it is broad enough, the party to the second agreement–although a non-signatory to the original agreement–may find that the arbitration provision applies to them as well. This was the result in a case before the Second Circuit involving a surety on a performance bond. In Federal Insurance Co. v. Metropolitan Transportation Authority, No. 18-3664 (2d Cir. Aug. 30, 2019) (Summary Order), a surety on a performance bond brought suit against the public transportation authorities that contracted with the contractor principal. The public authorities moved to dismiss the claim based on the arbitration clause in the underlying contract. The underlying contract had a broad arbitration clause, which provided that the “parties to this Contract hereby authorize and agree to the resolution of all disputes arising out of, under, or in connection with, the Contract” through arbitration. The underlying contract and all of its terms were expressly incorporated by reference into the performance bond. The district court concluded that the surety was bound by the arbitration On appeal, the Second Circuit affirmed. The court made two significant findings. First, the court agreed that the district court had properly concluded that the dispute was subject to determination under the arbitration provision in the underlying contract. Because the broad arbitration clause was not restricted to the immediate parties, the court held that it was effectively incorporated by reference into the performance bond. The court found the language of the arbitration provision sufficiently broad to bind the surety even though it was a non-signatory to the underlying contract. Second, the court held that the question of arbitrability was for the arbitrator to decide. This was because the contract used “any and all” language when describing the disputes to be resolved, which was “clearly and unmistakably” broad enough to require the issue of arbitrability to be decided by the arbitrator and not the court. https://www.natlawreview.com/article/non-signatory-surety-bound-arbitration-clause-incorporated-contract

Following up on our previous bulletin, Performance Bonds: What Project Finance Lenders Should Know, in this bulletin, we compare the widely used Canadian Construction Documents Committee’s Performance Bond Form 221-20021 (“CCDC Form”) with the new Form 32 – Performance Bond that is mandated for certain projects by the Ontario Construction Act2 (“Form 32”). Background Pursuant to section 85.1 of the Construction Act and section 12 of the accompanying General regulation, all “public contracts” with a contract price of $500,000 or more require the contractor to furnish both a performance bond and a labour and materials bond that, in each case, must be in the prescribed forms and have coverage limits of at least 50% per cent of the contract price.3 The Act defines a “public contract” as a contract where the owner is the Crown, a municipality or a broader public sector organization, but excludes contracts where the contractor is an architect or engineer from the application of that section.4 Thus, the provision is meant to capture all government-procured construction contracts with a contract price of $500,000 or more. In the context of public-private partnership (“P3”) and alternative financing and procurement (“AFP”) projects, section 1.1(4) of the Act clarifies that the “public contract” for the purposes of section 85.1 is not the typical project agreement between a special purpose vehicle and the government entity, but rather the “dropdown” construction contract or design-build contract between that special purpose vehicle and the contractor.5 Section 3 of the General regulation further stipulates that the minimum coverage limits for the bonds are capped at $50 million for P3 or AFP projects – i.e., the 50% requirement does not apply to projects with a contract price greater than $100 million.6 As with the other new provisions of the Act, the requirements of section 85.1 do not apply to contracts where the procurement process was commenced before July 1, 2018.7 Under section 1(4) of the Act, a procurement process begins whenever a request for qualifications, request for quotation, request for proposals, or a call for tenders is first made.8 In the context of projects procured by Infrastructure Ontario, for example, this would be the date that the request for qualifications is issued for a typical procurement. Notably, a market sounding or a Request for Expression of Interest issued by Infrastructure Ontario does not on its own constitute the commencement of a procurement process.9 Form 32 Form 32 to the Construction Act was developed by the Ministry of the Attorney General of Ontario in close consultation with the Surety Association of Canada and other industry stakeholders. It is intended to be a complete, detailed code of conduct governing the relationship between the surety, the owner, and the contractor, and is designed to address some of the deficiencies of the very short and potentially ambiguous CCDC Form. Form 32 is significantly longer and more detailed as compared to the CCDC Form. Unlike the CCDC Form, which is a 1 page document, Form 32 (in blank form, together with Schedules and Appendices) is 12 pages long. It sets out a detailed claims regime addressing, among other things: specific parameters for written notice (including various prescribed forms), a mandatory pre-notice meeting and post-notice conference, specific timelines for the surety’s investigation and response, a regime for necessary interim work and mitigation work, specifics regarding the owner’s direct expenses to be paid by the surety, and a detailed checklist of documents that must be delivered to the surety when a claim is made. Mandated Timelines A key new feature of Form 32 is that it introduces mandatory timelines for notice, investigation, and response following an alleged default. The CCDC Form does not mandate such timelines, instead relying on the reasonableness of the parties. Under the new Form 32, after receipt of a demand under the bond from the owner in the form of Schedule A to Form 32, the Surety must, within four business days, deliver to the owner an acknowledgement in the form set out at Schedule B. Furthermore, within twenty business days, the Surety must deliver a complete written response to the demand, based on its investigations and review, in the form of Schedule C. The surety must also propose a “Post-Notice Conference” within five business days or such longer period as may be agreed. Other Differences between the CCDC Form and Form 32 An apparently minor but consequential difference between Form 32 and the CCDC Form is the definition of “Contract” in the preamble. Form 32 incorporates not only the underlying contract but also “amendments made in accordance with its terms”. This language is not effectual on its own but where the underlying contract includes terms allowing minor variances and amendments, this more incorporative language may offer better protection against a surety who claims to having been discharged due to a variation in the contract without their consent. As noted above, article 1 of Form 32 imposes an express notice requirement and details the necessary procedure for declaring a principal in default. While notice to the surety was always a functional requirement due to the need to declare the principal in default, this new term makes this requirement express and adds procedural clarity. Section 1.2 also establishes a procedure for notice in cases with multiple sureties. Article 2, which requires a “Pre-Notice Meeting”, and article 5, which requires a “Post-Notice Conference”, provide the parties with a mandatory regime for meetings and communications both before and after the declaration of default. This appears to codify, and reinforce, the common recommendation that the bond parties communicate openly and often in respect of the bonded work and any potential issues. Article 3 imposes an express obligation on the surety to investigate a declared default and sets a timeline for their response to the obligee’s notice. This codifies the surety’s common law right to investigate defaults prior to responding to a claim but notably circumscribes that right by imposing a time limit on any investigations and establishing requirements for the response. Article