F. Arbitration

• Library: SC Construction Law Desk Book (SCBar) (2013 Ed.)

F. Arbitration¹¹⁵

1. Enforceability of Arbitration Clauses

Traditionally, most construction contracts have contained arbitration clauses, particularly if standard AIA contracts were used prior to 2007. Construction bonds typically incorporate by reference the contract between the principal and obligee, thereby incorporating the arbitration clause. As a result, the surety is typically bound to arbitrate disputes arising from obligations covered under its bonds.¹¹⁶While this proposition appears to be simple, complex issues can arise. For example, is the surety bound by the results of arbitration between the obligee and principal when the surety was not a named party to the arbitration? Also, does notice to the unnamed surety in the arbitration between the obligee and principal bind the surety?

The authorities from the various jurisdictions are divided on these issues. Some jurisdictions hold the surety responsible for judgments against the principal, even if the surety did not participate in the arbitration.¹¹⁷ In Massachusetts, the surety is required to seek adjudication through arbitration even though the performance bond does not contain an arbitration clause if it incorporates by reference the underlying construction contract that contains arbitration language.¹¹⁸ Other jurisdictions will not bind the surety unless the surety is a named party to the arbitration.¹¹⁹

2. Surety Bound by Obligee/Principal Arbitration

South Carolina case law does not provide any guidance on whether a surety is bound by the obligee/principal arbitration. South Carolina courts have held that in the context of litigation, a judgment against a principal is binding and conclusive on a surety.¹²⁰ In International Fidelity Insurance Co. v. China Construction, the Court relied on the case of Ward v. Federal Insurance Co. to reach this conclusion.¹²¹ Citing Ward, the Court stated that:

As a general rule, in all cases where the liability of a surety is dependent on the

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