Great American Insurance Co. v. Johnson Controls, Inc.

Surety - Performance Bonds - Declaratory Judgment, Arbitration or Stay Pending Other Resolution
Arbitration and Administrative Dispute Resolution

In Great American Insurance Co. v. Johnson Controls, Inc., 2020 U.S. Dist. Lexis 141454 (S.D. Ohio August 7, 2020), a first-tier subcontractor (Johnson Controls) was the obligee of a performance bond furnished by a second-tier subcontractor.  The subcontract had an arbitration provision calling for use of the AAA Construction Industry Rules, and the bond incorporated the subcontract by reference.  The second-tier subcontractor allegedly failed to perform some of the work.  After Johnson Controls’ cost to complete the work escalated over time, the surety filed suit seeking to limit or eliminate its bond liability.  The surety argued that the lawsuit was over its bond obligations and not subject to arbitration.  The court found that determination of the scope of the arbitration provision was, in the first instance, for the arbitrator not the court.  The court stated, “[i]ncorporating the AAA Construction Industry Rules . . . presents clear and unmistakable evidence that the parties intended to reserve arbitrability questions for an arbitrator.”  The court noted that “it is not determining that the present dispute is arbitrable, but only that an arbitrator must decide that issue.”  The court denied Johnson Controls’ motion to stay the case (which would have had the effect of preventing an appeal of the decision), and instead dismissed the action without prejudice.