Subcontractor Must Arbitrate Against Contractor Before Suing Bonding Company
Kegler Brown Construction Newsletter May 1, 1998
A California appellate court has ruled that a subcontractor must finish his arbitration proceedings against the prime contractor, before he can file suit against the contractor's surety on the payment bond. Federal Ins. Co. v. Superior Court, 1998 WL 18054 (Jan. 21, 1998).
A similar result might be reached under Ohio law in that O.R.C. §2711.02 requires the Court to stay the entire court "action" (until the arbitration is concluded), if there is a mandatory arbitration provision dealing with the dispute.
This means that any action against the surety under the payment bond is delayed because subcontractors generally cannot arbitrate against a surety because they do not have privity of contract.
This case points out one of the practical disadvantages of arbitration for subcontractors on bonded public projects. A subcontractor interested in a timely and cost-effective resolution of his payment claim may be frustrated by finding that he not only is unpaid following an arbitration with an insolvent or uncooperative contractor, but also that he has to file suit in this "second action" against the surety to actually get paid.