What happens if a subcontractor files a payment bond lawsuit but the underlying contract requires the subcontractor to arbitrate its claims against the general contractor? The subcontractor will smartly want to preserve its payment bond rights by filing a lawsuit within the statute of limitations. But, what if the general contractor wants to pursue claims against the subcontractor in arbitration? The answer is that courts have discretion to stay litigation pending the outcome of arbitration. Hence, courts have discretion to stay a subcontractor’s payment bond lawsuit pending the outcome of arbitration between a subcontractor and general contractor. The rationale is that the underlying factual issues between the subcontractor and general contractor will be resolved in the arbitration and potentially render the payment bond litigation moot.
For example, think of the garden-variety subcontractor and general contractor payment dispute. The subcontractor claims it is owed money for performed work. The general contractor claims the subcontractor is not owed money because the subcontractor performed defective work. In this scenario, the general contractor furnished a payment bond, and the subcontractor sues the payment bond. After the subcontractor filed its lawsuit, the general contractor demands arbitration against the subcontractor pursuant to the subcontract agreement. The payment bond surety (being defended and indemnified by the general contractor) moves to stay the subcontractor’s payment bond lawsuit pending the outcome of the arbitration. The court, exercising its discretion, elects to stay the payment bond litigation pending the outcome of arbitration because (i) the subcontractor contractually agreed to arbitrate its claims with the general contractor and (ii) the arbitration would resolve the predominant factual issue in dispute as to whether the general contractor owed the subcontractor money. If the general contractor does not owe the subcontractor money, then the subcontractor will not have a payment bond lawsuit (against the general contractor’ payment bond sureties).
If you are involved in a similar circumstance where the underlying subcontract contains an arbitration provision and you want to pursue or defend a payment bond claim, consult with counsel to determine the best course of action.
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