By Leslie King O’Neal
The “Do Nothing” Strategy is Risky in Arbitration
Parties have options when faced with a demand for arbitration. They can participate in the arbitration process, receive the arbitration award and pursue confirmation or vacatur, if appropriate. Or parties can put their heads in the sand, choose to “do nothing” and simply ignore the arbitration demand. Unlike litigation, in arbitration there are no defaults on liability for parties who don’t respond or participate. AAA Construction Arbitration Rule R-31 states, “An award shall not be made solely on the default of a party.”[i]
However, the AAA rules allow arbitration to proceed without the non-participating parties and, as this case shows, the award may bind them.
Payment Bond Claim Creates 15 Years of Litigation
The lengthy saga of Eastern Steel Constructors, Inc. v. International Fidelity Insurance Co.[ii] is the poster child for how conflicting dispute resolution clauses and dogged opposition combine to prolong litigation. Resolving a seemingly simple payment bond claim required an arbitration, a lawsuit and two appeals. Courts have noted that arbitration clauses may exacerbate disputes rather than providing fast, efficient, dispute resolution.[iii] Here, the surety’s refusal to participate in arbitration led to over a decade of litigation.
A Common Fact Pattern: Surety Issues Payment Bond
The fact pattern for this case was a common one. Ionadi Corporation contracted with Penn State University to erect steel for construction of the Millenium Center Complex on campus. Fidelity issued a $10.1 million payment bond for Ionadi. The bond guaranteed Ionadi’s obligation to pay Claimants, such as subcontractors. It also provided that the surety (Fidelity) was jointly and severally liable with Ionadi for payments due to claimants. Ionadi subcontracted with Eastern to install steel reinforcing material. The Subcontract provided disputes would be resolved through arbitration with the American Arbitration Association.
Key Differences in Payment Bond Create Conflict
Surprisingly, Fidelity’s payment bond, unlike most surety bonds, did not incorporate the subcontract by reference. Also, unlike the subcontract, the bond required claimants to sue the surety in court. These two differences contributed to the ensuing litigation. As noted in a prior post, conflicting dispute resolution clauses in construction project contracts often complicate the resolution process.
Subs Unpaid When General Contractor Goes Bust
Eastern worked on the project for about 18 months, but Ionadi paid its invoices only for the first five months. Then Ionadi stopped paying because of cash flow problems. Eastern made a claim on the payment bond for $622,182.90, which Ionadi owed. Fidelity made partial payment but there was a $253,788.08 balance remaining. Ionadi and Fidelity refused to pay the balance.
Sub Demands Arbitration, Notifies Surety
As the subcontract required, Eastern filed a demand for arbitration against the general contractor, seeking the balance due. This arbitration was consolidated with another subcontractor’s arbitration. Both subcontractors notified Fidelity of the arbitration, but Fidelity declined to participate. Then Ionadi filed bankruptcy, staying arbitration.
Surety: “I Don’t Want to Arbitrate & You Can’t Make Me!”
The arbitration proceeded after the stay was lifted. Fidelity attended the hearing and did not object to lifting the stay. The bankrupt general contractor did not defend itself in the arbitration. Despite multiple notices from the subcontractors, Fidelity refused to participate in the arbitration.[iv] After the subcontractors presented their claims, the arbitrator awarded Eastern $433,498.42, which included the subcontract balance plus interest and attorneys’ fees. The award also included $19,933.43 for arbitrator expenses. Eastern moved to confirm the award in the County Court of Common Pleas. Fidelity attended the hearing but filed no objection. Neither Ionadi nor Fidelity moved to vacate the award, which was confirmed into a final judgment.
Surety Resists Paying Judgment Confirming Award
Eastern sued Fidelity to enforce the arbitration award and collect on the judgment. It also made a statutory insurance bad faith claim. Finally deciding to participate, Fidelity moved for dismissal and for partial judgment on the pleadings, asserting it was not bound by the arbitration award and that the Pennsylvania insurance bad faith statute did not apply to a surety. Fidelity claimed it wasn’t bound by the arbitration award because it was not a party to the subcontract, it was not a party to the arbitration proceedings and it did not participate in them. The trial court rejected these arguments. After a jury trial, the court entered judgment for Eastern of $330,427.70, which included prejudgment interest.
Parties Go Another Round
Still intent on pursuing their claims, the parties cross-appealed to the Superior Court. Relying on a 1909 decision[v] the appellate court held Fidelity was bound by the arbitration award because its bond made it jointly and severally liable for all sums due to claimants. This included fees and costs Eastern incurred seeking recovery against the general contractor, but not its fees for the lawsuit against Fidelity. The court rejected Eastern’s insurance bad faith claim, finding the statute inapplicable to a surety.
Going for Round Three
Unsatisfied with the appellate court’s decision, the parties filed cross-petitions for appeal to the PA Supreme Court. Eastern requested review of the ruling that the insurance bad faith statute did not apply to sureties. Fidelity asked the court to review whether it was bound by the arbitration award and for attorney’s fees and interest.
PA Supremes: “Bad Faith” Statute Inapplicable to Sureties
Despite Eastern’s historical analysis of suretyship from Hammurabi’s Code through the mid-19th century, the Pennsylvania Supreme Court held that suretyship is not insurance and the bad faith statute did not apply to Fidelity.
“Do Nothing” Strategy Has Consequences for Surety
The surety’s “do nothing” strategy regarding arbitration ultimately failed. Rejecting Fidelity’s argument that it was unjust to find the arbitration award binding and conclusive on it because it lacked sufficient opportunity to defend itself, the PA Supreme Court held Fidelity was jointly and severally liable for the award. The court noted that, while Eastern could not compel Fidelity to arbitrate, it requested Fidelity’s participation numerous times.[vi] Fidelity had the opportunity to participate in the arbitration and chose not to do so. The court stated, ” . . . Fidelity was not forced to participate in an arbitration—it will simply have to bear the consequences of its decision not to.”
Takeaways
- Using a “do nothing” strategy in arbitration is risky, especially for entities guaranteeing another parties’ performance, such as sureties or guarantors.
- Conflicting dispute resolution clauses in construction project contracts increase the opportunity for controversy over which entity decides claims. This impairs fast, efficient dispute resolution .
[i] AAA Construction Arbitration Rules, https://www.adr.org/media/kydkdsn1/construction-industry-arbitration-rules-and-mediation-procedures-2024.pdf. AAA Rule 32 states that arbitration may proceed without a party if the party has received due notice. JAMS Rule 22(j) has similar provisions.https://www.jamsadr.com/rules-construction-arbitration
JAMS International Arbitration Rule 27 specifically deals with default. Rule 27-2 states, “The Tribunal will make no final award upon the default of a party without a determination made upon the submission of proof by the non-defaulting party of the validity and amount of that party’s claim. https://www.jamsadr.com/international-arbitration-rules
[ii] Eastern Steel Constructors, Inc. v. International Fidelity Insurance Co. (Case Nos: J-67A-2024, J-67B-2024) (PA Supreme Court, Middle District, February 18, 2026). https://law.justia.com/cases/pennsylvania/supreme-court/2026/103-map-2023.html
[iii] Retzios v. Epic Systems Corp. 126 F.4th 1282 (7th Cir. 2025) https://law.justia.com/cases/federal/appellate-courts/ca7/24-1701/24-1701-2025-01-24.html
[iv] “Throughout the arbitration proceedings, Eastern repeatedly notified Fidelity of the proceedings and invited Fidelity’s participation through various letters and communications. Fidelity did not accept any of these invitations or otherwise seek to intervene in arbitration.” Id. Among other reasons for refusing to participate, Fidelity asserted it did not sign the arbitration agreement. However, as noted in a prior post, parties may participate (and sometimes be compelled to participate) in arbitration even if they did not sign the agreement. The FAA requires arbitration agreements to be in writing, but it does not require all participants sign them.
[v] Conneaut Lake Agricultural Association v. Pittsburg Surety Co., 74 A. 620 (Pa. 1909). (holding an arbitration award is “conclusive and binding” on a surety if the surety had a fair opportunity to defend itself and protect its interests).
[vi] For example, in July 2011, Eastern’s counsel wrote the following email to Ionadi’s counsel: “Eastern offered [Fidelity] an opportunity to join this arbitration proceeding (since Eastern also has claims against [Fidelity] arising from its failure to pay Eastern the amounts due from its Principal, Ionadi), but [Fidelity] has refused to do so. To foreclose any claim of prejudice by [Fidelity] for not being included in this arbitration, as a condition of AAA’s approval of the proposed joinder, AAA should require Ionadi to advise [Fidelity] in writing of the proposed joinder, and the opportunity for it to elect to participate directly in the arbitration (if it so chooses).”
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