ARBITRATION PROVISION IN HOMEBUILDER’S WARRANTY AGREEMENT WITH HOMEOWNERS IS UNENFORCEABLE

shutterstock_17206660Buying a new home from a homebuilder is an exciting time.  How could you not be excited about buying and moving into a new home?   It is a big milestone.  When buying a new home from a homebuilder, it is common that you are provided a limited warranty agreement to sign that outlines your rights if there is a “warranty” claim, the length of the warranty period, what constitutes a valid warranty claim, and includes an arbitration provision requiring you to arbitrate claims arising out of the agreement or home.  It is also common that such limited warranty agreement contains important disclaiming language.  Homeowners should always consider what they sign, but the reality is that most homeowners are going to absolutely sign what the homebuilder wants them to sign (and the homebuilder may even be unwilling to sell a home without certain signatures that offsets their risks).   

 

A recent case, Anderson v. Taylor Morrison of Florida, Inc., 42 Fla. L. Weekly D1232a (Fla. 2d DCA 2017), potentially changes certain business practices of a large homebuilder, and perhaps many homebuilders, when the arbitration provision in its limited warranty agreement was deemed void against public policy.  The homebuilder’s limited warranty agreement is likely a standard form agreement that all of its homeowners sign with identical language.  Thus, this ruling impacts not only the enforceability of the arbitration provision in this case, but of any claim by a homeowner that signed the same limited warranty agreement.  This is certainly not what the homebuilder wanted when it thought it was containing disputes to arbitration and not litigation.

 

In this case, homeowners sued the homebuilder years after completion for a defect in the stucco system of their home.  One of the claims was a statutory violation of building code claim.  The homebuilder moved to compel arbitration pursuant to the limited warranty agreement that contained in material portion:

 

This Dispute Settlement provision sets forth the exclusive remedy for all disputes, claims or controversies arising out of, or in any manner related to, this Warranty or any alleged issues in your home or property. All disputes, claims or controversies which cannot be resolved between TM [the Builder] and you shall be submitted by you, not later than ninety (90) days after the expiration of the applicable warranty period, to the American Arbitration Association (“Arbitrator”) for resolution in accordance with the rules and regulations of the Arbitrator. The final decision of the Arbitrator shall be binding on all parties and shall include final decisions relating to enforcement of the terms and provisions of this Warranty. 

***

BUYER AGREES THAT THIS LIMITED WARRANTY SHALL BE THE EXCLUSIVE REMEDY FOR ANY ISSUES IN DESIGN, MATERIALS OR WORKMANSHIP. BUYER HERBY [sic] ASSUMES THE RISK OF ALL OTHER LOSS RESULTING FROM SUCH ISSUES, INCLUDING ANY CLAIMS FOR PROPERTY DAMAGE OR PERSONAL INJURY, AND WAIVE [sic] ALL OTHER CLAIMS, WHETHER IN CONTRACT, TORT OR OTHERWISE.

 

The trial court compelled arbitration per the limited warranty agreement.  On appeal, however, the Second District Court reversed finding that the arbitration provision was unenforceable against public policy because it prohibited the homeowners from pursing a statutory building code violation claim (i.e., that the stucco system was not installed as required by the governing building code).  See Anderson, supra (“The arbitration provision in the Warranty indicates that all issues related to the Warranty, the home, or the property are to be arbitrated. But read in context with other provisions in the Warranty, particularly the disclaimer provision, it is evident that the alleged building code violations cannot be remedied through arbitration because the claims are not covered by the Warranty and all non-Warranty claims are waived… Simply put, the arbitration provision here effectively limits the Andersons’ [homeowner] remedies to Warranty claims, as defined in the documents, and does not just substantially diminish the Andersons’ statutory remedy for a violation of the building code but totally eliminates it.”). 

 

 

Here, the import of the issue, in my opinion, is not necessarily the arbitration provision, but the capitalized disclaiming language that ultimately operates to disclaim liability for latent defects – or defects not readily observable, particularly at the time of closing.  A latent defect is a defect oftentimes discovered beyond the warranty period.  A warranty period really pertains to the period where the contractor or builder agrees to show back up to the property to address post-punchlist related items.  When this period expires (whether it is a contractual warranty period or statutory warranty period in the case of condominiums) does not mean a homeowner no longer has any recourse.  That recourse is based on whether the defect is a latent defect.    The disclaiming language in the limited warranty agreement limits a homeowner’s remedies for certain latent defects.  When this language is read in conjunction with the arbitration provision, the homeowner is waiving rights for claims unrelated to true warranty claims, such as a statutory building code violation claim, while agreeing to arbitrate “permissible” claims under the limited warranty agreement arising out of the home.   This has the effect of preventing homeowners from arbitrating certain, valid claims.

 

It is uncertain how a trial court or appellate court will treat such disclaiming language other than any dispute arising out of the home needs to be litigated and not arbitrated.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

QUICK NOTE: AIM TO AVOID A STAY TO YOUR MILLER ACT PAYMENT BOND CLAIM

imagesStrategy is important.  This is especially true if you are trying to avoid arbitration.  In a recent federal district court case, a subcontractor sued the prime contractor and the Miller Act payment bond surety.  The subcontractor, however, had an arbitration provision in its subcontract with the prime contractor.  The prime contractor moved to compel arbitration pursuant to the subcontract and moved to stay the subcontractor’s Miller Act payment bond claim.  The last thing, and I mean the last thing, the subcontractor wanted to do was to stay its claim against the Miller Act payment bond.  However, the district court compelled the subcontractor’s claim against the prime contractor to arbitration and stayed the subcontractor’s Miller Act payment bond claim pending the outcome of the arbitration.  See U.S. v. International Fidelity Ins. Co., 2017 WL 495614 (S.D.Al.  2017).  This is not what the subcontractor wanted. 

 

The outcome of this ruling may have been different if the subcontractor never sued the prime contractor and only sued the Miller Act payment bond surety.  The Miller Act payment bond surety did not move to compel the Miller Act claim to arbitration evidently meaning there was nothing in the subcontract that would support such an argument.  Had only the Miler Act payment bond surety been sued, the subcontractor may have likely been able to proceed with its payment dispute against the surety in federal district court without having to worry about arbitrating the same dispute with the prime contractor. 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CAN A NON-SIGNATORY INVOKE AN ARBITRATION PROVISION?

imagesAs you know from prior postings, arbitration is a creature of contract.  Hence, if you want your disputes to be resolved through arbitration, as opposed to litigation, make sure to include an arbitration provision in your agreement that covers all disputes arising out of or relating to the agreement

 

Under certain circumstances, a non-signatory to an agreement wants to invoke an arbitration clause in the agreement.   The non-signatory will move to compel a signatory to the agreement (with an arbitration provision) to arbitrate a dispute with the non-signatory.  Can a non-signatory do this?   Yes, under certain circumstances. 

 

This issue was raised by the Eleventh Circuit Court of Appeal’s ruling in Kroma Makeup EU, LLC v. Boldface Licensing + Branding, Inc., 2017 F.3d 192690 (11th Cir. 2017).   In this case, a defendant moved to compel arbitration based on a licensing agreement it was not a party too.  The Eleventh Circuit explained that Florida’s doctrine of equitable estoppel gives a non-signatory an argument in certain circumstances that it can invoke an arbitration provision in a contract it is not a signatory too:

 

Under that doctrine [of equitable estoppel], a defendant who is a non-signatory to an agreement containing an arbitration clause can force arbitration of a signatory’s claims when “the signatory … must rely on the terms of the written agreement in asserting its claims against the nonsignatory.…” A non-signatory, however, cannot invoke the doctrine to compel arbitration of claims that are not within the scope of the arbitration clause. Equitable estoppel does not allow a nonsignatory to an agreement to alter and expand an arbitration clause that would not otherwise cover the claims asserted.

Kroma Makeup, supra, at *2 (internal citations omitted). 

 

This ultimately means the non-signatory must show 1) the signatory is relying on the underlying contract (with the arbitration provision) to assert claims and 2) the scope of the arbitration provision in the contract covers the dispute.  The non-signatory news to show both to compel arbitration.

 

In Kroma Makeup, although the defendant was being sued based on issues relating to the underlying contract, the arbitration provision in the contract stated that “the Parties agree that the disputes arising between them concerning the validity, interpretation, termination or performance” of the Agreement will be arbitrated.”  However, the defendant was not a “party” to the agreement; thus, the scope of the arbitration provision did not cover the dispute at-issue.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

SUBCONTRACTORS MAY (LIKELY) BE REQUIRED TO STAY THEIR MILLER ACT PAYMENT BOND CLAIMS PENDING THE OUTCOME OF THE CONTRACT DISPUTES ACT RESOLUTION PROCESS

UnknownIf you are a subcontractor on federal construction projects, the opinion by the District Court of Alaska in U.S. f/u/b/o Brice Environmental Services Corp. v. Bhate Environmental Associates, Inc., 2016 WL 544406 (D.Alaska 2016),  provides an interesting or not-so-interesting outlook on subcontractors that participate (perhaps by choice) in the request for equitable adjustment (REA) and Contract Disputes Act dispute resolution process.  (See this article for more on this outlook that creates a conflict between a subcontractor’s Miller Act payment bond rights and a prime contractor’s participation in the Contract Disputes Act dispute resolution process.) 

 

In this matter, a soil remediation subcontractor submitted an REA to the prime contractor for approximately $3 Million associated with the prime contractor’s standby and additional work directives.  The subcontractor claimed that most of the REA was unrelated to issues caused by the owner, but rather, caused by the prime contractor.  The subcontractor and prime contractor agreed to a mutual termination of the subcontractor and the subcontractor reduced its REA to approximately $1.1 Million (to include only incurred costs versus anticipated costs).  The prime contractor then submitted a change order request to the federal government.  The subcontractor shortly thereafter sued the prime contractor and its Miller Act payment bond surety.

 

The prime contractor and its Miller Act payment bond surety moved to stay the lawsuit pending the completion a Contract Disputes Act resolution and, if required, completion of arbitration thereafter.  The subcontractor did not oppose staying its Miller Act payment bond claim pending arbitration with the prime contractor, but opposed staying the case pending the resolution of the prime contractor’s Contract Disputes Act claim. However, the subcontractor acknowledged that claims attributable to the federal government are passed through to the government and that the subcontractor shall not maintain any proceeding against the prime contractor with respect to government-related (owner) claims until resolution of Contract Dispute Act claims.  Moreover, the subcontract provided for the completion of the Contract Disputes Act resolution process between the prime contractor and federal government before the subcontractor could maintain any proceeding against the prime contractor in connection with any omission, default, or act by the federal government.   

 

 

Here, the subcontractor could not establish that the federal government’s acts did not contribute to its claims against the prime contractor; and, the prime contractor submitted a change order to the federal government that included the subcontractor’s costs supporting its position that the federal government’s acts were connected to the subcontractor’s claim.  Nonetheless, the subcontractor argued it would be unfair if it had to bear the brunt of waiting for the resolution of any Contract Disputes Act claim between the prime contractor and federal government before the subcontractor could pursue its claim against the prime contractor.  The Court dismissed this argument and stayed the action pending the outcome of the Contract Disputes Act resolution process between the prime contractor and federal government expounding:

 

The economic strain of awaiting resolution of the CDA procedures between Defendant Bhate [prime contractor] and AFCEC [federal government] is, while burdensome, still a reasonably foreseeable event under the Subcontract. Furthermore, denying the Motion to Stay and allowing this matter to proceed would bifurcate the matter, creating parallel proceedings involving many of the same facts and witnesses. Additionally, it could potentially force Defendants [prime contractor and surety] to take inconsistent positions in the simultaneous proceedings, supporting Plaintiff’s claims against AFCEC while defending against them in the arbitration between the parties. An order staying this matter is supported not only by the contract, but also the promotion of judicial economy and efficiency.

Bhate Environmental Associates, supra, at *4. 

 

This is undoubtedly a harsh ruling for a subcontractor that is now forced to wait a potentially long time while the prime contractor participates in the Contract Disputes Act resolution process. While harsh, the subcontractor agreed to bear this risk in its subcontract.  And, from the Court’s rationale, even if the subcontractor did not bear this risk, the Court still found that staying the subcontractor’s claims promoted judicial economy since it prevented the prime contractor from dealing with simultaneous disputes (one with the subcontractor and another with the federal government) and taking inconsistent positions.  

 

From the prime contractor’s perspective, this language that requires the subcontractor to bear this risk and stay any dispute pending the outcome of the Contract Disputes Act resolution process is extremely important language (based on the precise reasoning by the Court quoted above). 

 

From the subcontractor’s perspective, this reinforces the notion that it is imperative for parties to appreciate the risks they are agreeing to in their contracts, particularly as it relates to the resolution of disputes.  Also, this reinforces the risk that a subcontractor performing federal construction work may have to bear irrespective of the subcontract.  

 

Although the subcontractor is now in a wait-and-see mode while the Contract Disputes Act process runs its course, the subcontractor was smart by perfecting its Miller Act payment bond rights by timely filing suit.  Even though the prime contractor’s Contract Disputes Act resolution process may take some time, the prime contractor and its payment bond surety will ultimately have to deal with this dispute if the outcome of its Contract Disputes Act claim does not fully resolve the subcontractor’s claim to the subcontractor’s satisfaction.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.