DOES ARBITRATION APPLY TO CONTEMPORANEOUSLY EXECUTED CONTRACTS (WHEN ONE OF THE CONTRACTS DOES NOT HAVE AN ARBITRATION PROVISION)?

shutterstock_572312269Binding arbitration is an alternative to litigation.  Instead of having your dispute decided by a judge and/or jury, it is decided by an arbitrator through an arbitration process.  Arbitration, however, is a creature of contract, meaning there needs to be a contractual arbitration provision requiring the parties to arbitrate, and not litigate, their dispute.  Just like litigation, there are pros and cons to the arbitration process, oftentimes dictated by the specific facts and legal issues in the case.

 

What happens when a person executes two (or more) contemporaneous contracts, one with an arbitration provision and one without?  Are the parties required to arbitrate the dispute arising out of the contract that does not contain the arbitration provision?

 

The reality is that this has become an unnecessary over-complicated situation that should be avoided by specifically incorporating all of the contracts into an operative contract or, conversely, expressing the intent in each contract whether arbitration applies.  Being specific will avoid the over-compilation of this issue.

 

In an example of what really amounts to an over-complicated opinion regarding an arbitration provision, the case of Lowe v. Nissan of Brandon, Inc., 43 Fla. L. Weekly D103b (Fla. 2d DCA 2017) dealt with a consumer automobile transaction where a consumer challenged the sale price of an automobile.  The consumer purchased a car and signed three contemporaneous contracts: a purchase agreement, an installment sale contract (i.e., the purchase was subject to the condition that the installment contract would be accepted by a financing institution), and an arbitration agreement.  The purchase agreement incorporated the arbitration agreement.   The arbitration agreement incorporated the installment contract.  The installment contract (quite confusingly, in my opinion), however, did not incorporate the arbitration agreement or the purchase contract.

 

The consumer claimed that because the installment contract did NOT incorporate the arbitration agreement, arbitration did not apply to disputes involving the installment contract.  Notwithstanding, the trial court compelled arbitration. The appellate court affirmed.

 

The general contract principle regarding construing contemporaneously executed documents together has been reiterated in many casesSee, e.g.Dodge City, 693 So. 2d at 1035; Phoenix Motor Co., 144 So. 3d at 696 (quoting Collins, 641 So. 2d at 459). But if the parties execute ‘two separate contracts and only one contract contains an arbitration clause, the parties cannot be compelled to arbitrate disputes arising from the contract that does not call for arbitration.’ ” Phoenix Motor Co., 144 So. 3d at 696 (quoting Lee v. All Fla. Constr. Co., 662 So. 2d 365, 366 (Fla. 3d DCA 1995)). The exception is where the contract with the arbitration clause incorporates by reference the contract which does not contain an arbitration clause, such that the latter could be “interpreted as part of the [former] contract.” Id. at 697 (citing Affinity Internet, Inc. v. Consol. Credit Counseling Servs., Inc., 920 So. 2d 1286, 1288-89 (Fla. 4th DCA 2006)).

To incorporate by reference a collateral document, the incorporating document must (1) specifically provide “ ‘that it is subject to the incorporated [collateral] document’ ” and (2) the collateral document to be incorporated must be “ ‘sufficiently described or referred to in the incorporating agreement’ ” so that the intent of the parties may be ascertained. Kantner v. Boutin, 624 So. 2d 779, 781 (Fla. 4th DCA 1993) (quoting Hurwitz v. C.G.J. Corp., 168 So. 2d 84, 87 (Fla. 3d DCA 1964)). The [s]upreme [c]ourt set forth the second requirement for incorporation by reference in OBS Co. v. Pace Construction Corp., 558 So. 2d 404, 406 (Fla. 1990): “It is a generally accepted rule of contract law that, where a writing expressly refers to and sufficiently describes another document, that other document, or so much of it as is referred to, is to be interpreted as part of the writing.

Lowe, supra.

 

Here, there was no dispute regarding the contemporaneous execution of the contracts.  The appellate court found that while the installment contract did not incorporate the arbitration provision, this contract was a condition precedent to the purchase agreement.  Thus, once the installment contract was accepted by a financing institution, the purchase agreement with the arbitration provision became the operative contract without any conditions precedent. (The case actually has a more complicated legal analysis to affirm the trial court’s ruling that the parties should be compelled to arbitration).

 

In my opinion, this is nothing more than a basis to compel the parties to arbitrate when the installment contract that was sued upon did not contain an arbitration provision or incorporate the arbitration agreement or purchase agreement.  All of this could have been avoided had specificity occurred in the installment contract or had the purchase agreement specifically incorporated the installment contract.  But, if arbitration is a creature of contract, and the dealership prepared (which it did) the contracts it wanted the consumer to contemporaneously execute, compelling the parties to arbitrate based on what is perceived to be the “operative contract” seems to go against the grain that parties cannot be compelled to arbitrate disputes arising from a contract that does not contain an arbitration provision.

 

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.

 

DON’T WAIVE YOUR RIGHT TO ARBITRATE (UNLESS YOU WANT TO!)

shutterstock_348755237Does your construction contract require you to arbitrate (instead of litigate) disputes arising out of the contract?  If so, and you want to arbitrate, you do NOT want to do anything inconsistent or adverse with your right to arbitrate. Arbitration can be waived and you do not want arbitration to be waived if you believe this is the best forum to resolve your construction dispute.  For instance, actively participating in a lawsuit through the prosecution or defense of issues in the lawsuit is certainly inconsistent with your right to arbitrate.  This will result in a waiver of your right to compel arbitration.  

 

In a non-construction dispute—a dispute involving a law firm and its former partner—the law firm sued the partner.  Chaikin v. Parker Waichman LLP, 42 Fla. L. Weekly D2165b (Fla. 2d DCA 2017).  There was a partnership agreement that required disputes to be resolved by arbitration.  The law firm sued the partner claiming he violated a previously entered employment agreement that did not require arbitration.   When the partner counterclaimed, the law firm claimed that the counterclaim must be compelled to arbitration because the counterclaim arose out of the partnership agreement that required arbitration.  Guess what?  The trial court actually compelled the counterclaim to arbitration!  Crazy!  Clearly, any employment agreement and partnership agreement were intertwined such that the dispute would involve the same set of facts and any claims would have a significant relationship to the partnership agreement. 

 

On appeal, the Second District recognized this craziness and the significant relationship between any claims under an employment agreement and those under the partnership agreement:

 

[A] significant relationship is described to exist between an arbitration provision and a claim if there is a “contractual nexus” between the claim and the contract. A contractual nexus exists between a claim and a contract if the claim presents circumstances in which the resolution of the disputed issue requires either reference to, or construction of, a portion of the contract. More specifically, a claim has a nexus to a contract and arises from the terms of the contract if it emanates from an inimitable duty created by the parties’ unique contractual relationship.

Chaikin quoting Olson v. Fla. Living Options, Inc., 210 So.3d 107, 111 (Fla. 2d DCA 2016) 

 

Accordingly, the Second District held: what is sauce for the goose is sauce for the gander.  The law firm, by filing suit notwithstanding the arbitration provision in the partnership agreement, waived its right to compel arbitration of the counterclaim.  Chaikin, supra (explaining that the law firm initiating the lawsuit was adverse to its contention that its former partner’s counterclaims, predicated upon the same partnership agreement, be compelled to arbitration).  Do not waive your right to arbitrate (unless you want to!).  

 

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: DO YOUR HOMEWORK WHEN IT COMES TO SELECTING YOUR ARBITRATOR

imagesMany construction contracts contain arbitration provisions.  Instead of litigating a dispute arising out of the contract, the parties will arbitrate the dispute per the arbitration provision.  There are advantages to arbitration and certain disputes bode well for arbitration.  The key is you want to make sure you select the RIGHT arbitrator or arbitrators.  Do your homework regarding the arbitrator list presented to you by, say, the American Arbitration Association.  Strike out those on the list that either do not have the requisite experience you need to decide the dispute or you believe they are not going to be impartial.  For instance, if you want an arbitrator that you think will specifically follow the letter of the law or the precise terms of a contract, select those on the list that meet this requirement; strike out others that do not.  The same philosophy would apply if you want an arbitrator to have specific factual knowledge or a factual understanding regarding a driving issue in the dispute.  Do not neglect the homework required to select –or try to select — the arbitrator you believe is the most qualified to understand the issues.

 

Now, why is this important?  It is important because you need to arbitrate a dispute with the understanding that the arbitrator’s award (decision) is FINAL.  There are no appellate rights.  None.  Vacating an arbitrator’s award is very challenging and the bases to vacate an award are limited and, most of the time, will NOT apply.

 

In a recent decision, a party tried to vacate an arbitration award.  One of the arguments was that the arbitration panel failed to follow  Florida law.   Well, guess what?  An arbitrator does not necessarily have to comply with Florida law.  Legal error by an arbitration panel is not a basis to vacate an arbitration award.  See Managed Care Ins. Consultants, Inc. v. United Healthcare Ins. Co., 42 Fla. L. Weekly D1599b (Fla. 4th DCA 2017).

 

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.

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.