Category Archives: Arbitration

MILLER ACT PAYMENT BOND SURETY BOUND TO ARBITRATION AWARD

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Here is an interesting case binding a Miller Act payment bond surety to an arbitration award against its prime contractor (bond principal) that it received sufficient notice of.  Notice is the operative word.  The surety could have participated in the arbitration, elected not to, and when its prime contractor (bond principal) lost the arbitration, it was NOT given another bite out of the apple to litigate facts already been decided.

In BRC Uluslararasi Taahut VE Ticaret A.S. v. Lexon Ins. Co., 2020 WL 6801933 (D. Maryland 2020), a prime contractor was hired by the federal government to make security upgrades and interior renovations to a United States embassy in the Czech Republic.  The prime contractor hired a subcontractor to perform all of the installed contract work.   The prime contractor terminated the subcontractor for default during the course of construction.

The subcontractor demanded arbitration in accordance with the subcontract claiming it was wrongfully terminated.  The subcontractor also filed a lawsuit asserting a Miller Act payment bond claim against the prime contractor’s surety (as well as a breach of contract action against the prime contractor). The subcontractor made clear it intended to pursue its claims in arbitration and hold the payment bond surety jointly and severally liable.  The parties agreed to stay the lawsuit since the facts were identical to those being arbitrated. The arbitration went forward and an award was entered in favor of the subcontractor and against the prime contractor for approximately $2.3 Million.

The subcontractor moved to lift the stay entered in the lawsuit to confirm the arbitration award against the prime contractor and Miller Act payment bond surety.  The prime contractor moved to vacate the award.

Beginning with the prime contractor’s motion to vacate the arbitration award, the Federal Arbitration Act gives limited grounds to support vacating an arbitration award.  The grounds the prime contractor raised will not be discussed. They were all denied because it is difficult to vacate an arbitrator’s final award and that is the important take-away message.  In support of this (and contained in a noteworthy, lengthy discussion by the Court), the Court stated: “The FAA [Federal Arbitration Act] creates a ‘strong presumption in favor of confirming arbitration awards,’ and ‘judicial review’ of such awards ‘must be an extremely narrow exercise.’” BRC Uluslararasi Taahut, supra, at *4.

Of significance here, the subcontractor moved to enforce the arbitration award against the Miller Act payment bond surety, as it should.  Even though the surety was not a party to the arbitration, it was on notice of the arbitration, was notified the subcontractor would look to hold it jointly and severally liable, and the surety consented to the stay of the lawsuit pending the outcome of the arbitration. The Court noted, “[s]uch notice is sufficient to bind [the surety] to the arbitration award.” BRC Uluslararasi Taahut, supra, at *9 (citing cases showing that if the surety has notice of the proceedings against its principal, it can be bound by an arbitration award against the principal).  Further, the Court intuitively stated:

[The surety] clearly knew that the arbitration would occur.  Now dissatisfied with the outcome, [the surety] wishes not to be bound by the very proceeding [the surety] averred would avoid duplicative litigation.  The Court suspects that had [the prime contractor] prevailed in arbitration, [the surety] would be singing a different tune.  [The surety] will not be afforded a second bite at the litigation apple simply because it must now honor its obligations as the surety on the project.

Id.

Remember, if you are arbitrating rights, do not neglect to timely file your Miller Act payment bond lawsuit, or for that matter, any statutory payment bond lawsuit.  Give the surety NOTICE that you intend to hold it jointly and severally liable for any arbitration award entered against its prime contractor (bond principal).   Whether the surety elects to participate in the arbitration is within its discretion, but the key is to give the surety notice so that if you do prevail, you find yourself in same shoes as the subcontractor discussed in this case—binding the payment bond surety to the award entered against the prime contractor.  The prime contractor and its surety should also recognize this likely outcome.

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: EVIDENTIARY HEARING REQUIRED BEFORE COMPELLING NON-SIGNATORIES TO ARBITRATION

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As you know from prior articles, arbitration is a creature of contract where parties agree to resolve their dispute through arbitration, not litigation.  What if the parties are non-signatories to the arbitration agreement?

In a recent case, the trial court compelled parties that did not sign the governing agreement with an arbitration provision to arbitration.  One of the parties argued that the non-signatories to the agreement entered into another agreement which incorporated the agreement with the arbitration provision.  The trial court agreed and compelled the parties to arbitration.  The appellate court reversed because the party opposing arbitration disputed the underlying facts. As such, the appellate court held that the trial court was required to hold an evidentiary hearing to resolve disputed issues of fact.  This evidentiary hearing was important because the parties being compelled to arbitration were not the actual parties to the arbitration agreement, albeit they were related parties.

Check out this article for more information on this case.

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.

 

THE ARBITRATION PROVISION SHOULD DICTATE WHETHER JUDGE OR ARBITRATOR DECIDES ARBITRABILITY OF ISSUE

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An arbitration provision should specifically dictate whether you want a judge or arbitrator to decide the arbitrability of a claim or issue.  The reality is, if you prefer your disputes to be resolved by arbitration, you should dictate that the arbitrator decides the arbitrability of issues or claims.  This way the party opposing arbitration cannot try to circumvent this by having the judge decide, potentially altering the forum for disputes, and otherwise slowing down the dispute resolution process.   The recent case discussed below highlights why specifying who decides the arbitrability of a claim or issue is worthy.

In Doe v. Natt, 45 Fla. L. Weekly D712a (Fla. 2d DCA 2020), involving an arbitration agreement in an Airbnb clickwrap agreement, the matter at-issue was who decides whether a dispute is arbitrable, i.e., subject to the arbitration provision, a judge or the arbitrator.  (A clickwrap agreement is an online agreement we enter into with a company that requires us to click “I agree” boxes to proceed.  We have all entered into one.)    The arbitration provision required the parties to proceed to arbitration with the American Arbitration Association (“AAA”):

Arbitration Rules and Governing Law. The arbitration will be administered by the American Arbitration Association (“AAA”) in accordance with the Commercial Arbitration Rules and the Supplementary Procedures for Consumer Related Disputes (the “AAA Rules”) then in effect, except as modified by this Dispute Resolution section. (The AAA Rules are available at www.adr.org/arb_med or by calling the AAA at 1-800-778-7879.) The Federal Arbitration Act will govern the interpretation and enforcement of this section.

AAA’s rules (whether dealing with a commercial or construction dispute) provide, “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or the arbitrability of any claim or counterclaim.”  In other words, the arbitrator determines the arbitrability of a claim.

However, the Second District Court of Appeal focused on the fact that the arbitration provision at-issue did not specifically state the arbitrator is to decide issues of arbitrability and AAA’s rules were not attached to the clickwrap agreement. And, while other appellate courts that have found that an arbitrator determines arbitrability when AAA’s rules have been incorporated by reference into an arbitration provision, the Second District disagreed with those holdings finding that generally incorporating AAA’s rules was too general and ambiguous as to who decides the arbitrability of a dispute:

We hold that the clickwrap agreement’s arbitration provision and the AAA rule it references that addresses an arbitrator’s authority to decide arbitrability did not, in themselves, arise to “clear and unmistakable” evidence that the parties intended to remove the court’s presumed authority to decide such questions. The evidence on what these parties may have agreed to about the “who decides” arbitrability question was ambiguous; therefore, the court retained its presumed authority to decide the arbitrability dispute.

Doe, supra.

To avoid this generality or ambiguity, and arbitration provision should unmistakably dictate whether a judge or arbitrator decides the arbitrability of a claim or 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.

 

YOU CANNOT ARBITRATE CLAIMS NOT COVERED BY THE ARBITRATION AGREEMENT

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Regardless of the type of contract you are dealing with, “[a]rbitration provisions are contractual in nature, and therefore, construction of such provisions and the contracts in which they appear is a matter of contract interpretation.”  Wiener v. Taylor Morrison Services, Inc., 44 Fla. L. Weekly D3012f (Fla. 1st DCA 2019).   This means if you want to preserve your right to arbitrate claims you want to make sure your contract unambiguously expresses this right.  Taking this one step further, if you want to make sure an arbitrator, and not the court, determines whether the claim is arbitrable if a dispute arises, you want to make sure that right is expressly contained in the arbitration provision.

For example, in Wiener, a homeowner sued a home-builder for violation of the building code – a fairly common claim in a construction defect action.  The homeowner’s claim dealt with a violation of building code  as to exterior stucco deficiencies.   The home-builder moved to compel the lawsuit to arbitration based on a structural warranty it provided to the homeowner that contained an arbitration provision.   The structural warranty, however, was limited and did not apply to non-load-bearing elements which, per the warranty, were not deemed to have the potential for a major structural defect (e.g., a structural defect to load-bearing elements that would cause the home to be unsafe or inhabitable).  The trial court compelled the dispute to arbitration pursuant to the arbitration provision in the structural warranty.

But, the First District Court of Appeal held the trial court was wrong to compel the dispute to arbitration.  Why?  The homeowner did not sue the home-builder for a breach of the structural warranty.  Even if the homeowner was trying to navigate around the structural warranty, the warranty was limited in nature and would NOT apply to a claim dealing with defective stucco, which is not a load-bearing issue, to say the least.  See Wiener, supra (“[C]onsidering the plain meaning of the structural warranty agreement, the [plaintiff’s] complaint does not raise claims subject to arbitration under that agreement.”).  The home-builder could not have its cake and eat it too — it could not exclude claims from the warranty and then try to arbitrate those very excluded claims per an arbitration provision in the warranty.

Here, the issue of whether the claim was arbitrable (subject to arbitration), was decided by the court, as it typically is.  The arbitrability of a claim is typically a question for the court.  Wiener, supra. This does not mean that it needs to be that way.   Parties can clearly include in their arbitration provision that the determination of the arbitrability of a claim is a determination for an arbitrator, and not the court.

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.

SUBSEQUENT PURCHASER OF HOME COMPELLED TO ARBITRATION BASED ON COVENANT RUNNING WITH THE LAND

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Arbitration provisions are creatures of contract and courts should indulge reasonable presumptions in favor of requiring parties to arbitrate.   Keep this in mind when agreeing to an arbitration provision or trying to navigate around an arbitration provision.

 

An example of a court indulging a reasonable presumption in favor of arbitration can be found in the Second District Court of Appeal’s decision in Hayslip v U.S. Home Corp., Fla. L. Weekly D1798a (Fla. 2d DCA 2019) involving a subsequent purchaser of a home suing the homebuilder for construction defects.

The original owner purchased the home from the homebuilder. The home was conveyed with a special warranty deed recorded in the official records. (The deed was executed by the seller, not the original owner as the buyer, per Florida law.) The special warranty deed stated that all covenants and conditions in the deed run with the land including a dispute resolution provision that required mediation as a condition precedent to binding arbitration.

 

The original owner sold the property to the subsequent purchaser.  The subsequent purchaser then sued the homebuilder for construction defects (building code violations).  The homebuilder moved to compel arbitration pursuant to the special warranty deed arguing that since the arbitration provision was a covenant running with the land it would extend to the subsequent purchaser.  The Second District agreed; even though the subsequent purchaser was not a party to the original transaction, since the arbitration provision in the special warranty deed was a covenant running with the land that the subsequent purchaser would have notice of, the subsequent purchaser would be bound by the arbitration provision.

 

Here, it is undisputed that the [subsequent purchasers] were on notice of the original special warranty deed’s covenants and restrictions, and by taking title to and possession of the home, they acquiesced to the arbitration provision.  Further, Florida law does not require that the home buyer sign the warranty deed in order to be bound by it. 

***

A real covenant, or covenant running with the land, differs from a merely personal covenant in that the former concerns the property conveyed and the occupation and enjoyment thereof, whereas the latter covenant is collateral or is not immediately concerned with the property granted.

***

[T]he performance of the covenant here affects “the occupation and enjoyment” of the home…as it dictates the means by which the [subsequent purchasers]  must seek to rectify building defects related to the home. Not only is the covenant triggered when an apparent defect in the home is realized and the homeowners seek recourse from the builder, but the outcome of the arbitration proceeding necessarily impacts the home as well. Thus, the arbitration provision touches and concerns the property itself. 

Hayslip, supra (internal quotations and citations omitted).

 

 

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: YES, YOU CAN WAIVE THE RIGHT TO ARBITRATE

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A party can waive the contractual right to arbitrate.  Waiver is the “voluntary and intentional relinquishment of a known right or conduct which implies the voluntary and intentional relinquishment of a known right.”  Ship IV Harbour Island, LLC v. Boylan, 44 Fla. L. Weekly D831a (Fla. 5th DCA 2019) (citation and internal quotation omitted).  Thus, a party can waive its right to arbitrate a dispute by engaging in conduct inconsistent with the right to arbitrate.  One way a party can act inconsistently with the right to compel a dispute to arbitration is by engaging in discovery in litigation, particularly discovery as to the merits of the case.  See Ship IV Harbour Island, supra (after court ordered limited discovery regarding arbitration, party thereafter waived right to arbitration by engaging in discovery as to the merits of the dispute).    For this reason, if your desire is to preserve the integrity of a contractual arbitration provision, do not do anything inconsistent with this right such that you give the other party the argument that you waived the contractual right to arbitration.  

 

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 PROVISIONS ARE CHALLENGING TO CIRCUMVENT

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Arbitration provisions are enforceable and they are becoming more challenging to circumvent, especially if one of the parties to the arbitration agreement wants to arbitrate a dispute versus litigate a dispute.  Remember this when agreeing to an arbitration provision as the forum for dispute resolution in your contract.  There is not a one-size-fits-all model when it comes to arbitration provisions and how they are drafted.  But, there is a very strong public policy in favor of honoring a contractual arbitration provision because this is what the parties agreed to as the forum to resolve their disputes.  

 

By way of example, in Austin Commercial, L.P. v. L.M.C.C. Specialty Contractors, Inc., 44 Fla.L.Weekly D925a (Fla. 2d DCA 2019), a subcontractor and prime contactor entered into a consultant agreement that contained the following arbitration provision:

 

Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be subject to the dispute resolution procedures, if any, set out in the Prime Contract between [Prime Contractor] and the [Owner]. Should the Prime Contract contain no specific requirement for the resolution of disputes or should the [Owner] not be involved in the dispute, any such controversy or claim shall be resolved by arbitration pursuant to the Construction Industry Rules of the American Arbitration Association then prevailing, and judgment upon the award by the Arbitrator(s) shall be entered in any Court having jurisdiction thereof.

 

The prime contract between the owner and prime contractor did not require arbitration.

 

The prime contractor initially hired the subcontractor during the design phase of the project as a consultant.  The consultant agreement contained the aforementioned arbitration provision. Then, during the construction phase, the prime contractor and subcontractor entered into a work order that incorporated the terms of the consultant agreement, meaning the arbitration provision was incorporated into the work order.  

 

A payment dispute arose during the construction phase and the subcontractor sued the prime contractor.  The prime contractor moved to compel the dispute to arbitration per the terms of the arbitration provision in the consultant agreement.  The trial court denied the prime contractor’s motion to compel.   This was reversed on appeal – and it was probably an easy reversal for three main reasons:

 

One:  Florida has a strong public policy in favor of enforcing arbitration provisions, as mentioned above.  Remember this. 

 

Two:  the work order between the prime contractor and subcontractor for the construction phase incorporated the terms of the consultant agreement that contained an arbitration provision.  Thus, the consultant agreement with the arbitration provision had to be interpreted together with the work order.  Remember that a document or contract can incorporate another document or contract. 

 

Three:  the dispute was between the subcontractor and prime contractor.   The owner was NOT “involved” in the dispute because it was not a party to the lawsuit and the payment dispute the subcontractor initiated against the prime contractor did not involve the owner considering the owner did not need to participate in the dispute.   “[O]ne would not ordinarily understand an entity to be ‘involved’ in a dispute where that entity is neither drawn into the dispute nor affected by the dispute. Only an impermissible, strained textual interpretation of ‘involved in the dispute’ would yield a conclusion that HCAA [Owner] would be affected by a financial dispute between Austin [Prime Contractor] and Mims [Subcontractor].”  Austin Commercial, supra.   Remember this that the word “involve,” as this word is used in the arbitration provision, is not going to be read so broadly to render inconsequential the prime contractor’s right to arbitrate disputes with its subcontractor. 

 

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.

 

 

SUPREME COURT HOLDS ARBITRATOR CAN FULLY DECIDE THRESHOLD ARBITRABILITY ISSUE

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shutterstock_1018025605The United States Supreme Court recently decided parties to a contract can agree, under the Federal Arbitration Act, an arbitrator, rather than a court, can fully resolve the initial arbitrability question.  Henry Schein, Inc. v. Archer and White Sales, Inc., 2019 WL 122164 (2019).  The arbitrability question is whether the dispute itself is subject to arbitration under an arbitration provision.  Parties that do not want to arbitrate try to circumvent this process by filing a lawsuit and asking the court to determine the threshold arbitrability question.  

 

In Henry Schein, Inc., the contract at-issue provided:

 

This Agreement shall be governed by the laws of the State of North Carolina.  Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property) shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association.  The place of arbitration shall be in Charlotte, North Carolina.

 

The plaintiff in this case asserted a claim for injunctive relief (among other claims) and argued that, therefore, the dispute is not subject to arbitration based on the exception in the provision.  The initial, threshold issue became whether the dispute was subject to arbitration and, importantly, who decides this issue. The Court further looked at whether a trial court can resolve this issue under the “wholly groundless” exception, i.e.,the court can decide the issue if the argument for arbitration is wholly groundless.  

 

The Supreme Court held that, “[w]hen the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract.  In those circumstances, a court possesses no power to decide the arbitrability issue.  That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” Henry Schein, Inc, supra, at *4.  Through this ruling, the Court rejected the wholly groundless exception that would allow a trial court to rule on an threshold arbitrability question if the argument for arbitration is wholly groundless. 

 

The Court did not rule as to whether the arbitration provision at-issue delegated the arbitrability question to the arbitrator.   However, the American Arbitration Association’s rules provide that arbitrators have the power to resolve such threshold arbitrability questions so there is an argument that the provision through reference to the American Arbitration Association gave this authority to the arbitrator.  But, the best thing to do, as always, is to be clear.   Include language in the arbitration provision that specifically states that an arbitrator is authorized to decide the arbitrability of issues, particularly if it is your arbitration provision and you want disputes resolved by arbitration.  Conversely, if you want the initial, threshold issue of arbitrability to be decided by a court, make sure to specify that in the 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.

 

 

 

 

 

DRAFTING A CONTRACTUAL ARBITRATION PROVISION

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shutterstock_505551922A recent Florida case discussing a contractual arbitration provision in a homebuilder’s contract discussed the difference between a narrow arbitration provision and a broad arbitration provision.  See Vancore Construction, Inc. v. Osborn, 43 Fla.L.Weekly D2769b (Fla. 5th DCA 2018).   Understanding the distinction between the two types of arbitration provisions is important, particularly if you are drafting and/or negotiating a contractual arbitration provision.

 

A narrow contractual arbitration provision includes the verbiage “arises out of”  the contract such that disputes arising out of the contract are subject to arbitration.  Arbitration is required for those claims the have a direct relationship with the contract.

 

A broad contractual arbitration provision includes the verbiage “arises out of or relating to” the contract such that disputes arising out of or relating to the contract are subject to arbitration.  Arbitration is required for those claims that have a significant relationship to the contract. A significant relationship exists if there is a nexus between the claim and the contract meaning the “claim presents circumstances in which the resolution of disputed issues requires either reference to, or construction of, a portion of the contract.”  See Vancore Construction, Inc., supra, (citation omitted). 

 

When drafting or negotiating an arbitration provision, make sure you understand those claims that will be subject to arbitration and those potential claims that will not.    Typically, if you want a arbitration provision in your contract, you more than likely prefer a broad arbitration provision such that claims arising out of or relating to the contract will be subject to arbitration.

 

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.

OWNERS BOUND BY ARBITRATION CLAUSE ON ROOFING SHINGLES PACKAGING

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shutterstock_1084249700In today’s age, you are probably familiar with terms such as a shrinkwrap contract (terms and conditions), which is a boilerplate contract included with a retained product, or a clickwrap contract (terms and conditions), which is generally a boilerplate contract that is digitally accepted when purchasing software or an electronic product. These are are boilerplate terms from manufacturers or vendors of products or software.  Arbitration provisions in these types of agreements have generally found to be enforceable.

 

In the recent ruling by the Eleventh Circuit Court of Appeals in Dye v. Tamko Building Products, Inc., 2018 WL 5729085 (11th Cir. 2018), the court held that an arbitration provision included in a product-purchase limited warranty agreement on the package of every roofing shingles binds a homeowner to arbitrating disputes over the opened and retained product with the manufacturer, irrespective of whether the shingles were purchased by an owner’s roofer.   The shingles do not have to be purchased and opened by the owner for the arbitration provision to apply. If the roofer uses or retained the shingles for purposes of the owner’s home, such knowledge of the product-purchase limited warranty agreement on the packaging of the shingles is imputed to the owner (end-user of the shingles).  In this manner, the court summarized:

 

 

At the end of the day, the point is simply this: modern consumers are on notice that products come with warranties and other terms and conditions of purchase.  And they are free to research (or not), request (or not), and read (or not) those terms before unwrapping their purchases.  As to the case before us, Florida law makes clear that providing conspicuously printed product packaging is an OK way to convey purchase terms.  Florida consumers who purchase, open, and retain a product are thus bound in accordance with warranty terms conspicuously printed on that product’s packaging, whether they actually take the time to read them or not. 

***

To summarize, then, acceptance of Tamko’s [roofing manufacturer] purchase terms—arbitration clause and all—was incidental to, and reasonably necessary to accomplish the homeowner’s express grant of agency authority to their roofers to purchase and install shingles, and in any event, the roofers’ notice of the terms printed on the shingle wrappers in properly imputed to the homeowners. 

Dye, supra. 

 

Arbitration clauses are favored.  So, the next time you purchase or download a product and receive a boilerplate contract with terms and conditions, such as a limited warranty document that contains an arbitration provision, remember, the arbitration provision will likely be deemed enforceable.

 

 

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.