PAROL EVIDENCE CAN BE USED TO DEFEAT FRAUDULENT LIEN

Parol or extrinsic evidence can be used to defeat an argument that a lien is a fraudulent lien. And, just because a lien amount exceeds the total contract amount does not presumptively mean the lien is willfully exaggerated or recorded in bad faith. Finally, a ruling invalidating a construction lien can create the irreparable harm required to support a petition for writ of certiorari. All of these issues are important when dealing with and defending against a fraudulent lien and are explained in a recent case involving a dispute between an electrical subcontractor and its supplier.

In Farrey’s Wholesale Hardware Co., Inc. v. Coltin Electrical Services, LLC, 44 Fla.L.Weekly D130a (Fla. 2d DCA 2019), there were various revisions to the supplier’s initial purchase order, both from a qualitative and quantitative perspective, and a ninth-revised purchaser order was issued and accepted. The electrical subcontractor claimed that deliveries were late, unassembled, and did not include the required marking (likely the UL marking), to pass building inspections. As a result, the subcontractor withheld money from the supplier and the supplier recorded a lien in the amount of $853,773.16 and filed a foreclosure lawsuit.

The subcontractor moved for a motion for partial summary judgment that the lien should be deemed a fraudulent lien and invalid because it was overstated by approximately $32,000. The subcontractor argued that taking the amount of the ninth-revised purchase order and deducting the undisputed amount paid to the supplier would result in a lien amount of $825,417.06, approximately $32,000 less than the supplier’s lien amount. The supplier, through an affidavit, argued this delta is nothing more than a good faith dispute and can be explained because the total cost of materials furnished to the job site was based on its initial purchase order and its revised purchase order. The subcontractor countered that the affidavit is parol evidence and should be disregarded because the parties agreed on the total amount of the supplies through the ninth-revised purchase order and the supplier was trying to create a new contract through the affidavit. The trial court agreed and found the lien fraudulent, and issued a partial summary judgment invalidating the supplier’s lien. The subcontractor moved for a petition of writ of certiorari.

Parol Evidence Rule

“[T]he parol evidence rule prevents the terms of a valid written contract or instrument from being varied ‘by a verbal agreement or other extrinsic evidence where such agreement was made before or at the time of the instrument in question.’” Farrey’s Wholesale, supra(citation omitted). The parol evidence rule, however, is not applied to exclude evidence of subsequent agreements modifying the original agreement, or of fraud, accident, or mistake. Id.

The appellate court, reversing the trial court, found that the parol evidence rule “does not bar extrinsic evidence offered for the purpose of showing whether the filing of a construction lien was made in good or bath faith. This is a separate and distinct inquiry that does not trigger the parol evidence rule.” Hence, the appellate court maintained there were disputed issues of material fact as to whether the lien was fraudulent.

The appellate court further found that the trial court erred in finding the lien fraudulent in that just because the lien amount exceeded the ninth-revised purchase order does not mean it was willfully exaggerated. In other words, even if the ninth-revised purchase order was the complete agreement, the lien, in of itself, is not willfully exaggerated just because the lien exceeded the total amount of the contract.

Appeal of Lien

On another important point in this case, because the appeal was based on a writ of certiorari (versus a final appeal of a final dispositive judgment), there had to be irreparable harm to justify the basis of the appeal. The appellate court held there would be irreparable harm if the supplier had to wait until the end of the litigation to appeal because its judgment would then be unsecured (it would be without a remedy to pursue its lien which had been transferred to a lien transfer bond). See Farrey’s Construction Wholesale, supra (“This means that on remand [back to the trial court], all matters pertaining to Farrey’s construction lien, which includes the status of the lien transfer bond, will be returned to their prejudgment postures.”).

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

Posted on January 19, 2019 by David Adelstein Posted in Arbitration | Tagged arbitrability, arbitration, arbitrator, Federal Arbitration Act

The 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.

DRAFTING A CONTRACTUAL ARBITRATION PROVISION

Posted on December 24, 2018 by David Adelstein Posted in Arbitration | Tagged arbitration, arbitration provision, broad arbitration, narrow arbitration, significant relationship

A 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.

BAILOUT FOR AN IMPROPERLY DRAFTED INDEMNIFICATION PROVISION

Posted on December 22, 2018 by David Adelstein Posted in Indemnification | Tagged 725.06, contractual indemnification, Florida Statute 725.06, indemnification, indemnity, severability, severence

A recent opinion came out that held that even though an indemnification provision in a subcontract was unenforceable per Florida Statute s. 725.06, the unenforceable portion is merely severed out of the indemnification clause leaving the rest of the clause intact. In essence, an otherwise invalid indemnification clause is bailed out by this ruling (which does not even discuss whether this subcontract had a severability provision that states that if any portion of any provision in the subcontract is invalid, such invalid portion shall be severed and the remaining portion of the provision shall remain in full force and effect).

This opinion arose from a construction defect case, CB Contractxors, LLC v. Allens Steel Products, Inc.,43 Fla.L.Weekly D2773a (Fla. 5^thDCA 2018), where the general contractor, sued by an association, flowed down damages to subcontractors based on the contractual indemnification provision in the subcontracts. Subcontractors moved to dismiss the contractual indemnification claim because it was not compliant with Florida Statute s. 725.06. The indemnification provision required the subcontractors to indemnify the general contractor even for the general contractors own partial negligence, but failed to specify a monetary limitation on the extent of the indemnification as required by Florida Statute s. 725.06. (The indemnification clause in the subcontract was the standard intermediate form of indemnification that required the subcontractor to indemnify the general contractor for claims regardless of whether the claims were caused in part by the general contractor.)

The trial court held that because the indemnification clause was unenforceable under Florida Statute s. 725.06, the general contractor’s contractual indemnification claims fail. But, the appellate court reversed providing a bailout to an unenforceable indemnification clause by simply severing out the unenforceable portion. Thus, while a subcontractor would be required to indemnify the general contractor for its own negligence, it would not be required to indemnify the general contractor for any partial negligence caused by the general contractor.

This case leads to a couple of very important takeaways:

Make sure the indemnification clauses in your construction contracts comply with Florida Statute s. 725.06. Have a construction attorney review the indemnification provision. Do not, and I mean, do not, bank on this ruling that even if the indemnification provision is noncompliant, only the unenforceable part will be severed. That is not good practice.

Include a severability provision in your contract. Always. Even though this case did not discuss such a clause, the clause will bolster the argument that only the unenforceable aspect of the provision should be severed.