INCLUDING IN YOUR ARBITRATION CLAUSE THAT ARBITRATION WILL BE CONDUCTED BY THE AMERICAN ARBITRATION ASSOCIATION

imagesThe American Arbitration Association (known as “AAA”) is a well-recognized organization that administers binding arbitration.  AAA has its own set of developed arbitration rules and procedures that must be followed in a construction arbitration referred as the Construction Industry Arbitration Rules and Mediation Procedures.  (This is no different than a dispute proceeding in federal or state court where a party must follow a governing rule of civil procedures.)

 

Parties that incorporate a binding arbitration provision often include language that the arbitration must be conducted by AAA and/or pursuant to AAA’s Construction Industry Arbitration Rules.   Sometimes when a dispute occurs, a party wants to challenge the scope of the arbitration provision because they prefer that their dispute gets resolved through litigation instead of arbitration.  But, as illustrated by the Eleventh Circuit decision in U.S. Nutraceuticals, LLC v. Cyanotech Corp., 2014 WL 5471913 (11th Cir. 2014), this is not an easy accomplishment.

 

In this case, the buyer and seller entered into two contracts with the second contract succeeding the first contract. Both contracts contained a confidentiality provision; however, the second contract provided that a party can enforce the confidentiality provision in court. Both contracts also contained an arbitration provision for dispute resolution that required the arbitration to be conducted “under the auspices of the American Arbitration Association.”  The second contract, though, excluded from arbitration disputes relating to a breach of the confidentiality provision. (Under the first contract, disputes relating to the breach of the confidentiality provision would be subject to arbitration.)

 

A dispute arose and the buyer sued the seller for claims associated with the breach of the confidentiality provision.  Based on the allegations in the buyer’s lawsuit, it was unclear whether the first contract, the second contract, or both, were implicated by the dispute.  The seller moved to compel the dispute to arbitration pursuant to the first contract that did not carve out an exception for breaches of the confidentiality provision.  The district court denied the motion, but the Eleventh Circuit reversed ruling that the district court should have compelled arbitration.  The reason was that the arbitration provisions incorporated the rules of the American Arbitration Association.  Once the parties did this, they agreed that the arbitrator would decide whether a particular dispute was subject to the arbitration provision.  Hence, questions as to the scope or arbitrability of a dispute would be determined by the arbitrator and not the court.

 

The arbitration clause in this case that required the arbitration to be conducted “under the auspices of the American Arbitration Association” is not language atypical to a construction contract.  This language, however, was enough for the Eleventh Circuit to deem AAA’s applicable rules and procedures incorporated into the arbitration clause.   In a construction dispute, Rule 9 of the Construction Industry Arbitration Rules (set forth below) authorizes the arbitrator to rule on the scope or arbitrability of a dispute, which is not ideal for a party that wants the court versus the arbitrator to have this power.  It is important that parties that want to carve out exceptions to the arbitration clause to clearly convey these exceptions in the clause.  Further, if parties want the court instead of the arbitrator to determine the scope or arbitrability of a particular claim, this should also be clearly conveyed in the clause.  Otherwise, this determination will be made by the arbitrator.

 

 

R-9. Jurisdiction

(a) 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.

(b) The arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a part. Such an arbitration clause shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitrator that the contract is null and void shall not for that reason alone render invalid the arbitration clause.

(c) A party must object to the jurisdiction of the arbitrator or to the arbitrability of a claim or counterclaim no later than the filing of the answering statement to the claim or counterclaim that gives rise to the objection. The arbitrator may rule on such objections as a preliminary matter or as part of the final award.

 

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.

 

 

 

 

 

ENFORCEABILITY OF CONTRACT AS A WHOLE TO BE DETERMINED BY ARBITRATOR AND NOT A BASIS TO VACATE ARBITRATION AWARD

untitledArbitration is a form of dispute resolution that parties elect in their contracts.  With respect to construction contracts, the arbitration provision may provide that the parties will submit their dispute to the American Arbitration Association.  A benefit to arbitration is that the dispute will be decided by an arbitrator or panel of arbitrators that theoretically have expertise in the subject matter of the dispute.  A downside is that there is no great avenue to appeal or vacate an arbitrator’s award (absent very limited circumstances) even if a party believes the arbitrator misapplied the law.

 

An example of this downside can be found in The Village of Dolphin Commerce Center, LLC v. Construction Service Solutions, LLC, 39 Fla. L. Weekly D1065a (Fla. 3d DCA 2014), where an owner hired a contractor to construct a warehouse. At the time of contract, the contractor was not licensed.  The contractor became licensed after the execution of the contract.  The contractor proceeded with construction and, due to a payment dispute, recorded a construction lien.  The contractor also filed a demand for arbitration with the American Arbitration Association pursuant to its contract. The owner answered the demand for arbitration and asserted as a defense that the contract was unenforceable pursuant to Florida Statute s. 489.128 which provides, “As a matter of public policy, contracts entered into…by an unlicensed contractor shall be unenforceable in law or in equity by the unlicensed contractor.”   Section 489.128 further provides that, “[i]f a contract is rendered unenforceable under this section, no lien or bond claim shall exist in favor of the unlicensed contractor….”

 

The owner further filed a lawsuit in circuit court asking the court to declare that that the contractor’s claim of lien was unenforceable since the contractor was unlicensed at the time of contract.  The contractor asserted a counterclaim (although it is uncertain what claims were asserted) and moved to compel arbitration; the circuit court stayed the action and compelled the parties to arbitrate the dispute.

 

During arbitration, the owner never objected to the arbitrator’s jurisdiction to rule on whether the contractor’s lack of license at the time of contract prevented it from enforcing the contract and the construction lien. “The rules of the American Arbitration Association specifically state that any objection to the panel hearing an issue must be submitted with the answering statement or it is determined that the panel will have jurisdiction.”  The Village at Dolphin Commerce Center, supra.

 

The contractor prevailed in the arbitration and moved to enforce the arbitration award in circuit court.  The owner moved to vacate the award based on the unenforceability of the contract and lien under s. 489.128 (because the contractor was not properly licensed at the time of its contract with the owner).  The trial court affirmed the arbitration award and the owner appealed.

 

The issue on appeal was whether the arbitrator had jurisdiction to determine the enforceability of the contract and the lien pursuant to s. 489.128.   The Third District held that it did:

 

“[T]he issue of enforceability was submitted to the panel and neither party objected.  As such, based on the AAA [American Arbitration Association] rules, the panel had jurisdiction to determine the issue.  To ask the trial court to revisit the issue would require the trial court to step into an appellate position.   The Florida Arbitration Statutes do not provide for such.  Pursuant to section 682.13, Florida Statutes, the authority of the trial court to vacate an arbitration award is very narrow.”

The Village at Dolphin Commerce Center, supra.

 

 

The Third District, relying primarily on the United States Supreme Court’s decision in Buckeye Check Cashing, Inc. v. Cardegna, 126 S. Ct. 1204 (2006), as well as other Florida appellate decisions, maintained that when a party is challenging the legality / enforceability of a contract as a whole (versus only the arbitration provision), that determination MUST go to the arbitrator and not the court.  For this reason, the Court held, “Those cases make clear that a trial or appellate court’s view that an arbitration panel wrongly decided the issue of illegality of a contract, and specifically illegality of a contract under section 489.128, is not a basis to vacate an arbitration award.” The Village at Dolphin Commerce Center, supra.

 

 

imagesA3FNB0L2Now, there are interesting take-aways from this ruling that need to be considered: 

 

    • If a party is arguing that a contract that contains an arbitration provision is unenforceable as a whole (such as being unenforceable because the contractor was not licensed at the time of contract), that determination should go to the arbitrator and not the court.   Yet, even the Third District noted that the Fourth District in Jupiter Medical Center, Inc. v. Visiting Nurse Association of Florida, Inc., 72 So.3d 184 (Fla. 4th DCA 2011), entered a ruling that conflicted with the United States Supreme Court (and, thus, the instant ruling) by stating: “If [a] contract is found to be illegal, a prior arbitration will not prevent the trial court from vacating the award.”  The Village at Dolphin Commerce Center, supra, quoting Jupiter Medical Center, Inc., 72 So.3d at 186.  How should this be reconciled with the instant ruling?  If a party in arbitration under the rules of the American Arbitration Association wants to preserve its argument that the arbitrator does not have jurisdiction to rule on the enforceability of the contract and lien under s. 489.128, it needs to (a) timely object to the arbitrator’s jurisdiction in accordance with the American Arbitration Association’s rules to ensure this argument is not waived and (b) hope that the court agrees with the Fourth District’s ruling in Jupiter Medical Center that a court can vacate an arbitration award if a contract is found to be illegal.  More than likely, however, the court will do exactly what the Third District did in The Village at Dolphin Commerce Center by holding that the arbitrator has the authority to determine the enforceability of a contract when the legality of the contract is be challenged as whole.

 

    • If a party wants to have the ability to appeal a ruling, particularly a ruling that involves a potentially incorrect application of the law, that party should NOT agree to a contract that contains an arbitration provision.  There is no discussion in this case (and the appellate court likely did not know) why the arbitration panel overlooked the fact that the contractor was not properly licensed and/or the reasons it found that s. 489.128 did not apply.  It did appear from the opinion, however, that the contractor was not properly licensed at the time of the contract and that s. 489.128 should have applied.

 

    • Determine whether the party being hired is licensed at the time of contract. Also, if a party is required to be licensed at the time of contract, it should get licensed in order to avoid having the other party to the contract argue that the contract and/or lien is unenforceable.

 

    • Recently, I discussed the Second District Court’s opinion in Snell v. Mott’s Contracting Services, Inc., 39 Fla. L. Weekly D1053a (Fla. 2d DCA), where the Court held that the contractor’s lien was unenforceable because the contractor did not timely enforce the lien in court after receiving a Notice of Contest of Lien.  (See http://www.floridaconstructionlegalupdates.com/dont-forget-to-timely-foreclose-the-construciton-lien-in-court/).   There is no discussion in The Village at Dolphin Commerce Center whether the contractor ever moved to foreclose its lien in court. Most likely, it asserted a lien foreclosure action in its counterclaim against the owner in court that was stayed pending the arbitration.  However, if it did not, then there would remain an issue as to how the lien is enforceable if it was not timely foreclosed on in 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.