ARBITRATION PROVISIONS ARE CHALLENGING TO CIRCUMVENT

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.

 

 

DRAFTING A CONTRACTUAL ARBITRATION PROVISION

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.

QUICK NOTE: UNENFORCEABLE LANGUAGE IN ARBITRATION PROVISION

imagesAlthough arbitration is a dispute resolution provision provided for in a contract, the scope of judicial review of an arbitrator’s award is still governed by law.  There are limited circumstances in which an arbitrator’s award can be challenged under the law.  One of those circumstances is not because a party believes that an arbitrator applied the incorrect law.  

 

In a recent construction case, discussed in more detail here, an arbitration provision provided that a party can essentially appeal/challenge an arbitrator’s award to the circuit court if the arbitrator applied the incorrect law.  The appellate court held this language was unenforceable because it attempted to expand the legal scope of judicial review of an arbitration award.  The issue, here, became more than just the unenforceable language but whether the entire arbitration clause should be deemed unenforceable.  In other words, the issue became whether the unenforceable language that expanded the scope of judicial review of an arbitration award could be severed from the provision such that the parties would still be required to arbitrate (hence, the importance of a severability provision in a contract) OR the entire arbitration provision should be deemed unenforceable.  This is a HUGE difference because in one instance the parties still can arbitrate absent the expanded scope of judicial review and in the other instance the arbitration clause is unenforceable in entirety and the parties would be required to litigate. 

 

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.

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.