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.

SUBCONTRACT REQUIRING ARBITRATION OUTSIDE OF FLORIDA

shutterstock_1127513288Have you entered into a subcontract that requires you to arbitrate disputes?  If so, does the arbitration provision require you to arbitrate your dispute outside of Florida?  If so, the case of Sachse Construction and Development Corp.  v. Affirmed Drywall, Corp., 43 Fla. L. Weekly D1622e (Fla. 2d DCA 2018) applies and reinforces the notion: Read and consider what you sign!  

 

In Sachse Construction, a drywall subcontractor entered into a subcontract for a construction project in Miami with an  arbitration provision.   The subcontract provided that it shall be construed in accordance with Michigan law and required that arbitration shall take pace in Michigan per the Construction Industry Rules of the American Arbitration Association. 

 

A dispute arose and, naturally, the drywall subcontractor did not want to arbitrate against the general contractor in Michigan.  The subcontractor argued the arbitration provision was unenforceable pursuant to Florida Statute s. 47.025, which is a Florida venue statute that renders a venue provision in construction contracts void if it requires a resident contractor to initiate venue outside of Florida (see hyperlink for more on the statute).  A clever argument.  But…the venue provision in the subcontract at-issue involved arbitration, not litigation, and the appellate court held that if the arbitration provision was governed by the Federal Arbitration Act, then the Federal Arbitration Act would preempt the application of s. 47.025 and the venue provision would not be rendered unenforceable.  “[A] Florida court must enforce an arbitration agreement that is valid and enforceable under the FAA even when the agreement would be unenforceable under Florida law.”  Sasche Construction, supra

 

The Federal Arbitration Act would apply if the contract involved interstate commerce.  (Commerce, as defined under the Federal Arbitration Act, involves commerce among the states or with foreign countries).  For this reason, the appellate remanded back to the trial court to determine whether interstate commerce applied. If interstate commerce did apply then the drywall subcontractor would be required to arbitrate its dispute in Michigan.

 

Two considerations:

 

First, it would seem that the general contractor should be able support the application of interstate commerce to trigger the application of the Federal Arbitration Act.  It argued that its principal office was in Michigan, but it should be able to further argue accounting or other financial or insurance related issues were processed and performed in Michigan.  It may also argue that the materials to be incorporated into the project (e.g., the drywall, etc.) were materials that flowed through interstate commerce.  If this is the case, the drywall subcontractor will be required to arbitrate its dispute in Michigan—a huge advantage to the general contractor.  

 

Second, even if interstate commerce did not apply and the application of s. 47.025 came into effect, it is uncertain why the parties would be required to litigate the dispute versus arbitrate the dispute in Florida, instead of Michigan.  The appellate court did note that the contract did not contain a severability clause (reinforcing the importance of such a clause in a contract), but there was not any argument or real discussion regarding this issue and the invalidation of an arbitration provision as a whole.  

 

Remember, read and consider what you sign!  It can have huge implications, such as being required to arbitrate your dispute outside of Florida.

 

 

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.

 

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.