QUICK NOTE: UNENFORCEABLE LANGUAGE IN ARBITRATION PROVISION

Posted on October 19, 2018April 24, 2020 by Edward Garber

Although 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

Posted on July 21, 2018April 24, 2020 by Edward Garber

Have 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.

DOES ARBITRATION APPLY TO CONTEMPORANEOUSLY EXECUTED CONTRACTS (WHEN ONE OF THE CONTRACTS DOES NOT HAVE AN ARBITRATION PROVISION)?

Posted on January 6, 2018January 6, 2018 by Edward Garber

Binding 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 cases. See, 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.

DON’T WAIVE YOUR RIGHT TO ARBITRATE (UNLESS YOU WANT TO!)

Posted on October 14, 2017October 14, 2017 by Edward Garber

Does 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!).

QUICK NOTE: DO YOUR HOMEWORK WHEN IT COMES TO SELECTING YOUR ARBITRATOR

Posted on July 19, 2017July 19, 2017 by Edward Garber

Many construction contracts contain arbitration provisions. Instead of litigating a dispute arising out of the contract, the parties will arbitrate the dispute per the arbitration provision. There are advantages to arbitration and certain disputes bode well for arbitration. The key is you want to make sure you select the RIGHT arbitrator or arbitrators. Do your homework regarding the arbitrator list presented to you by, say, the American Arbitration Association. Strike out those on the list that either do not have the requisite experience you need to decide the dispute or you believe they are not going to be impartial. For instance, if you want an arbitrator that you think will specifically follow the letter of the law or the precise terms of a contract, select those on the list that meet this requirement; strike out others that do not. The same philosophy would apply if you want an arbitrator to have specific factual knowledge or a factual understanding regarding a driving issue in the dispute. Do not neglect the homework required to select –or try to select — the arbitrator you believe is the most qualified to understand the issues.

Now, why is this important? It is important because you need to arbitrate a dispute with the understanding that the arbitrator’s award (decision) is FINAL. There are no appellate rights. None. Vacating an arbitrator’s award is very challenging and the bases to vacate an award are limited and, most of the time, will NOT apply.

In a recent decision, a party tried to vacate an arbitration award. One of the arguments was that the arbitration panel failed to follow Florida law. Well, guess what? An arbitrator does not necessarily have to comply with Florida law. Legal error by an arbitration panel is not a basis to vacate an arbitration award. See Managed Care Ins. Consultants, Inc. v. United Healthcare Ins. Co., 42 Fla. L. Weekly D1599b (Fla. 4th DCA 2017).

ARBITRATION PROVISION IN HOMEBUILDER’S WARRANTY AGREEMENT WITH HOMEOWNERS IS UNENFORCEABLE

Posted on June 2, 2017June 2, 2017 by Edward Garber

Buying a new home from a homebuilder is an exciting time. How could you not be excited about buying and moving into a new home? It is a big milestone. When buying a new home from a homebuilder, it is common that you are provided a limited warranty agreement to sign that outlines your rights if there is a “warranty” claim, the length of the warranty period, what constitutes a valid warranty claim, and includes an arbitration provision requiring you to arbitrate claims arising out of the agreement or home. It is also common that such limited warranty agreement contains important disclaiming language. Homeowners should always consider what they sign, but the reality is that most homeowners are going to absolutely sign what the homebuilder wants them to sign (and the homebuilder may even be unwilling to sell a home without certain signatures that offsets their risks).

A recent case, Anderson v. Taylor Morrison of Florida, Inc., 42 Fla. L. Weekly D1232a (Fla. 2d DCA 2017), potentially changes certain business practices of a large homebuilder, and perhaps many homebuilders, when the arbitration provision in its limited warranty agreement was deemed void against public policy. The homebuilder’s limited warranty agreement is likely a standard form agreement that all of its homeowners sign with identical language. Thus, this ruling impacts not only the enforceability of the arbitration provision in this case, but of any claim by a homeowner that signed the same limited warranty agreement. This is certainly not what the homebuilder wanted when it thought it was containing disputes to arbitration and not litigation.

In this case, homeowners sued the homebuilder years after completion for a defect in the stucco system of their home. One of the claims was a statutory violation of building code claim. The homebuilder moved to compel arbitration pursuant to the limited warranty agreement that contained in material portion:

This Dispute Settlement provision sets forth the exclusive remedy for all disputes, claims or controversies arising out of, or in any manner related to, this Warranty or any alleged issues in your home or property. All disputes, claims or controversies which cannot be resolved between TM [the Builder] and you shall be submitted by you, not later than ninety (90) days after the expiration of the applicable warranty period, to the American Arbitration Association (“Arbitrator”) for resolution in accordance with the rules and regulations of the Arbitrator. The final decision of the Arbitrator shall be binding on all parties and shall include final decisions relating to enforcement of the terms and provisions of this Warranty.

***

BUYER AGREES THAT THIS LIMITED WARRANTY SHALL BE THE EXCLUSIVE REMEDY FOR ANY ISSUES IN DESIGN, MATERIALS OR WORKMANSHIP. BUYER HERBY [sic] ASSUMES THE RISK OF ALL OTHER LOSS RESULTING FROM SUCH ISSUES, INCLUDING ANY CLAIMS FOR PROPERTY DAMAGE OR PERSONAL INJURY, AND WAIVE [sic] ALL OTHER CLAIMS, WHETHER IN CONTRACT, TORT OR OTHERWISE.

The trial court compelled arbitration per the limited warranty agreement. On appeal, however, the Second District Court reversed finding that the arbitration provision was unenforceable against public policy because it prohibited the homeowners from pursing a statutory building code violation claim (i.e., that the stucco system was not installed as required by the governing building code). See Anderson, supra (“The arbitration provision in the Warranty indicates that all issues related to the Warranty, the home, or the property are to be arbitrated. But read in context with other provisions in the Warranty, particularly the disclaimer provision, it is evident that the alleged building code violations cannot be remedied through arbitration because the claims are not covered by the Warranty and all non-Warranty claims are waived… Simply put, the arbitration provision here effectively limits the Andersons’ [homeowner] remedies to Warranty claims, as defined in the documents, and does not just substantially diminish the Andersons’ statutory remedy for a violation of the building code but totally eliminates it.”).

Here, the import of the issue, in my opinion, is not necessarily the arbitration provision, but the capitalized disclaiming language that ultimately operates to disclaim liability for latent defects – or defects not readily observable, particularly at the time of closing. A latent defect is a defect oftentimes discovered beyond the warranty period. A warranty period really pertains to the period where the contractor or builder agrees to show back up to the property to address post-punchlist related items. When this period expires (whether it is a contractual warranty period or statutory warranty period in the case of condominiums) does not mean a homeowner no longer has any recourse. That recourse is based on whether the defect is a latent defect. The disclaiming language in the limited warranty agreement limits a homeowner’s remedies for certain latent defects. When this language is read in conjunction with the arbitration provision, the homeowner is waiving rights for claims unrelated to true warranty claims, such as a statutory building code violation claim, while agreeing to arbitrate “permissible” claims under the limited warranty agreement arising out of the home. This has the effect of preventing homeowners from arbitrating certain, valid claims.

It is uncertain how a trial court or appellate court will treat such disclaiming language other than any dispute arising out of the home needs to be litigated and not arbitrated.

QUICK NOTE: AIM TO AVOID A STAY TO YOUR MILLER ACT PAYMENT BOND CLAIM

Posted on February 17, 2017February 17, 2017 by Edward Garber

Strategy is important. This is especially true if you are trying to avoid arbitration. In a recent federal district court case, a subcontractor sued the prime contractor and the Miller Act payment bond surety. The subcontractor, however, had an arbitration provision in its subcontract with the prime contractor. The prime contractor moved to compel arbitration pursuant to the subcontract and moved to stay the subcontractor’s Miller Act payment bond claim. The last thing, and I mean the last thing, the subcontractor wanted to do was to stay its claim against the Miller Act payment bond. However, the district court compelled the subcontractor’s claim against the prime contractor to arbitration and stayed the subcontractor’s Miller Act payment bond claim pending the outcome of the arbitration. See U.S. v. International Fidelity Ins. Co., 2017 WL 495614 (S.D.Al. 2017). This is not what the subcontractor wanted.

The outcome of this ruling may have been different if the subcontractor never sued the prime contractor and only sued the Miller Act payment bond surety. The Miller Act payment bond surety did not move to compel the Miller Act claim to arbitration evidently meaning there was nothing in the subcontract that would support such an argument. Had only the Miler Act payment bond surety been sued, the subcontractor may have likely been able to proceed with its payment dispute against the surety in federal district court without having to worry about arbitrating the same dispute with the prime contractor.

CAN A NON-SIGNATORY INVOKE AN ARBITRATION PROVISION?

Posted on January 27, 2017January 27, 2017 by Edward Garber

As you know from prior postings, arbitration is a creature of contract. Hence, if you want your disputes to be resolved through arbitration, as opposed to litigation, make sure to include an arbitration provision in your agreement that covers all disputes arising out of or relating to the agreement.

Under certain circumstances, a non-signatory to an agreement wants to invoke an arbitration clause in the agreement. The non-signatory will move to compel a signatory to the agreement (with an arbitration provision) to arbitrate a dispute with the non-signatory. Can a non-signatory do this? Yes, under certain circumstances.

This issue was raised by the Eleventh Circuit Court of Appeal’s ruling in Kroma Makeup EU, LLC v. Boldface Licensing + Branding, Inc., 845 F.3d 1351 (11^th Cir. 2017). In this case, a defendant moved to compel arbitration based on a licensing agreement it was not a party too. The Eleventh Circuit explained that Florida’s doctrine of equitable estoppel gives a non-signatory an argument in certain circumstances that it can invoke an arbitration provision in a contract it is not a signatory too:

Under that doctrine [of equitable estoppel], a defendant who is a non-signatory to an agreement containing an arbitration clause can force arbitration of a signatory’s claims when “the signatory … must rely on the terms of the written agreement in asserting its claims against the nonsignatory.…” A non-signatory, however, cannot invoke the doctrine to compel arbitration of claims that are not within the scope of the arbitration clause. Equitable estoppel does not allow a nonsignatory to an agreement to alter and expand an arbitration clause that would not otherwise cover the claims asserted.

Kroma Makeup, supra, (internal citations omitted).

This ultimately means the non-signatory must show 1) the signatory is relying on the underlying contract (with the arbitration provision) to assert claims and 2) the scope of the arbitration provision in the contract covers the dispute. The non-signatory news to show both to compel arbitration.

In Kroma Makeup, although the defendant was being sued based on issues relating to the underlying contract, the arbitration provision in the contract stated that “the Parties agree that the disputes arising between them concerning the validity, interpretation, termination or performance” of the Agreement will be arbitrated.” However, the defendant was not a “party” to the agreement; thus, the scope of the arbitration provision did not cover the dispute at-issue.

SUBCONTRACTORS MAY (LIKELY) BE REQUIRED TO STAY THEIR MILLER ACT PAYMENT BOND CLAIMS PENDING THE OUTCOME OF THE CONTRACT DISPUTES ACT RESOLUTION PROCESS

Posted on February 18, 2016February 18, 2016 by Edward Garber

If you are a subcontractor on federal construction projects, the opinion by the District Court of Alaska in U.S. f/u/b/o Brice Environmental Services Corp. v. Bhate Environmental Associates, Inc., 2016 WL 544406 (D.Alaska 2016), provides an interesting or not-so-interesting outlook on subcontractors that participate (perhaps by choice) in the request for equitable adjustment (REA) and Contract Disputes Act dispute resolution process. (See this article for more on this outlook that creates a conflict between a subcontractor’s Miller Act payment bond rights and a prime contractor’s participation in the Contract Disputes Act dispute resolution process.)

In this matter, a soil remediation subcontractor submitted an REA to the prime contractor for approximately $3 Million associated with the prime contractor’s standby and additional work directives. The subcontractor claimed that most of the REA was unrelated to issues caused by the owner, but rather, caused by the prime contractor. The subcontractor and prime contractor agreed to a mutual termination of the subcontractor and the subcontractor reduced its REA to approximately $1.1 Million (to include only incurred costs versus anticipated costs). The prime contractor then submitted a change order request to the federal government. The subcontractor shortly thereafter sued the prime contractor and its Miller Act payment bond surety.

The prime contractor and its Miller Act payment bond surety moved to stay the lawsuit pending the completion a Contract Disputes Act resolution and, if required, completion of arbitration thereafter. The subcontractor did not oppose staying its Miller Act payment bond claim pending arbitration with the prime contractor, but opposed staying the case pending the resolution of the prime contractor’s Contract Disputes Act claim. However, the subcontractor acknowledged that claims attributable to the federal government are passed through to the government and that the subcontractor shall not maintain any proceeding against the prime contractor with respect to government-related (owner) claims until resolution of Contract Dispute Act claims. Moreover, the subcontract provided for the completion of the Contract Disputes Act resolution process between the prime contractor and federal government before the subcontractor could maintain any proceeding against the prime contractor in connection with any omission, default, or act by the federal government.

Here, the subcontractor could not establish that the federal government’s acts did not contribute to its claims against the prime contractor; and, the prime contractor submitted a change order to the federal government that included the subcontractor’s costs supporting its position that the federal government’s acts were connected to the subcontractor’s claim. Nonetheless, the subcontractor argued it would be unfair if it had to bear the brunt of waiting for the resolution of any Contract Disputes Act claim between the prime contractor and federal government before the subcontractor could pursue its claim against the prime contractor. The Court dismissed this argument and stayed the action pending the outcome of the Contract Disputes Act resolution process between the prime contractor and federal government expounding:

The economic strain of awaiting resolution of the CDA procedures between Defendant Bhate [prime contractor] and AFCEC [federal government] is, while burdensome, still a reasonably foreseeable event under the Subcontract. Furthermore, denying the Motion to Stay and allowing this matter to proceed would bifurcate the matter, creating parallel proceedings involving many of the same facts and witnesses. Additionally, it could potentially force Defendants [prime contractor and surety] to take inconsistent positions in the simultaneous proceedings, supporting Plaintiff’s claims against AFCEC while defending against them in the arbitration between the parties. An order staying this matter is supported not only by the contract, but also the promotion of judicial economy and efficiency.

Bhate Environmental Associates, supra, at *4.

This is undoubtedly a harsh ruling for a subcontractor that is now forced to wait a potentially long time while the prime contractor participates in the Contract Disputes Act resolution process. While harsh, the subcontractor agreed to bear this risk in its subcontract. And, from the Court’s rationale, even if the subcontractor did not bear this risk, the Court still found that staying the subcontractor’s claims promoted judicial economy since it prevented the prime contractor from dealing with simultaneous disputes (one with the subcontractor and another with the federal government) and taking inconsistent positions.

From the prime contractor’s perspective, this language that requires the subcontractor to bear this risk and stay any dispute pending the outcome of the Contract Disputes Act resolution process is extremely important language (based on the precise reasoning by the Court quoted above).

From the subcontractor’s perspective, this reinforces the notion that it is imperative for parties to appreciate the risks they are agreeing to in their contracts, particularly as it relates to the resolution of disputes. Also, this reinforces the risk that a subcontractor performing federal construction work may have to bear irrespective of the subcontract.

Although the subcontractor is now in a wait-and-see mode while the Contract Disputes Act process runs its course, the subcontractor was smart by perfecting its Miller Act payment bond rights by timely filing suit. Even though the prime contractor’s Contract Disputes Act resolution process may take some time, the prime contractor and its payment bond surety will ultimately have to deal with this dispute if the outcome of its Contract Disputes Act claim does not fully resolve the subcontractor’s claim to the subcontractor’s satisfaction.

STAYING MILLER ACT PAYMENT BOND LAWSUIT PENDING ARBITRATION

Posted on March 6, 2015March 6, 2015 by Edward Garber

In a prior posting, I discussed how federal courts have discretion to stay a subcontractor’s lawsuit against a payment bond surety pending an arbitration between the subcontractor and general contractor. This posting did not pertain to a Miller Act payment bond. However, low and behold, this same rationale would apply to a subcontractor’s lawsuit against a Miller Act payment bond.

In U.S. f/u/b/o John Jamar Construction Services v. Travelers Casualty and Surety Co. of America, 2015 WL 757858 (S.D.Tex. 2015), a subcontractor sued the prime contractor’s Miller Act payment bond. The prime contractor countered that the subcontractor materially breached the subcontract causing it to terminate the subcontractor for default.

The subcontract contained an arbitration provision and the prime contractor served an arbitration demand on the prime contractor. The surety was not bound by the arbitration provision (as it was not a party to the subcontract) but moved to stay the Miller Act lawsuit pending the outcome of the arbitration between the prime contrator and subcontractor. The federal district court agreed with the surety and stayed the litigation because the factual and legal issues between the prime contractor and subcontractor substantially overlapped with the subcontractor’s claims against the Miller Act payment bond surety.

Accordingly, if you are a prime contractor and involved in a dispute with a subcontractor where your subcontract contains an arbitration provision–such as in this case where the prime contractor terminated the subcontractor for default–there is little downside in demanding arbitration pursuant to the subcontract. If the subcontractor initiates a Miller Act lawsuit, there is authority that the lawsuit will be stayed pending the outcome of the arbitration.

Conversely, if you are a subcontractor and involved in a dispute with a prime contractor where your subcontract contains an arbitration provision, there is upside in moving forward with the Miller Act lawsuit to ensure the lawsuit is filed within the one-year limitations period. However, if there is concern the prime contractor will move to demand arbitration under the subcontract (as a means to stay the Miller Act litigation), you may want to consider simultaneously moving to demand arbitration against the prime contractor to preserve your status as the claimant (plaintiff) in the arbitration.