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

Posted on May 23, 2014November 8, 2024 by Edward Garber

Arbitration 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.

Now, 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. 4^th 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 https://floridaconstru.wpengine.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.

STAYING LITIGATION AGAINST A PAYMENT BOND SURETY PENDING THE OUTCOME OF ARBITRATION INVOLVING THE GC AND SUB

Posted on February 27, 2014November 8, 2024 by Edward Garber

The all-too-common dilemma: If the subcontract includes an arbitration provision, but the payment bond does not, can the subcontractor pursue a simultaneous lawsuit against the payment bond surety while there is an arbitration proceeding involving the general contractor? And, can the general contractor or the payment bond surety stay the litigation pending the outcome of the arbitration involving the subcontractor?

Hofer, Inc. v. Fidelity and Deposit Co. of Maryland, 2014 WL 644598 (N.D. Fla. 2014), is an interesting opinion that involves this very dilemma. In this case, a payment dispute arose where the subcontractor claimed it was owed money for work it performed for an apartment project and the general contractor claimed the subcontractor was not owed money for deficient work. A familiar fact pattern! The subcontract contained an arbitration provision. Before arbitration came into play, the subcontractor filed a lawsuit against the payment bond. (The payment bond was not an unconditional payment, but rather, a conditional payment bond meaning that if the owner did not pay the general contractor, the subcontractor would have lien rights, not payment bond rights.) After the lawsuit was filed, the general contractor demanded arbitration with its subcontractor pursuant to the subcontract. The payment bond did not contain an arbitration provision nor did it incorporate by reference the subcontract’s arbitration provision. Thus, there was no way the surety could be compelled to arbitration. After the arbitration proceeding commenced, the payment bond surety moved to stay the lawsuit pending the outcome of the arbitration proceeding involving the subcontractor and general contractor. Naturally, the subcontractor contested this motion–it was the party that initiated the dispute first.

The Northern District maintained that it is has discretion whether to stay the litigation pending the outcome of the arbitration. It explained that there is a heavy presumption that litigation can proceed at the same time as arbitration when the litigation involves a nonarbitrable claim (a claim not subject to arbitration such as the payment bond claim), but “if the arbitrable issues are crucial for the determination of nonarbitrable claims, a court has discretion to stay the litigation.” Hofer, supra, at *1. In other words, if the arbitration is going to resolve issues that are important to the litigation, a court has the discretion to stay the litigation pending the outcome of arbitration.

A payment bond surety is entitled to most of the contractual defenses of its bond-principal general contractor. Therefore, it would be entitled to the same defenses / arguments that the general contractor was raising against the subcontractor pertaining to deficient work. So, if the general contractor prevails in its arbitration, the subcontractor’s claim against the payment bond surety could become moot. Because the payment bond was a conditional bond, the surety and general contractor could argue that the subcontractor does not have a payment bond claim because the owner never paid the general contractor for the subcontractor’s work and the subcontract contained a pay-if-paid provision. However, it does not appear this argument was asserted so perhaps the owner did pay the general contractor and the general contractor simply withheld the amount of the back-charge. To this point, the Northern District maintained, “Nothing in the record suggests that whether Apex [general contractor] has been paid for Hofer’s [subcontractor] work will be an issue in the arbitration process.” Hofer, supra, at *2. Indeed, the only issue in arbitration was whether the general contractor paid the subcontractor the proper amounts due under the subcontract. This means that the fact that the payment bond was a conditional bond instead of an unconditional payment bond was of no true significance in this dispute. This is important because since most payment bonds are unconditional payment bonds (that are not conditioned on the payment of the owner and where pay-if-paid is not a defense), the rationale in this case would apply to unconditional payment bonds.

The Northern District found that even though the subcontractor was not bound to arbitrate its dispute with the payment bond surety, the litigation should nonetheless be stayed because i) the subcontractor agreed to resolve its disputes with the general contractor through arbitration and ii) the predominant issue in the dispute, that being whether the general contractor owed the subcontractor money, was being decided by the arbitration proceeding.

Although the actual facts of the dispute were not discussed, it seems apparent that once the subcontractor filed the lawsuit against the payment bond, the general contractor affirmatively demanded arbitration pursuant to the subcontract in furtherance of having the dispositive facts of the dispute decided by an arbitrator instead of through litigation. This was a good strategy because the general contractor and subcontractor agreed to have such disputes decided by arbitration. Even though the payment bond surety was not bound by the arbitration provision, the surety is typically defended by the general contractor and is raising most of the same defenses the general contractor would raise such as deficient work. Now, because the court had discretion as to whether to stay the litigation or allow it to proceed simultaneously with the arbitration, this is a risk the general contractor took by virtue of the subcontract. It is a risk because if the Northern District denied the surety’s motion to stay, the general contractor could have likely had the facts of this dispute determined by litigation instead of arbitration (depending on which case was tried first) which could have made portions of the arbitration moot.

So, what could have been done to prevent this scenario? A couple of thoughts to create the argument to avoid a simultaneous litigation and arbitration:

In drafting the arbitration provision in the subcontract, ensure that it includes the general contractor’s surety. The provision could state something to the effect that if the subcontractor initiates a claim against the general contractor’s surety, the surety, at its option, can invoke and demand arbitration pursuant to this arbitration provision as the surety is an intended third party beneficiary of the right to demand arbitration in this provision. The key is that if the subcontractor files suit and the general contractor/surety prefer arbitration, they have a contractual provision that would make it compelling to dismiss the litigation or, more likely, stay it pending the outcome of arbitration.
The other option, although far, far less common, is to include in the bond that the dispute resolution procedure is the same as in the subcontract of the claimant. There may be arguments around such a provision and the surety may not want its fate determined in an arbitration where there are not any appellate rights (and, perhaps, it may have concerns over the indemnification it is receiving from the general contractor).

For more information on arbitration provisions, please see: https://floridaconstru.wpengine.com/deference-given-to-arbitration-agreements/ and https://floridaconstru.wpengine.com/appreciating-the-risks-or-frustrations-of-arbitration/.

DEFERENCE GIVEN TO ARBITRATION PROVISIONS

Posted on August 12, 2013November 8, 2024 by Edward Garber

The recent case of Pulte Home Corp. v. Bay at Cypress Creek Homeowner’s Association, Inc., 38 Fla. L. Weekly D1705a (Fla. 2d DCA 2012) involves a dispute by a homeowner’s association against its developer / homebuilder. In this case, the association sued the developer / homebuilder for building code violations under Florida Statute s. 553.84. The association did this in order to try to circumvent an arbitration provision in the developer / homebuilder’s limited warranty given in favor of initial purchasers. The developer / homebuilder moved to compel arbitration which was denied by the trial court. On appeal, the Second District Court of appeals reversed the trial court finding that statutory claims were covered by the arbitration provision.

The issue to remember is that deference is given to arbitration provisions and that statutory claims, breach of contract claims, warranty claims, and tort claims are all claims that may be submitted to arbitration pursuant to an arbitration provision. In Pulte Home, the association, for strategic reasons, did not want to arbitrate and tried to pursue a claim that did not subject it to arbitration. Although the Second District did not recite the arbitration provision in the opinion, the Court maintained that the agreement to arbitrate in the limited warranty given to initial purchasers covered statutory claims.

APPRECIATING THE RISKS OR FRUSTRATIONS OF ARBITRATION

Posted on July 11, 2013November 8, 2024 by Edward Garber

Arbitration, just like litigation, can come with its own risks and frustrations. Once an arbitration award is rendered, the prevailing party will usually file an action or move to compel a circuit court to confirm the arbitrator’s award so that the award is turned into a judgment. However, a party that does not like the arbitrator’s award, will try to move to modify or vacate the award in accordance with Florida’s Arbitration Code (Florida Statutes Chapter 682). Although there are specific statutory grounds in order to move to modify or vacate an arbitrator’s award (and the motion must be filed within a specific window of time – typically, 90 days after delivery of the award), non-prevailing parties will still make an effort to vacate or modify the award with the circuit court within their required time parameters. The bases to modify or vacate an award are different than appellate rights afforded to litigants in court because an arbitration award is not supposed to be vacated or modified if an arbitrator erred as to the law.

The case of Wells v. Castro, 38 Fla. L. Weekly D1509a (Fla. 3d DCA 2013), illustrates certain frustrations. Without going into the factual details of the dispute, an arbitrator entered an award in favor of a claimant (party demanding arbitration) against one respondent (party responding to the demand for arbitration) and against the claimant as to another respondent. All of the parties agreed that the arbitrator is vested with the authority to determine the prevailing party for purposes of being entitled to attorneys’ fees. The respondent that prevailed as to the claimant’s claim wanted to be the prevailing party in order to recover its attorneys’ fees. However, the arbitrator found that neither party was the prevailing party meaning neither the respondent nor claimant would be entitled to recover their attorneys’ fees (as to the claimant’s claim against the prevailing respondent). Notably, under the Florida Supreme Court’s decision in Trytek v. Gale Indus., Inc., 3 So.3d 1194 (Fla. 2009), a court is to look at which party prevailed on the significant issues in the case for purposes of determining the prevailing party and has discretion to determine that there is not a prevailing party; stated differently, there is now uncertainty as to whether a party will be deemed the prevailing party and be entitled to their attorneys’ fees under the “significant issues” standard.

The respondent that prevailed moved the circuit court to essentially modify the arbitration award arguing that the arbitrator erroneously concluded that neither party was the prevailing party and that the respondent should have been deemed the prevailing party because it prevailed as to the claimant’s claims. The trial court granted the motion and deemed the respondent the prevailing party for purposes of being entitled to attorneys’ fees.

On appeal through a petition for a writ of mandamus (in this case, an appeal for the appellate court to order the trial court to confirm the arbitrator’s award), the Third District reversed the trial court maintaining: (a) the parties agreed to have the arbitrator determine the issue of prevailing party for purposes of attorneys’ fees (and need to live by that determination) and (b) an arbitrator’s error of law is not a basis to vacate or modify an award. Thus, if the arbitrator erred in determining the prevailing party under Florida caselaw, the parties need to live with that determination because they agreed to have the arbitrator determine this issue in their arbitration.

While there are certain benefits to arbitration, it can come with its own risks and frustrations. Again, the reasons to modify or vacate the award are limited under Florida statute and not designed to correct an arbitrator’s potential errors in law. Also, if the parties want the arbitrator to determine the prevailing party for purposes of attorneys’ fees (which makes sense since the arbitrator will be the most familiar with the factual nature of the dispute), the parties will more than likely have to live by that determination.

UNDERSTANDING COMMON LAW INDEMNITY

Posted on May 22, 2013November 8, 2024 by Edward Garber

Common law indemnification is a “common” third party claim in multi-party litigation, particularly construction defect litigation. For instance, if a general contractor is sued by an owner for defects, the contractor may third party in the applicable subcontractors and assert a common law indemnification theory against the subcontractors to flow through liability. However, common law indemnity does not have to be asserted as a third party claim, but can be asserted as an affirmative claim after a judgment is entered against a party.

For example, in Diplomat Resorts Limited Partnership v. Tecnoglass, LLC, 38 Fla. L. Weekly D1126a (Fla. 4th DCA 2013), a hotel owner hired a contractor to furnish and install glass shower doors in hotel rooms. The subcontractor, naturally, purchased the glass doors from a fabricator / manufacturer and then installed the doors at the hotel. Unfortunately, many of the glass shower doors spontaneously fractured. The hotel owner obtained a judgment against the contractor in arbitration for the damages it incurred in replacing the doors. However, because the contractor was likely not collectible, the hotel owner took an assignment of the contractor’s claims against the fabricator / manufacturer because the thought was the glass fractured due to a defect in the fabrication process.

The hotel owner, standing in the shoes of its contractor through the assignment, sued the fabricator / manufacturer and asserted a common law indemnification claim which was dismissed with prejudice by the trial court. On appeal, the Fourth District reversed finding that the hotel owner (standing in the shoes as the contractor) properly asserted the following elements of common law indemnification: 1) that the contractor is wholly without fault, 2) the fabricator / manufacturer is at fault, and 3) the fabricator / manufacturer is liable to the contractor because the contractor was vicariously, constructively, derivatively, or technically liable to the hotel owner for the wrongful acts of the fabricator / manufacturer.

One of the challenges with common law indemnification is that there are court decisions that require the party seeking indemnification to be in a “special relationship” with the party it is seeking indemnification from. The Fourth District, however, maintained that a party does not need to specifically plead the existence of a special relationship because this “merely describes a relationship which makes a faultless party ‘only vicariously, constructively, derivatively, or technically liable for the wrongful acts” of the party at fault.” Diplomat Resorts Limited Partnership.

Although the Fourth District’s decision in Diplomat Resorts appears to make a common law indemnification claim easier to prevail on a motion to dismiss, it is still a challenging claim to prove because it requires the party seeking indemnity to be wholly without fault. In other words, if that party is slightly at fault, there is no common law indemnity. Putting this in context, if the contractor is slightly at fault regarding installing the shower doors, it will not prevail on its common law indemnification claim.

In fact, the fabricator / installer in Diplomat Resorts argued that the contractor failed to properly install the glass doors for this very reason; however, there was no finding by the arbitrator that the contractor improperly installed the glass doors. Had there been a specific finding, there likely would be no common law indemnification claim because “a former adjudication against an indemnitee [e.g., contractor], finding the indemnitee’s acts to be wrongful, is binding against the indemnitee and precludes indemnification.” Diplomat Resorts Limited Partnership.

Notably, there are times in arbitration or litigation where parties do not want specific findings of fact. One of those is in a situation where a defendant may look to another for a common law indemnification claim (such as against a manufacturer) because that party does not want a finding that it did anything wrong that would be contradictory to its position that its liability flows 100% from the party it is pursuing the common law indemnification claim against.

CAREFUL DRAFTING OF ARBITRATION PROVISIONS TO ENSURE THE STATUTE OF LIMITATIONS APPLIES TO CLAIMS RESOLVED THROUGH ARBITRATION

Posted on November 27, 2011November 8, 2024 by Edward Garber

Many construction contracts include arbitration provisions as the means to resolve a dispute instead of resorting to litigation. Certain owners prefer to resolve their disputes with contractors through arbitration and certain contractors, likewise, prefer to resolve their disputes with subcontractors through arbitration.

The case of Raymond James Financial Services, Inc. v. Phillips, 36 Fla. L. Weekly D2479a (2d DCA 2011), certified the following question to the Florida Supreme Court:

“Does Section 95.011, Florida Statutes, apply to arbitration when the parties have not expressly included a provision in their arbitration agreement stating that it is applicable.”

While this case was not a construction case, the question certified to the Florida Supreme Court was a fundamental issue that applied to ALL arbitration provisions. Section 95.011 is included in Florida Statutes Chapter 95 (“Chapter 95”) dealing with the statute of limitations for actions. The statute of limitations requires lawsuits to be brought within the specified timeframe set forth in Chapter 95 or else the action is time-barred, meaning it cannot properly be asserted under the law. In this case, however, the Second District found that there was nothing in the arbitration provision at-issue that required actions to be brought within the limitations periods set forth in Chapter 95 and, along these lines, nothing in Chapter 95 clarified that the statutes of limitations for actions was intended to apply to disputes resolved through arbitration.

This decision was crucial because if the statute of limitations is not intended to apply to disputes resolved through arbitration, and nothing in the arbitration provision clarifies that the statute of limitations periods set forth in Chapter 95 are intended to apply, then there is technically NO time period for when a dispute needs to be initiated because they could never be time-barred under the law. The corollary of this is that it could open arbitration floodgates because parties that thought they could no longer bring an arbitration claim under the law could now assert an argument that their claim was never time-barred under the law.

Luckily, the Florida Supreme Court answered the Second District’s certified question in the affirmative holding that the statute of limitations DOES APPLY TO ARBITRATION PROCEEDINGS!!! See Raymond James Financial Services, Inc. v. Phillips, 126 So.3d 186 (2013). This means that the defense of statute of limitations can be raised in an arbitration proceeding as a basis to bar an untimely filed claim.

With respect to construction contractors, parties that utilize the AIA Agreements (promulgated by the American Institute of Architects) that select arbitration as the dispute resolution procedure should still safely ensure the agreement contains a provision to the effect:

“In no effect shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim would be barred under the applicable statute of limitations.”

The AIA standard form agreements usually include this provision almost verbatim. This provision should not be deleted. When drafting or negotiating an AIA agreement that includes an arbitration provision, a party should ensure that language to the effect is included in the agreement and not deleted or substantially manipulated so as to render it ambiguous. Also, parties that do not use an AIA agreement and prefer arbitration need to draft such a provision or mimic one after the provision used in the standard form AIA agreements to ensure the statute of limitations applies to claims / disputes resolved through arbitration no matter what.