DON’T FORGET TO TIMELY FORECLOSE THE CONSTRUCITON LIEN IN COURT!

Posted on May 22, 2014May 22, 2014 by Edward Garber

A Notice of Contest of Lien under Florida Statute s. 713.22 is a vehicle that will shorten the statute of limitations for a lienor to foreclose on a recorded construction lien from one year to 60 days from the date the lien is contested. A copy of a Notice of Contest of Lien is identified below. An unwary lienor that fails to timely foreclose on its claim of lien in court will be deprived of its lien rights!

The recent decision in Snell v. Mott’s Contracting Services, Inc., 39 Fla. L. Weekly D1053a (Fla. 2d DCA), illustrates such an unwary lienor. In this case, a contractor recorded a claim of lien on a residential project. The owner then filed a lawsuit against the contractor and the contractor moved to dismiss or stay the action based on an arbitration provision in the contract. The owner then filed a Notice of Contest of Lien to shorten the contractor’s statute of limitations to foreclose on the lien to 60 days. The contractor, however, never moved to foreclose its lien in court; the court compelled the dispute to arbitration.

The contractor prevailed in arbitration and the arbitrator found that the contractor was the prevailing party under Florida Statute s. 713.29 that entitles a prevailing party in a lien action to its attorney’s fees (i.e., a party that prevails on the significant issues in the action).

However, the two issues on appeal were: (1) whether the contractor could be entitled to its attorney’s fees under s. 713.29 when it failed to timely foreclose on its lien in court after it received the Notice of Contest of Lien and (2) whether the arbitrator, absent express agreement of the parties, had authority to determine entitlement to attorney’s fees.

As it pertains to the first issue, the Second District found that because the contractor failed to comply with s. 713.22 by foreclosing on its lien in court within 60 days after the lien was contested, the contractor was not entitled to attorney’s fees pursuant to s. 713.29. Stated simpler, the contractor was not entitled to attorney’s fees because it no longer had lien rights since it failed to timely foreclose on its lien in court within 60 days after the lien was contested by the owner.

As it pertains to the second issue, the Second District found that an arbitrator has no authority / jurisdiction to determine a party’s entitlement to attorney’s fees unless the parties to the arbitration expressly waive the right to have a court determine entitlement.

This cases raises a few important points:

Even if there is an arbitration provision in a contract, it is still imperative that a lien foreclose action be filed in court! File the lien action and simultaneously move to stay the lien foreclosure action pending the arbitration.

If you receive a Notice of Contest of Lien, do not forget that it operates to shorten the statute of limitations to foreclose on the lien to 60 days. Otherwise, the lien will not be enforceable.

If you want an arbitrator to determine the entitlement to attorney’s fees, it is good practice to ensure that the parties to arbitration expressly agree to grant the arbitrator this authority and waive the court’s authority to determine entitlement.

NOTICE OF CONTEST OF LIEN

To: (Name and address of lienor)

You are notified that the undersigned contests the claim of lien filed by you on ___, (year) , and recorded in ___ Book ___, Page ___, of the public records of ___ County, Florida, and that the time within which you may file suit to enforce your lien is limited to 60 days from the date of service of this notice. This ___ day of ___, (year) .

Signed: (Owner or Attorney)

For more information on Notice of Contests of Lien, please see: https://floridaconstru.wpengine.com/oh-no-a-lien-is-recorded-what-are-some-of-my-options/.

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, 2014February 27, 2014 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, 2013August 12, 2013 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, 2013July 11, 2013 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.

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

Posted on November 27, 2011November 27, 2011 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.