WAIVER OF ARBITRATION BY NOT SUBMITTING CLAIM TO INITIAL DECISION MAKER…REALLY!

Arbitration is a form of dispute resolution that is a creature of contract.   If you want an arbitrator to resolve your disputes, you need to ensure there is an arbitration provision in your contract.   There are pros and cons to arbitration.  One con is you lose the right to appeal.  A couple of pros, however, are that your arbitrator(s), which you generally have some control in the selection of, will be versed in the construction industry and it can be a more efficient forum to resolve disputes in the times of COVID.   Once you have your scheduling conference with the appointed arbitrator(s), you will be able to agree upon a set final hearing (trial) time and have milestone dates that work backwards from the final hearing date.  This is much more efficient than being placed on an unrealistic trial docket or having to deal with the gamesmanship of motions just to be able to get your case at-issue for trial.

However, the right to arbitrate your dispute can be waived.  This was the issue in Leder v. Imburgia Construction Services, Inc., 2021 WL 3177338 (Fla. 3d DCA 2021), which I will be the first to tell you the ruling is quite baffling to me.  In a nutshell, the contractor, by not complying with the submission of a claim to the Initial Decision Maker was found to have waived the dispute resolution provision in the AIA contract.  Not sure this makes sense, but this was the ruling.

The contract, which was clearly an AIA contract, between the owner and contractor contained a dispute resolution provision.  It contained an arbitration provision to resolve disputes.  However, prior to arbitration, there were other dispute resolution steps parties had to follow.  The parties were required to submit claims to the Initial Decision Maker.  In this contract, the parties identified the “Miami Shores Village Building Department Official” as the Initial Decision Maker.  The AIA defaults to the architect as the Initial Decision Maker, but sometimes parties will agree on a third-person to serve in this role.  (I have never seen parties select a public body or official to serve in this role!).   The Initial Decision Maker’s decision is a condition precedent to mediation, which is then a condition precedent to litigation.   This is boilerplate AIA language in contracts with a contractor and owner.

The owner filed suit against the contractor after the contractor abandoned the project due to a dispute over a change order.  The contractor moved to dismiss the suit based on the arbitration provision.  The owner argued the contractor waived the right to arbitrate by not complying with the dispute resolution provision prior to abandoning the project, i.e., by not submitting the change order dispute to the Initial Decision Maker.   The trial court found the owners’ argument without merit and dismissed the complaint based on the arbitration provision.  The appellate court, on the other hand, found the owners’ waiver argument compelling and reversed the dismissal.

The Owners contend that the arbitration provision in the contract is unenforceable as it was waived. We agree.

Although a dispute arose between the parties, neither party initiated a claim with the Initial Decision Maker. Under the contract, a condition precedent to mediation is filing a claim with the Initial Decision Maker, and a condition precedent to arbitration is demanding mediation of the Initial Decision Maker’s decision. In this case, either party had the ability to initiate a claim with the Initial Decision Maker because the dispute relating to the fifth change order affected both parties and was related to the construction contract. However, neither party elected to do so.

***

In the instant case, the Contractor waived its right to arbitrate based on its pre-litigation action and the language in the parties’ contract. As stated above, prior to binding arbitration, there are other steps that the parties to the contract must take to preserve its contractual right to arbitrate—submitting a claim to the Initial Decision Maker, and thereafter, pursuing mediation. Neither party utilized this procedure to resolve their dispute relating to the…change order, including taking the first step—initiating a claim with the Initial Decision Maker. As such, we conclude that the parties waived their right to arbitrate under the terms of their contract. Therefore, we reverse the order granting the Contractor’s motion to dismiss the amended complaint and, on remand, the trial court is instructed to order the Contractor to file an answer to the Owners’ amended complaint.

Leder, supra, at *2-3.

The morale of this case is if there is a dispute resolution provision — comply with it — versus having to deal with this bonkers ruling where the court deemed a waiver of the arbitration provision and the entire dispute resolution process just because the claim had not been submitted to the Initial Decision Maker!

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

QUICK NOTE: YES, YOU CAN WAIVE THE RIGHT TO ARBITRATE

A party can waive the contractual right to arbitrate.  Waiver is the “voluntary and intentional relinquishment of a known right or conduct which implies the voluntary and intentional relinquishment of a known right.”  Ship IV Harbour Island, LLC v. Boylan, 44 Fla. L. Weekly D831a (Fla. 5th DCA 2019) (citation and internal quotation omitted).  Thus, a party can waive its right to arbitrate a dispute by engaging in conduct inconsistent with the right to arbitrate.  One way a party can act inconsistently with the right to compel a dispute to arbitration is by engaging in discovery in litigation, particularly discovery as to the merits of the case.  See Ship IV Harbour Island, supra (after court ordered limited discovery regarding arbitration, party thereafter waived right to arbitration by engaging in discovery as to the merits of the dispute).    For this reason, if your desire is to preserve the integrity of a contractual arbitration provision, do not do anything inconsistent with this right such that you give the other party the argument that you waived the contractual right to arbitration.  

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.