Category Archives: Arbitration

CONSIDER ARBITRATION PROVISION IN HOMEBUILDER’S WARRANTY AND PURCHASE-AND-SALE AGREEMENT

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When you enter into a contract with a homebuilder, particularly a tract homebuilder, please consider two things when it comes to dispute resolution: (1) your purchase-and-sale agreement likely contains an arbitration provision, and (2) your limited warranty agreement you get in connection with closing likely also reinforces the arbitration provision, especially with warranty claims governed by the limited warranty agreement. This dispute resolution is important because it means the homebuilder wants disputes resolved through the arbitration process and NOT through the litigation process (where the nature of disputes and allegations are public).

Look, there are pros and cons with arbitration, no different than litigation. Arbitrating a dispute is not necessarily a bad thing, and with certain disputes, ideal. There is no right to appeal in arbitration, but the dispute should resolve itself quicker than litigation, and you’ll have more control over the decision maker, i.e., the arbitrator.

In a recent case, Osborne v. Drees Home of Florida, Inc., 49 Fla.L.Weekly D215a (Fla. 5th DCA 2024), a buyer purchased a home from a homebuilder.  The purchase-and-sale agreement and limited warranty contained arbitration provisions.  The buyer, years later, sold the home to a subsequent buyer / purchaser and assigned the limited warranty it received from the homebuilder.  The subsequent buyer then sued the homebuilder under theories of negligence and violation of Florida’s building code for defective stucco, windows, and painting. (There was no contract between the subsequent buyer and the homebuilder.) The homebuilder moved to compel mediation under the limited warranty agreement.  The trial court granted the homebuilder’s motion; however, the appellate court reversed.

“[T]here are three elements for courts to consider in ruling on a motion to compel arbitration of a given dispute: (1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived.”  “The general rule is that where an arbitration agreement exists between the parties, arbitration is required only of those controversies or disputes which the parties have agreed to submit to arbitration.”  “[T]he question whether the parties have submitted a particular dispute to arbitration, i.e., the ‘question of arbitrability’ is an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.”  To determine whether a dispute must be submitted to arbitration, the scope of the arbitration provision governs.  The scope of an arbitration clause is a pure matter of contract interpretation, and the determination of whether an arbitrable issue exists requires the court to examine the plain language of the arbitration agreement.  “Although any doubts regarding the scope of an arbitration clause should be resolved in favor of arbitration, where the contract provision is not doubtful, arbitration should not be ordered.” 

Osborne, supra (internal citations omitted).

The appellate court found the defect claims raised by the subsequent buyer were NOT covered by the limited warranty agreement, where the only warranty remaining was structural (load bearing) in nature: “Because the [plaintiffs’] claims are not within the scope of the Limited Warranty’s arbitration provision and the [plaintiffs] have not otherwise agreed to arbitrate their claims, we reverse the order compelling arbitration…..” Osborne, supra.

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: STAYING, NOT DISMISSING, ARBITRABLE DISPUTES UNDER FEDERAL ARBITRATION ACT

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As you hopefully know from posted articles, arbitration is a creature of contract. Stated differently, there must be a contractual basis to have a dispute resolved through binding arbitration. The Federal Arbitration Act (FAA) applies to transactions involving interstate commerce. Oftentimes, lawsuits are filed despite an arbitration provision in a contract because parties can, if they desire, waive their rights to have their dispute resolved through binding arbitration.

In what should not be a shocker, the United States Supreme Court in Smith v. Spizzirri, 144 S.Ct. 1173, 1178 (2024), held that when a federal “district court finds that a lawsuit involves an arbitrable dispute, and a party requests a stay pending arbitration, section 3 of the FAA compels the court to stay the proceeding.”  Dismissing the lawsuit should not be the option.  Staying the lawsuit should.

[S]taying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts. The FAA provides mechanisms for courts with proper jurisdiction to assist parties in arbitration by, for example, appointing an arbitrator; enforcing subpoenas issued by arbitrators to compel testimony or produce evidence; and facilitating recovery on an arbitral award. Keeping the suit on the court’s docket makes good sense in light of this potential ongoing role, and it avoids costs and complications that might arise if a party were required to bring a new suit and pay a new filing fee to invoke the FAA’s procedural protections.

Smith, supra, at 1178 (internal citations omitted).

If you have questions or concerns regarding an arbitration provision, the best time to ask is before you sign the contract that includes binding arbitration as the method to resolve disputes.

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.

BE STRATEGIC WHEN SUING A MANUFACTURER UNDER A WARRANTY WITH AN ARBITRATION PROVISION

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I’ve said this before, and I’ll say it again: arbitration is a creature of contract. If you don’t want to arbitrate, don’t agree to an arbitration provision as the means to resolve your dispute. Now, with that said, there are times you may not have a choice. An arbitration provision in a warranty from a manufacturer of a product is an example. If you are procuring the product, you are agreeing to the terms of the express warranty. Manufacturers are not negotiating their product warranty on a case-by-case basis considering they are not typically the ones selling the product directly to the end user. This does not mean that is a bad thing. It just means if you elect to sue the manufacturer directly for an alleged product defect or under the terms of the warranty, you should read the warranty and consider the strategic aspect that suing the manufacturer will have on your case.

In SICIS North America, Inc. v Sadie’s Hideaway, LLC, 48 Fla.L.Weekly D1581c (Fla. 1st DCA 2023), an owner elected to sue a tile manufacturer, a general contractor, the architect, and a window and door company. One of the arguments the owner raised was that exterior tiles installed were defective. The tiles were procured by the general contractor. The owner sued the general contractor under various theories and sued the tile manufacturer for breaches of warranty and negligence. The general contractor asserted a crossclaim for indemnification against the tile manufacturer. The tile manufacturer moved to compel the owner’s claim and the general contractor’s crossclaim to arbitration since there was an arbitration provision in the warranty documents and the general contractor’s indemnification claim arose from that transaction. The trial court denied the motion to compel arbitration. On appeal, the appellate court reversed:

First, because [the owner] was suing [the tile manufacturer] based upon the written warranty, it was bound by the arbitration provision contained in [the general contractor’s] agreement with [the tile manufacturer]. As the Florida Supreme Court has explained, “[W]hen a plaintiff sues under a contract to which the plaintiff is not a party . . . we will ordinarily enforce an arbitration clause contained in that contract, absent some other valid defense. . . .” . [The owner] had no valid defense against arbitration, a fact which it apparently realized when it voluntarily dismissed its express warranty claim after the notice of appeal and initial brief were filed.

Second, the trial court erred in not compelling arbitration based upon the agency relationship that existed between [the owner] and [the general contractor]. The essential elements of an actual agency relationship are: (1) acknowledgement by the principal that the agent will act for him; (2) the agent’s acceptance of the undertaking; and (3) control by the principal over the actions of the agent. 

***

[T]he record evidence establishes that [the owner] authorized [the general contractor] as its general contractor to act as its agent when purchasing the tiles from [the tile manufacturer]. Article 3 of the parties’ agreement provides that [the general contractor] “accept[ed] the relationship of trust and confidence established by the [a]greement,” it would “exercise [its] skill and judgment in furthering the interests of the Owner,” it would “furnish efficient business administration and supervision,” and it would “furnish at all times an adequate supply of workers and materials.” Section 10.1 authorizes [the general contractor] to obtain bids from “suppliers of materials,” and Section 12.1.9 provides that “the Contractor will not be required to make payments to subcontractors or suppliers unless and until the Owner pays Contractor for their work and materials.” In line with its duties pursuant to the agreement, [the general contractor] alleged below in its indemnification claim that a special relationship existed between it and [the tile manufacturer] because [the tile manufacturer] provided “certain materials” to it to install on the project. In addition, [the tile manufacturer] filed with the trial court a signed copy of its purchase agreement with [the general contractor]. Because [the general contractor’s purchase of the tiles was within the scope of work that [the owner] hired it to do, it was unnecessary for [the owner] to expressly authorize [the general contractor] to enter into the arbitration agreement with [the tile manufacturer]. [The owner] is bound by that agreement by virtue of its agency relationship with [the general contractor].

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.

SICIS North America, supra (internal citations omitted).

The owner did not need to sue the tile manufacturer. It could have just sued the general contractor for the tiles. Also, in numerous cases, it is not the product that is the problem; it is the installation. Did the warranty cover installation or only defects in the product itself?  It may likely be the latter and the warranty probably limited the scope of the manufacturer’s liability. It is uncertain in this instance, but even if there was an inherent product defect in the tiles, there are also economic loss rule considerations. The point is – suing the manufacturer was likely overkill in this case by the owner as it could have sued the general contractor that procured the tiles and was responsible for installing the tiles. Now, the owner and general contractor are tasked with arbitrating claims against a manufacturer under a warranty that probably has favorable terms to the manufacturer if indeed the tiles are proven to be defective and the root of the owner’s construction defect claim.

IF YOU WANT TO ARBITRATE, DON’T WAIVE YOUR RIGHTS TO DO SO

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I have said this before, but it is worth saying it again.  Arbitration is a creature of contract.  This means if you want your dispute to be decided by an arbitrator through a binding arbitration process, you need have a written arbitration agreement.  Such agreement is oftentimes included in the dispute resolution provision of your construction contract.  It is always advisable to have counsel draft your arbitration provision since this can be an important provision if a dispute ensues down the road. Arbitration provisions are common in construction contracts.

However, the right to arbitrate can be waived.  If you participate in a litigation and act inconsistent with your contractual right to arbitrate, this can serve as a waiver of your right to later demand arbitration.  Whether you waived your right to arbitrate has nothing to do with whether the other party was prejudiced by you acting inconsistently with your right to arbitrate.  This issue was recently decided by the Supreme Court in Morgan v. Sundance, Inc., 2022 WL 1611788 (2022), where the Supreme Court held prejudice to the other party is a non-issue under the Federal Arbitration Act (which broadly applies to contracts involving interstate commerce) when it comes to determining whether a party waived his/her/its right to arbitrate.

Although this may appear insignificant, it is not.  It reinforces the notion that if you want to arbitrate your dispute pursuant to your contract, you should NOT take any action inconsistent with this right.  The best practice is actually to demand arbitration from the get-go.  If you need to file a lawsuit, reference in the lawsuit that the dispute is subject to arbitration, you have demanded arbitration, and that you will be contemporaneously filing a motion to stay the action pending arbitration.   If you are responding to the lawsuit, the best practice is to file the motion to stay the action and compel arbitration pursuant to the contract right off the bat.  There is no reason to wait. These are best practices because you are not undertaking any action inconsistent with the right to arbitrate and, importantly, not giving the other side the waiver argument.  Remember, whether the other party is prejudiced by any proven waiver is moot–it does not impact whether or not you waived your right to arbitrate.

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.

 

ASSOCIATION BOUND BY ARBITRATION PROVISION IN PURCHASE-AND-SALE CONTRACTS AND DEEDS

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When an association files a lawsuit pertaining to matters of common interest, the lawsuit is typically filed as a class on behalf of the owners that make up the association (i.e., the association’s members).  How do you deal with an arbitration provision that is included in an owner’s purchase-and-sale agreement or recorded in the deed?  The recent opinion in Lennar Homes, LLC v. Martinique at the Oasis Neighborhood Association, Inc., 47 Fla. L. Weekly D15c (Fla 3rd DCA 2021) dealt with this exact issue with a homeowner’s association ruling that the association was required to arbitrate its latent construction defect claims against the developer (homebuilder).

In this case, a community in Miami consisted of 26 townhouse buildings.  There was a broad arbitration provision in each owner’s purchase-and-sale agreement that included disputes relating to property damage.  Further, with each closing, a special warranty deed was recorded that included a nearly identical arbitration provision.

The association became aware of latent defects relating to the exterior walls of the buildings and filed a lawsuit against the developer (homebuilder).    The developer moved to compel the dispute to arbitration which was denied by the trial court because there was no specific agreement between the association and the developer that required arbitration and the lawsuit dealt with matters that the association was obligated to maintain.

The developer appealed contending that the association was bound by the arbitration provision in its members’ (the real property owners) purchase-and-sale agreements and deeds.   The Third District Court of Appeal, relying on the Second District Court of Appeal’s decision in Pulte Home Corp. v. Vermillion Homeowners Ass’n, Inc., 109 So.3d 233, 235 (Fla. 2d DCA 2013), agreed with the developer: “Consistent with our sister court’s analysis in Pulte, we hold that the Association’s right to proceed in its representative capacity in this case required it to abide by the members’ agreement with [the developer] to arbitrate this dispute.” Lennar Homes, supra.

As an aside, the association also argued that the arbitration provision in the purchase-and-sale agreement and special warranty deed should be deemed void against public policy under Florida Statute s. 720.3075(1)(b) that provides in material part: “It is declared that the public policy of this state prohibits the inclusion or enforcement of certain types of clauses in homeowners’ association documents, including declaration of covenants, articles of incorporation, bylaws, or any other document of the association which binds members of the association, which either have the effect of or provide that: A homeowners’ association is prohibited or restricted from filing a lawsuit against the developer, or the homeowners’ association is otherwise effectively prohibited or restricted from bringing a lawsuit against the developer.”   The Third District Court of Appeal found this argument unavailing as the purchase-and-sale agreement and special warranty deed, both of which included the arbitration provision, are not association documents (e.g., declarations of covenants, articles of incorporation, bylaws, etc.).

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.

 

GENERAL CONTRACTOR INTERVENING TO COMPEL ARBITRATION PER THE SUBCONTRACT

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It is not uncommon that a general contractor’s subcontract will include an arbitration provision.  Or it will allow the general contractor to select binding arbitration as the method to resolve disputes at the general contractor’s SOLE OPTION.   A general contractor’s subcontract should absolutely give the general contractor this important right.  (Keep this in mind when drafting dispute resolution provisions for a general contractor.)

It is also not uncommon for a subcontractor the sue a general contractor’s payment bond surety, and NOT the general contractor.  One reason to do this is to create an argument to avoid the dispute resolution provision in the subcontract.  (Another reason is to avoid any pay-if-paid defense.)  When this occurs, a general contractor may still want to arbitrate the subcontractor’s payment bond dispute and a way to do so is for the general intervene in the lawsuit and move to compel arbitration. Sometimes, it is even practical for the general contractor to immediately initiate the arbitration process against the subcontractor, particularly if the general contractor wants to assert a counterclaim, so that the motion to compel is supported by the formal demand for arbitration (and filed with the American Arbitration Association or other body administering the arbitration).  I have done this on a number of occasions.

By way of example, in U.S. f/u/b/o American Electric Co., LLC, 2021 WL 5280665 (M.D.Fla. 2021), the general contractor hired a subcontractor for a federal construction project.  The subcontract included a binding arbitration provision.

As required, the general contractor had a Miller Act payment bond.  The subcontractor filed a Miller Act payment bond lawsuit in federal district court against the payment bond surety.  The general contractor moved to intervene in the lawsuit to compel arbitration of the dispute and stay the dispute pending the outcome of arbitration.  The general contractor also claimed that if arbitration is not compelled, it will assert a counterclaim against the subcontractor.  The district court agreed that that the general contractor was entitled to permissively intervene under the Federal Rules of Civil Procedure:

[The general contractor] and [subcontractor] are the parties to the Subcontract, and, pursuant to the Payment Bond, [the general contractor] is jointly and severally liable for any sum the Court may find the Surety Defendants owe to [the subcontractor].  Under the circumstances similar to those presented in this action, other courts have found that the intervening general contractor’s claims share common questions of law or fact with the subcontractor’s suit against the general contractor’s surety. The Court reaches the same conclusion here.  [The general contractor’s] claims and defenses share common questions of law and fact with the [payment bond] action pending, and, thus, [the general contractor] has shown that its interest is based on the action pending before the Court.

American Electric Company, supra, at *3 (internal citations omitted).

Additionally, the district court further found that the subcontractor would not be prejudiced by staying the action and compelling arbitration:

Here, all considerations weigh in favor of permitting [the general contractor] to intervene. First, allowing [the general contractor] to intervene in this action will further judicial economy by preventing a multiplicity of suits and the risk of inconsistent results. If denied intervention, [the general contractor] could still initiate an arbitration action or a separate lawsuit against [the subcontractor] on the underlying contract dispute. Similarly, if [the general contractor] is barred from intervening and [the subcontractor] recovers against the Surety Defendants, the Surety Defendants may file a separate action for indemnity against [the general contractor]. These various proceedings would waste resources dealing with the same dispute and would present the untenable risk of inconsistent results.

American Electric Company, supra, at *5 (internal citations omitted).

 

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.

 

DISPUTES WILL NOT BE SUBJECT TO ARBITRATION PROVISION IF THERE IS NO “SIGNIFICANT RELATIONSHIP”

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As you know from prior articles, arbitration is a creature of contract.  This means if you want your disputes to be resolved by binding arbitration, as opposed to litigation, you want to make sure there is an arbitration provision in your contract.  If there are certain types of disputes you do not want subject to arbitration, you want to specify those types of disputes/claims in your arbitration provision.  If you are not sure, make sure to discuss the pros and cons of arbitration with your counsel when drafting and negotiating the contract.  However, even with a broad arbitration provision, there are times where a dispute may still fall out of the scope of the arbitration provision, i.e., the dispute is not arbitrable. If this occurs, such dispute will be resolved by litigation.  Parties that have buyer’s remove and do not want to arbitrate their dispute may try to make this argument that the dispute is not subject to the scope of the arbitration provision.  There are times this argument carries weight because the dispute has no significant relationship to the agreement with the arbitration provision, as shown below.

In Deweees v. Johnson, 46 Fla. L. Weekly D2356b (Fla. 4th DCA 2021), a plaintiff purchased a home in a private residential community.  The purchase contract with the developer contained a broad arbitration provision that materially provided that, “all post-closing claims, disputes, and controversies…between purchaser and seller will be resolved by binding arbitration except those arising under section G.5 and G.6 above.”  Dewees, supra.  Sections G.5 and G.6 provided that the purchaser will not interfere in the sales process with other purchasers and will not interfere with workmen during the construction process.   There was also a workmanship and structural defect warranty for the dwelling that also contained an arbitration provision.

A year-and-a-half after the plaintiff entered into the purchase contract, she injured herself while riding her bicycle in the community.  The roads were still under construction and were uneven, which caused the bicycle accident.

The plaintiff sued the developer, the contractor hired to construct the road, and the general contractor.  The claims against the developer sounded in negligence for the developer’s failure to ensure the roads were safe for bicyclists, failing to warn bicyclists using the road of known hazards, and breach of the nondelegable duty to maintain the premises in a safe and reasonable manner.   The developer moved to compel the dispute to arbitration, which the trial court granted.

Deciding whether a particular claim is covered by a broad arbitration provision requires a determination whether a significant relationship exists between the claim and the agreement containing the arbitration clause, regardless of the legal label attached to the dispute. [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 imitable duty created by the parties’ unique contractual relationship.  In contrast, a claim does not have a nexus to a contract if it pertains to the breach of a duty otherwise imposed by law or in recognition of public policy, such as a duty under the general common law owed not only to the contracting parties, but also to third parties and the public.

Dewees, supra (quotations and citations omitted).

For plaintiff’s claims to be subject to the arbitration provision in the purchase contract, they must not only arise from the purchase contract, but also have a significant relationship to the purchase contract.  But here, plaintiff’s claims against the developer do NOT have a significant relationship to the purchase contract.  For this reason, the appellate court reversed the trial court’s order compelling the dispute to binding arbitration.  Plaintiff’s claims “do not refer to or implicate contractual duties created or governed by the Purchase Contract or Dwelling Warranty but concern duties generally owed to the public, including all invitees using the roadways in [the community].  None of the allegations in the complaint require reference to or construction of any portion of the Purchase Contract or Dwelling Warranty.  The allegations instead rely on obligations that would extend to anyone who might be injured by the developer’s tortious conduct.”  Dewees, supra.     There was no contractual nexus between the purchase contract and the plaintiff’s dispute against the developer.

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.

 

WAIVING THE RIGHT TO ARBITRATE UNDER FEDERAL LAW

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If there is an arbitration provision in your contract that you want to enforce, you do not want to take action inconsistent with those rights as this could give rise to a waiver argument, i.e., that you waived your rights to arbitrate, particularly if the other party has been prejudiced.

Under federal policy and law, establishing waiver requires the party arguing waiver to “bear a heavy burden of proof.”  U.S. f/u/b/o John Wayne Construction, G.S.A. Division, LLC v. Federal Ins. Co., 2021 WL 4526727 (M.D.Fla. 2021) quoting Stone v. E.F. Hutton & Co., 898 F.2d 1542, 1543 (11th Cir. 1990).

“To determine whether the right to arbitrate has been waived, courts apply a two part test: i) whether, “‘under the totality of the circumstances,’ the party ‘has acted inconsistently with the arbitration right’”; and ii) “whether, by doing so, that party ‘has in some way prejudiced the other party.’”  Id. quoting Ivax Corp. V. B. Braun of Am., Inc., 286 F.3d 1309, 1315-16 (11th Cir. 2002).   Substantial participation in litigation prior to invoking the right to arbitrate supports a party acting inconsistent with the right to arbitrate.  Id.   And, “‘[p]rejudice has been found in situations where the party seeking arbitration allows the opposing party to undergo the types of litigation expenses that arbitration was designed to alleviate.’”  Id. quoting Morewitz v. W. of Eng. Ship Owners Mut. Prot. & Indem. Ass’n (Luxembourg), 62 F.3d 1356, 1366 (11th Cir. 1995).

Hence the heavy burden for a party to support to prove waiver– establishing both substantial participation in litigation that is inconsistent with the right to arbitrate AND prejudice.

An example of this heavy burden to support waiver can be found in the Federal Magistrate’s Report and Recommendation in U.S. f/u/b/o John Wayne Construction, G.S.A. Division, LLC.  Here, a prime contractor on a federal project in Louisiana hired a drywall subcontractor.  The subcontract contained a detailed provision to address disputes with the final process as follows:

[I]t may choose to pursue the matter in court, subject to the requirements on venue and alternative dispute resolution agreed to herein. Any claim by[subcontractor] filed in state or federal court against [prime contractor] and/or [prime contractor’s] surety shall only be filed and/or resolved in anycourt within the exclusive venue of Duval County, Florida. At [prime contractor’s] sole option, [prime contractor] may require Alternative DisputeResolution (ADR) methods to be used to resolve the dispute, including binding arbitration in accordance with the Construction Industry Rules ofthe American Arbitration Association, instead of litigation in a court of law. In the event [prime contractor] elects binding arbitration, any claimsthat [subcontractor] may have against any bonds provided by [prime contractor] shall be stayed, pending the result of such binding arbitration.

(As an aside, an arbitration provision is enforceable if it gives one party – perhaps the prime contractor—the sole option to select arbitration as the binding dispute resolution procedure, as was the situation in this arbitration provision.)

Due to a dispute between the drywall subcontractor and prime contractor, the prime contractor filed a lawsuit in state court in Louisiana.  The subcontractor, after a mediation between the parties reached an impasse, moved to dismiss the lawsuit and contemporaneously filed a lawsuit in Florida federal court against the prime contractor and Miller Act payment bond surety (based on venue provision in the subcontract).  The prime contractor did not dispute the dismissal contending it was formally invoking its right to arbitrate with the subcontractor. The prime contractor further moved to compel arbitration of the subcontractor’s Florida federal court lawsuit pursuant to its rights under the subcontract’s dispute resolution procedure.

The subcontractor argued that the prime contractor waived its right to compel arbitration by virtue of it initially filing a lawsuit against the subcontractor in Louisiana state court.  The prime contractor countered that the subcontractor cannot meet the required heavy burden to support waiver and, nonetheless, it did not act inconsistent with its rights to arbitrate.  The Federal Magistrate agreed with the prime contractor finding that waiver did not occur recommending the parties be compelled to binding arbitration.

First, the Magistrate found that the prime contractor filing the Louisiana lawsuit where there was limited litigation was insubstantial and did not result in the substantial participation in litigation to demonstrate it was acting inconsistent with its right to arbitrate. Further, once the subcontractor filed its lawsuit in the Florida federal court, the prime contractor filed its motion to compel the lawsuit to arbitration and did not substantially participate in litigation in the Florida federal court.  “Under the ‘totality of circumstances,’ it does not appear that the Louisiana Lawsuit or the current case [in Florida federal court”] before this Court amount to ‘substantial participation in litigation’ to a point that was inconsistent with the intent to arbitrate.” U.S. f/u/b/o John Wayne Construction, G.S.A. Division, LLC, supra.

Second, the Magistrate found that even if the prime contractor acted inconsistent with its right to arbitrate by initiating the Louisiana lawsuit, this would not matter because there was no prejudice to the subcontractor. The Magistrate noted that while the subcontractor incurred costs due to the Louisiana lawsuit, the subcontractor filed only one motion, a hearing was not held on the motion, and the dispute was dismissed without prejudice; thus, the expenses were not so prejudicial to the subcontractor.   Moreover, “looking at the totality of circumstances (along with the finding that the Louisiana Lawsuit amounted to insubstantial litigation), the undersigned [Magistrate] find that [the subcontractor] is not so prejudiced to satisfy its heavy burden.” U.S. f/u/b/o John Wayne Construction, G.S.A. Division, LLC, supra.

 

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.

 

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

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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.

 

COURTS GENERALLY FAVOR THE ENFORCEMENT OF ARBITRATION PROVISIONS

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In recent posts (here and here) I have discussed arbitration provisions and cases dealing with the enforceability of arbitration provisions.

The case of Lemos v. Sessa, 46 Fla.L.Weekly D701a (Fla. 3d DCA 2021) deals with two noteworthy principles when it comes to arbitration that warrant another post about arbitration provisions.

First, courts will and should try to resolve any ambiguity in arbitration provisions in favor of arbitration. 

Second, when there is an offending arbitration provision or one that includes language that violates public policy, the trial court “should sever the offending provisions from the arbitration clause so long as such severance does not undermine the parties’ intent.” Lemos, supra.   This principle is reinforced when the arbitration provision is in an agreement that contains a severability provision.

In Lemos, a client sued her former attorney.  The retainer or engagement agreement included an arbitration provision.  The arbitration provision contained fee-shifting and cost-shifting provisions that violated pubic policy. The engagement agreement also included a severability provision. The client claimed the arbitration provision should not apply because it was both ambiguous and violative of public policy.  On appeal, the appellate court found the arbitration provision was not ambiguous as it required claims regarding the attorney’s representation to be subject to arbitration.  While the appellate court did find the fee-shifting and cost-shifting clauses in the arbitration provision to be contrary to public policy, such offending and invalid clauses could be severed from the arbitration provision “because their removal neither subverts the essence of the arbitration clause, nor causes us to drastically rewrite the parties’ agreement.” Lemos, supra.

The gist  is that courts generally favor the enforcement of arbitration provisions.

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.