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

Posted on February 18, 2016November 8, 2024 by Edward Garber

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

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

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

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

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

Bhate Environmental Associates, supra, at *4.

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

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

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

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

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 MILLER ACT PAYMENT BOND LAWSUIT PENDING ARBITRATION

Posted on March 6, 2015November 8, 2024 by Edward Garber

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

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

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

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

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

BE CAUTIOUS WHEN FILING YOUR LAWSUIT IF YOU REALLY WANT TO ARBITRATE

Posted on November 25, 2014November 8, 2024 by Edward Garber

If you really want to arbitrate your construction dispute pursuant to your contract, DO NOT file a lawsuit without at least contemporaneously moving to stay the lawsuit and compel arbitration. Otherwise your right to arbitration will be waived. The determination as to whether a party waived their right to arbitrate is a determination for the court (not the arbitrator) as demonstrated in the non-construction case of Cassedy, Jr. v. Hofmann, 39 Fla. L. Weekly D2450a (1^st DCA 2014).

In this case, the plaintiffs filed a lawsuit against their stockbroker that they voluntarily dismissed without prejudice years later. The plaintiffs then initiated arbitration with the Financial Industry Regulatory Authority. The defendant filed a lawsuit to prevent the arbitration from going forward arguing that the plaintiffs waived their right to arbitration by initiating the lawsuit that they subsequently dismissed. The First District Court of Appeals held the trial court must conclude whether a party waived their right to arbitrate by acting inconsistently with the right to arbitrate a dispute. The First District did not decide whether the right to arbitration had been waived; however, considering the plaintiffs filed the very lawsuit that they subsequently dismissed, it would appear that this right was waived or should be deemed waived. If the plaintiffs really wanted to arbitrate, they should not have first filed a lawsuit without preserving their right to arbitrate through a contemporaneous motion to stay the lawsuit and compel arbitration.

DOWNSIDE OF A BROAD ARBITRATION PROVISION

Posted on November 14, 2014November 8, 2024 by Edward Garber

In Sunsplash Events Inc. v. Robles, 39 Fla. L. Weekly D2368a (Fla. 4^th DCA 2014), the plaintiff entered into an employment agreement with the defendant. The employment agreement contained an arbitration provision that read, “[T]he Parties hereby agree and specifically stipulate that all differences, claims or matters of dispute relating to the performance of duties and/or benefits arising between the Parties to this Agreement contained herein shall be submitted to a mutually acceptable arbitrator….” Contemporaneously with the execution of the employment agreement, the parties entered into a bill of sale agreement regarding the plaintiff’s existing business whereby the plaintiff sold the inventory and goods of that business to the defendant. This separate bill of sale agreement did not contain an arbitration provision.

Plaintiff thereafter sued the defendant relating to the bill of sale agreement (that did not contain an arbitration provision) and the defendant moved to compel arbitration based on the arbitration provision in the employment agreement. The plaintiff’s claims were interrelated to the employment agreement.

The Fourth District Court of Appeal held that the arbitration provision in the employment agreement included plaintiff’s claims relating to the bill of sale agreement because the claims fell within the ambit of the employment agreement’s broad arbitration provision:

“[T]he plaintiff’s claims relating to the bill of sale agreement have a significant relationship to the claims relating to the employment agreement. According to the second amended complaint, the numerous misrepresentations alleged to have been made by the company president to induce the plaintiff into entering the bill of sale agreement are the same misrepresentations alleged to have been made to induce the plaintiff into entering the employment agreement. As a result, the claims relating to the bill of sale agreement are inextricably intertwined with the transaction from which the employment agreement emanated and the employment agreement itself.”

This case contains an important holding–a broad arbitration provision can compel parties to arbitrate a dispute under a separate agreement that does not contain an arbitration provision. Thus, this goes back to the fundamental premise that parties should not include an arbitration provision if they do not want to arbitrate. And, if an arbitration provision exists in one agreement and not a separate agreement (whether simultaneously executed or executed on a subsequent date), that separate agreement should clarify it is not subject to the arbitration provision in the earlier agreement.

INCLUDING IN YOUR ARBITRATION CLAUSE THAT ARBITRATION WILL BE CONDUCTED BY THE AMERICAN ARBITRATION ASSOCIATION

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

The American Arbitration Association (known as “AAA”) is a well-recognized organization that administers binding arbitration. AAA has its own set of developed arbitration rules and procedures that must be followed in a construction arbitration referred as the Construction Industry Arbitration Rules and Mediation Procedures. (This is no different than a dispute proceeding in federal or state court where a party must follow a governing rule of civil procedures.)

Parties that incorporate a binding arbitration provision often include language that the arbitration must be conducted by AAA and/or pursuant to AAA’s Construction Industry Arbitration Rules. Sometimes when a dispute occurs, a party wants to challenge the scope of the arbitration provision because they prefer that their dispute gets resolved through litigation instead of arbitration. But, as illustrated by the Eleventh Circuit decision in U.S. Nutraceuticals, LLC v. Cyanotech Corp., 2014 WL 5471913 (11^th Cir. 2014), this is not an easy accomplishment.

In this case, the buyer and seller entered into two contracts with the second contract succeeding the first contract. Both contracts contained a confidentiality provision; however, the second contract provided that a party can enforce the confidentiality provision in court. Both contracts also contained an arbitration provision for dispute resolution that required the arbitration to be conducted “under the auspices of the American Arbitration Association.” The second contract, though, excluded from arbitration disputes relating to a breach of the confidentiality provision. (Under the first contract, disputes relating to the breach of the confidentiality provision would be subject to arbitration.)

A dispute arose and the buyer sued the seller for claims associated with the breach of the confidentiality provision. Based on the allegations in the buyer’s lawsuit, it was unclear whether the first contract, the second contract, or both, were implicated by the dispute. The seller moved to compel the dispute to arbitration pursuant to the first contract that did not carve out an exception for breaches of the confidentiality provision. The district court denied the motion, but the Eleventh Circuit reversed ruling that the district court should have compelled arbitration. The reason was that the arbitration provisions incorporated the rules of the American Arbitration Association. Once the parties did this, they agreed that the arbitrator would decide whether a particular dispute was subject to the arbitration provision. Hence, questions as to the scope or arbitrability of a dispute would be determined by the arbitrator and not the court.

The arbitration clause in this case that required the arbitration to be conducted “under the auspices of the American Arbitration Association” is not language atypical to a construction contract. This language, however, was enough for the Eleventh Circuit to deem AAA’s applicable rules and procedures incorporated into the arbitration clause. In a construction dispute, Rule 9 of the Construction Industry Arbitration Rules (set forth below) authorizes the arbitrator to rule on the scope or arbitrability of a dispute, which is not ideal for a party that wants the court versus the arbitrator to have this power. It is important that parties that want to carve out exceptions to the arbitration clause to clearly convey these exceptions in the clause. Further, if parties want the court instead of the arbitrator to determine the scope or arbitrability of a particular claim, this should also be clearly conveyed in the clause. Otherwise, this determination will be made by the arbitrator.

R-9. Jurisdiction

(a) The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.

(b) The arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a part. Such an arbitration clause shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitrator that the contract is null and void shall not for that reason alone render invalid the arbitration clause.

(c) A party must object to the jurisdiction of the arbitrator or to the arbitrability of a claim or counterclaim no later than the filing of the answering statement to the claim or counterclaim that gives rise to the objection. The arbitrator may rule on such objections as a preliminary matter or as part of the final award.

THE CONTRACTUAL RIGHT TO ARBITRATE CAN BE WAIVED

Posted on October 24, 2014October 24, 2014 by Edward Garber

Arbitration is a form of dispute resolution that emanates from your contract. Hence, if your contract requires arbitration, then arbitration, as opposed to litigation, is the method of dispute resolution. But, the contractual right to arbitrate can be waived if a party actively participates in litigation or takes a position in litigation that is wholly inconsistent with their contractual right to arbitrate. Remember, if you negotiated arbitration as the form of dispute resolution in your contract, and you want to arbitrate a dispute, then take action consistent with this right. Otherwise, you risk waiving this contractual right to arbitrate—a right that you negotiated on the front-end in your contract.

However, just because you file a lawsuit or counterclaim does not mean that you automatically waive your right to arbitration. The key is that if you want to arbitrate to file a motion to compel arbitration simultaneously with the lawsuit / counterclaim moving the court to compel the dispute to arbitration pursuant to an arbitration provision in your contract. For instance, in Andre Franklin, Inc. v. Wax, 2014 WL 5002130 (Fla. 2d DCA 2014), a contractor recorded a lien on a residential project prompting the owner to file a lawsuit against the contractor to, among other things, discharge the construction lien. The contractor filed a counterclaim moving to foreclose the lien and for breach of contract and simultaneously moved to compel arbitration; the contractor also moved to dismiss or abate the lawsuit. At a hearing, the trial court granted the motion to dismiss and allowed the owner to amend the complaint. When the owner amended the complaint, the contractor renewed its motion to compel arbitration and simultaneously answered the amended complaint. The owner argued that the contractor waived the right to arbitrate by filing the counterclaim and arguing the motion to dismiss and abate; the trial court agreed.

On appeal, the Second District held that the contractor never waived its right to arbitration. The Second District explained:

A party may waive its contractual right to arbitrate by actively participating in a lawsuit or taking action inconsistent with that right.

***

[But,] we conclude that Franklin [contractor] did not waive its contractual right to arbitrate by filing a counterclaim simultaneously with its motion to compel arbitration, motion to dismiss, and motion to abate. Franklin did not implement discovery. Franklin’s filing of the counterclaims and motion to dismiss at the same time as a motion to compel arbitration is filed, without more, does not waive the contractual right to arbitrate.

Andre Franklin, Inc., supra, at *1, 2.

DON’T INCLUDE AN ARBITRATION PROVISION IN YOUR CONTRACT IF YOU DON’T WANT TO ARBITRATE!

Posted on August 8, 2014November 8, 2024 by Edward Garber

Arbitration as the method of dispute resolution is based on your contract. If you don’t want to arbitrate, do not (I repeat, do not) include an arbitration provision. If you ultimately have no choice and need to agree to a contract that includes an arbitration provision, understand that this provision will be enforced unless the parties agree to waive it.

The recent case of Bari Builders, Inc. v. Hovstone Properties Florida, LLC, et al., 39 Fla. L. Weekly D1648a (Fla. 4^th DCA 2014), exemplifies what happens if you include an arbitration provision. In this case, a condominium association sued the developer for construction defects. The developer (that may have also served as the general contractor / home builder) third-partied in its subcontractors. However, there was a binding arbitration provision in the subcontract. Subcontractors, therefore, moved to compel arbitration of the developer’s claims against them. The developer, naturally, did not want to arbitrate its third-party claims against subcontractors when it was being sued by the condominium association. It makes more sense to wrap up the disputes in one matter. The developer tried to argue around arbitration by arguing that the arbitration provision in its contract was ambiguous because another place in the contract said, “In all actions the parties waive the right to jury and agree to determination of all facts by the court.” The Fourth District Court of Appeal disagreed with the developer’s ambiguity argument and reconciled this language:

“[T]he jury waiver language in the subcontract does not render the arbitration provision ambiguous, as the two provisions can be reconciled in favor of arbitration. Read together, the provisions provide that the parties agree to submit any ‘controversy or claim’ to arbitration and, thereafter, any award may be reduced to judgment in court without the right to a jury trial. Additionally, in the event that the parties choose to waive their right to arbitration, the clause provides that any ‘action’ in court will be in the form of a bench trial.”

Bari Builders, supra.

As shown in this case, courts will favor arbitration when there is an arbitration provision in the contract. If parties prefer arbitration, and specifically if arbitration is preferred by a general contractor, the contract should include language that in the event the general contractor is sued by the developer or association (or any third-party), the general contractor, at its sole discretion, can waive arbitration and the parties are bound to the forum governing the dispute against the general contractor. In other words, the general contractor has the authority to join in the subcontractor to any dispute it is involved in irrespective of the arbitration provision.

ARE YOU SURE YOU WANT TO ARBITRATE?!?

Posted on July 14, 2014November 8, 2024 by Edward Garber

Arbitration is a hot topic in dispute resolution as parties need to dictate in their contracts whether they want to arbitrate disputes arising out of their contract or, if not, litigate their disputes. Recently, I discussed a Third District Court of Florida case where the court held that when a party is challenging the legality of a contract, that determination MUST be decided by the arbitrator; and, the arbitration award will NOT be vacated simply because the arbitrator may have decided the issue wrong.

The Florida Supreme Court also chimed in on this issue in a non-construction case. In Visiting Nurse Association of Florida, Inc. v. Jupiter Medical Center, Inc., 39 Fla. L. Weekly S503b (Fla. 2014), the issue was whether a court can vacate an arbitration award because of an illegal contract. In this case, the party moving to vacate the arbitration award argued that the arbitration panel reached a decision based on an interpretation of an agreement that would render the agreement illegal. The Florida Supreme Court nixed this argument stating: “the claim that an arbitration panel construed a contract containing an arbitration provision to be an unlawful agreement is an insufficient basis to vacate an arbitrator’s decision pursuant to the FAA [Federal Arbitration Act] or the FAC [Florida Arbitration Code].” Jupiter Medical Center, supra.

If a party wants to be able to challenge an arbitration award based on the potential illegality of the entire contract, they should include this specific right in their contract that allows the court and not the arbitrator to determine the illegality and enforceability of the contract. The contract should also provide that the parties can move to vacate the award based on the illegality of the contract. However, by preserving such arguments or rights, the party is severely watering-down the fundamental purpose of arbitration which is to timely and efficiently resolve disputes. Yes, technical arguments such as the illegality of a contract will have more weight in court where there is a right to appeal. But, this should be known on the front-end when selecting arbitration as the method of dispute resolution in order to achieve a timely, efficient, and final resolution versus a resolution in court where the losing party will have a right to appeal and prolong the dispute resolution process.

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.

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/.