CLEARLY DETERMINING IN CONTRACT WHO DETERMINES ARBITRABILITY OF DISPUTE

Posted on March 27, 2021March 27, 2021 by Edward Garber

As you know from prior postings: “Arbitration provisions are creatures of contract and must be construed ‘as a matter of contract interpretation.’ ” Fallang Family Limited Partnership v. Privcap Companies, LLC, 46 Fla.L.Weekly D639e (Fla. 4^th DCA 2021) (citation omitted). Thus, if you prefer to arbitrate potential disputes, instead of litigating potential disputes, you want to include an arbitration provision in your contract. While there are positives and negatives to arbitration, no different than litigation, these positives and negatives should be considered during the contract negotiation process when dealing with the dispute resolution process in the contract.

Generally, under the law, the arbitrability of a dispute is determined by the court. However, this can be deferred to the arbitrator with clear and unmistakable language in the contract.

By way of example, the American Arbitration Association includes a rule that allows an arbitrator to rule on the arbitrability of the dispute, i.e., the claims asserted are subject to the governing arbitration provision in the contract. Recent law has suggested that if the objective is to authorize an American Arbitration Association arbitrator to make this determination, the contract clearly and unmistakably needs to state this intent and generally referring to the American Arbitration Association rules is not good enough. For this reason, I have included in arbitration provisions language that specifically states, “In the event of any dispute as to the arbitrability of any claim or dispute, the parties agree that an appointed arbitrator within the American Arbitration Association shall make this determination.” I have also included in arbitration provisions the converse so that if there is a dispute as to the arbitrability of a claim or dispute, the court, and not the arbitrator, will make this determination.

In Fallang Family Limited Partnership, the arbitration provision simply read: “In the event of any dispute under this agreement the parties agree to submit to binding arbitration in the state of Florida with a panel of one arbitrator. The arbitrator shall be chosen by the AAA [American Arbitration Association] and the AAA rules and procedure shall apply, and the arbitration will be governed by the law of the state of Florida.” A lawsuit was filed and the court compelled certain claims to arbitration finding that such claims were arbitrable; however, the court authorized the arbitrator to make the final determination as to the arbitrability of the claims.

As mentioned, the rules of the American Arbitration Association allow the arbitrator to rule on the arbitrability of claims subject to the arbitration provision. However, the simple arbitration provision did not clearly and unmistakably specify this intent. The Fourth District concluded “that the general reference to the ‘AAA rules’ in this case left ambiguity as to whether the arbitrator has authority to decide arbitrability to the exclusion of the trial court.” Fallang Family Limited Partnership, supra. Based on this ambiguity, the Fourth District held that the trial court’s ruling was right making the initial determination as to which claims were arbitrable with the final decision left to the arbitrator. Fallang Family Limited Partnership, supra (“[W]e conclude that the trial judge’s order in this case properly made a preliminary decision as to which counts of the complaint are covered by the arbitration agreement, based on a limited showing of the facts in this multiple count, factually complex case, and properly left the final decision as to what was arbitrable to the arbitrator.”).

The bottom line is that, naturally, it may not be the most efficient for the trial court to make a preliminary determination as to the arbitrability of the claim with a final decision left to the arbitrator. However, this ruling was due to the fact that the American Arbitration Association’s rules were incorporated into the contract but did NOT clearly and mistakably say that the arbitrator, and the arbitrator alone, would rule on the arbitrability of claims. For this reason, there is value taking the extra step in the contract to clearly and mistakably reflect this intent, one way or the other.

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.

THE ARBITRATION PROVISION SHOULD DICTATE WHETHER JUDGE OR ARBITRATOR DECIDES ARBITRABILITY OF ISSUE

Posted on April 4, 2020April 4, 2020 by Edward Garber

An arbitration provision should specifically dictate whether you want a judge or arbitrator to decide the arbitrability of a claim or issue. The reality is, if you prefer your disputes to be resolved by arbitration, you should dictate that the arbitrator decides the arbitrability of issues or claims. This way the party opposing arbitration cannot try to circumvent this by having the judge decide, potentially altering the forum for disputes, and otherwise slowing down the dispute resolution process. The recent case discussed below highlights why specifying who decides the arbitrability of a claim or issue is worthy.

In Doe v. Natt, 45 Fla. L. Weekly D712a (Fla. 2d DCA 2020), involving an arbitration agreement in an Airbnb clickwrap agreement, the matter at-issue was who decides whether a dispute is arbitrable, i.e., subject to the arbitration provision, a judge or the arbitrator. (A clickwrap agreement is an online agreement we enter into with a company that requires us to click “I agree” boxes to proceed. We have all entered into one.) The arbitration provision required the parties to proceed to arbitration with the American Arbitration Association (“AAA”):

Arbitration Rules and Governing Law. The arbitration will be administered by the American Arbitration Association (“AAA”) in accordance with the Commercial Arbitration Rules and the Supplementary Procedures for Consumer Related Disputes (the “AAA Rules”) then in effect, except as modified by this Dispute Resolution section. (The AAA Rules are available at www.adr.org/arb_med or by calling the AAA at 1-800-778-7879.) The Federal Arbitration Act will govern the interpretation and enforcement of this section.

AAA’s rules (whether dealing with a commercial or construction dispute) provide, “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 or the arbitrability of any claim or counterclaim.” In other words, the arbitrator determines the arbitrability of a claim.

However, the Second District Court of Appeal focused on the fact that the arbitration provision at-issue did not specifically state the arbitrator is to decide issues of arbitrability and AAA’s rules were not attached to the clickwrap agreement. And, while other appellate courts that have found that an arbitrator determines arbitrability when AAA’s rules have been incorporated by reference into an arbitration provision, the Second District disagreed with those holdings finding that generally incorporating AAA’s rules was too general and ambiguous as to who decides the arbitrability of a dispute:

We hold that the clickwrap agreement’s arbitration provision and the AAA rule it references that addresses an arbitrator’s authority to decide arbitrability did not, in themselves, arise to “clear and unmistakable” evidence that the parties intended to remove the court’s presumed authority to decide such questions. The evidence on what these parties may have agreed to about the “who decides” arbitrability question was ambiguous; therefore, the court retained its presumed authority to decide the arbitrability dispute.

Doe, supra.

To avoid this generality or ambiguity, and arbitration provision should unmistakably dictate whether a judge or arbitrator decides the arbitrability of a claim or issue.

DOWNSIDE OF A BROAD ARBITRATION PROVISION

Posted on November 14, 2014November 14, 2014 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, 2014 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.

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

Posted on May 23, 2014May 23, 2014 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.