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

Posted on June 12, 2022June 12, 2022 by Edward Garber

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.

WAIVING THE RIGHT TO ARBITRATE UNDER FEDERAL LAW

Posted on October 17, 2021October 17, 2021 by Edward Garber

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 (11^th 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 (11^th 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 (11^th 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.

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

Posted on August 15, 2021August 15, 2021 by Edward Garber

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!

DON’T WAIVE YOUR RIGHT TO ARBITRATE (UNLESS YOU WANT TO!)

Posted on October 14, 2017October 14, 2017 by Edward Garber

Does your construction contract require you to arbitrate (instead of litigate) disputes arising out of the contract? If so, and you want to arbitrate, you do NOT want to do anything inconsistent or adverse with your right to arbitrate. Arbitration can be waived and you do not want arbitration to be waived if you believe this is the best forum to resolve your construction dispute. For instance, actively participating in a lawsuit through the prosecution or defense of issues in the lawsuit is certainly inconsistent with your right to arbitrate. This will result in a waiver of your right to compel arbitration.

In a non-construction dispute—a dispute involving a law firm and its former partner—the law firm sued the partner. Chaikin v. Parker Waichman LLP, 42 Fla. L. Weekly D2165b (Fla. 2d DCA 2017). There was a partnership agreement that required disputes to be resolved by arbitration. The law firm sued the partner claiming he violated a previously entered employment agreement that did not require arbitration. When the partner counterclaimed, the law firm claimed that the counterclaim must be compelled to arbitration because the counterclaim arose out of the partnership agreement that required arbitration. Guess what? The trial court actually compelled the counterclaim to arbitration! Crazy! Clearly, any employment agreement and partnership agreement were intertwined such that the dispute would involve the same set of facts and any claims would have a significant relationship to the partnership agreement.

On appeal, the Second District recognized this craziness and the significant relationship between any claims under an employment agreement and those under the partnership agreement:

[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 inimitable duty created by the parties’ unique contractual relationship.

Chaikin quoting Olson v. Fla. Living Options, Inc., 210 So.3d 107, 111 (Fla. 2d DCA 2016)

Accordingly, the Second District held: what is sauce for the goose is sauce for the gander. The law firm, by filing suit notwithstanding the arbitration provision in the partnership agreement, waived its right to compel arbitration of the counterclaim. Chaikin, supra (explaining that the law firm initiating the lawsuit was adverse to its contention that its former partner’s counterclaims, predicated upon the same partnership agreement, be compelled to arbitration). Do not waive your right to arbitrate (unless you want to!).

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.