COURTS GENERALLY FAVOR THE ENFORCEMENT OF ARBITRATION PROVISIONS

Posted on April 4, 2021April 4, 2021 by Edward Garber

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.

QUICK NOTE: COMPELLING ARBITRATION BASED ON EQUITABLE ESTOPPEL

Posted on March 28, 2021March 28, 2021 by Edward Garber

In the prior posting, I discussed arbitration provisions and to clearly and unmistakably include in the arbitration provision the person — judge or arbitrator — you want to determine the arbitrability of a given dispute.

In another posting, I discussed how the doctrine of equitable estoppel can be used by a non-signatory to a contract with an arbitration provision to compel arbitration or to compel a non-signatory to arbitration. This occurs “when a signatory to a contract containing the arbitration clause raises allegations of substantially interdependent and concerted misconduct by both a non-signatory [to the contract] and one or more of the signatories to the agreement.” Kratos Investments LLC v. ABS Healthcare Services, LLC, 46 Fla.L.Weekly D603a (Fla. 3d DCA 2021) (internal citations omitted).

Whether or not to include an arbitration provision in your contract is a dispute resolution consideration that should be factored in on the frontend. Further, whether or not to compel a given dispute to arbitration based on an arbitration provision (whether or not you are a non-signatory to the contract with the arbitration provision and want to raise equitable estoppel) is another dispute resolution consideration that should be factored in when the dispute arises. It is always best to consult with counsel during the contract drafting and negotiation process and when the dispute arises to best prepare for your dispute resolution options moving forward

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.

MILLER ACT PAYMENT BOND SURETY BOUND TO ARBITRATION AWARD

Posted on November 28, 2020November 28, 2020 by Edward Garber

Here is an interesting case binding a Miller Act payment bond surety to an arbitration award against its prime contractor (bond principal) that it received sufficient notice of. Notice is the operative word. The surety could have participated in the arbitration, elected not to, and when its prime contractor (bond principal) lost the arbitration, it was NOT given another bite out of the apple to litigate facts already been decided.

In BRC Uluslararasi Taahut VE Ticaret A.S. v. Lexon Ins. Co., 2020 WL 6801933 (D. Maryland 2020), a prime contractor was hired by the federal government to make security upgrades and interior renovations to a United States embassy in the Czech Republic. The prime contractor hired a subcontractor to perform all of the installed contract work. The prime contractor terminated the subcontractor for default during the course of construction.

The subcontractor demanded arbitration in accordance with the subcontract claiming it was wrongfully terminated. The subcontractor also filed a lawsuit asserting a Miller Act payment bond claim against the prime contractor’s surety (as well as a breach of contract action against the prime contractor). The subcontractor made clear it intended to pursue its claims in arbitration and hold the payment bond surety jointly and severally liable. The parties agreed to stay the lawsuit since the facts were identical to those being arbitrated. The arbitration went forward and an award was entered in favor of the subcontractor and against the prime contractor for approximately $2.3 Million.

The subcontractor moved to lift the stay entered in the lawsuit to confirm the arbitration award against the prime contractor and Miller Act payment bond surety. The prime contractor moved to vacate the award.

Beginning with the prime contractor’s motion to vacate the arbitration award, the Federal Arbitration Act gives limited grounds to support vacating an arbitration award. The grounds the prime contractor raised will not be discussed. They were all denied because it is difficult to vacate an arbitrator’s final award and that is the important take-away message. In support of this (and contained in a noteworthy, lengthy discussion by the Court), the Court stated: “The FAA [Federal Arbitration Act] creates a ‘strong presumption in favor of confirming arbitration awards,’ and ‘judicial review’ of such awards ‘must be an extremely narrow exercise.’” BRC Uluslararasi Taahut, supra, at *4.

Of significance here, the subcontractor moved to enforce the arbitration award against the Miller Act payment bond surety, as it should. Even though the surety was not a party to the arbitration, it was on notice of the arbitration, was notified the subcontractor would look to hold it jointly and severally liable, and the surety consented to the stay of the lawsuit pending the outcome of the arbitration. The Court noted, “[s]uch notice is sufficient to bind [the surety] to the arbitration award.” BRC Uluslararasi Taahut, supra, at *9 (citing cases showing that if the surety has notice of the proceedings against its principal, it can be bound by an arbitration award against the principal). Further, the Court intuitively stated:

[The surety] clearly knew that the arbitration would occur. Now dissatisfied with the outcome, [the surety] wishes not to be bound by the very proceeding [the surety] averred would avoid duplicative litigation. The Court suspects that had [the prime contractor] prevailed in arbitration, [the surety] would be singing a different tune. [The surety] will not be afforded a second bite at the litigation apple simply because it must now honor its obligations as the surety on the project.

Id.

Remember, if you are arbitrating rights, do not neglect to timely file your Miller Act payment bond lawsuit, or for that matter, any statutory payment bond lawsuit. Give the surety NOTICE that you intend to hold it jointly and severally liable for any arbitration award entered against its prime contractor (bond principal). Whether the surety elects to participate in the arbitration is within its discretion, but the key is to give the surety notice so that if you do prevail, you find yourself in same shoes as the subcontractor discussed in this case—binding the payment bond surety to the award entered against the prime contractor. The prime contractor and its surety should also recognize this likely outcome.

QUICK NOTE: EVIDENTIARY HEARING REQUIRED BEFORE COMPELLING NON-SIGNATORIES TO ARBITRATION

Posted on August 24, 2020August 24, 2020 by Edward Garber

As you know from prior articles, arbitration is a creature of contract where parties agree to resolve their dispute through arbitration, not litigation. What if the parties are non-signatories to the arbitration agreement?

In a recent case, the trial court compelled parties that did not sign the governing agreement with an arbitration provision to arbitration. One of the parties argued that the non-signatories to the agreement entered into another agreement which incorporated the agreement with the arbitration provision. The trial court agreed and compelled the parties to arbitration. The appellate court reversed because the party opposing arbitration disputed the underlying facts. As such, the appellate court held that the trial court was required to hold an evidentiary hearing to resolve disputed issues of fact. This evidentiary hearing was important because the parties being compelled to arbitration were not the actual parties to the arbitration agreement, albeit they were related parties.

Check out this article for more information on this case.

NOW IS THE TIME TO REVISIT CONTRACT LANGUAGE IN LIGHT OF COVID-19 TO ADDRESS FUTURE CONTRACTS

Posted on April 12, 2020April 12, 2020 by Edward Garber

Now is the time! Today! If you are currently in the process of negotiating or executing contracts, now is the time to ensure the contract protects your interest in light of this new world we enter into. The impacts associated with COVID-19 may have been realized by some parties, but not others. Regardless, the full extent of the COVID-19 impacts has likely been realized by no one — we are dealing with an unknown, prospective impact.

Will projects get suspended? Will they stop and start back up due to disinfecting? Will they slow down due to health concerns and preventative measures? Will there be unanticipated material lead times? Will current material lead times or material orders be delayed? Will material prices increase? Will there be a labor shortage and/or inefficiencies with the labor force? Will labor costs increase in order to address the preventative measures and anticipated inefficiencies?

These are some questions you may be asking, plus more. You are asking these questions because of the unknown factor associated with COVID-19 and any future health crisis. This is the reason now is the time — the time to ensure your contract best captures the risk of the unknown.

Here are considerations:

1. Force majeure wording. – This needs to be beefed up and tweaked to address COVID-19 and, potentially, other pandemics / health crisis. You need to have an understanding who is bearing the cost risk for a project being shut down (by the government or otherwise), suspended, or slowed-down due to this issue. Leaving it alone is a mistake. All contracts until this pandemic hit left it alone meaning no contract truly addressed the global pandemic we are all facing.

2. Additional safety and preventative health measures. – This needs to be factored in as the additional measures will add a cost to the project. The measures may also add a cost in that they will add certain inefficiencies into the project that need to be factored into the schedule and general conditions.

3. Material price escalations.- Could the cost of materials increase due to supply chain issues? It is certainly a possibility and should be considered. Further, it is likely that to avoid this issue, a party wants to accelerate the ordering of materials at today’s price, and there may be additional storage costs associated with doing this. Conversely, what if the price of materials skyrocket post-contract? This issue could break a party’s performance, profitability, and financial wherewithal to perform. A party may want to address protection from any uncertainty with material price escalations.

4. Material lead times and material delays.- If there are delays tied to COVID-19, how this being allocated? There could be a realistic delay in material deliveries that impacts the project’s schedule. The delay is not the ordering party’s fault but the result of impacts associated with the pandemic. Based on this concern, this may result in the discussion of material accelerations and the additional storage costs associated with doing this (also discussed above).

5. No-damage-for-delay.- A no-damage-for-delay provision is common. However, a party may want to deliberately carve-out from this issue delays associated with or tied to COVID-19 or any pandemic / health crisis. The carve-out language should be broad and include language “arising out of or relating to” COVID-19 or any pandemic / health crisis based on the uncertainty as to how impacts may be realized.

6. Contingencies.- Certain contracts, such as GMP contracts, contain a contingency. Parties may want to add a contingency in the contract for COVID-19 and pandemics / health crisis. A certain sum is built into the contract sum to address the unknown costs that could be incurred.

7. Dispute resolution.- Knowing that the onslaught of COVID-19 cases will start affecting the judicial system, parties may want to revisit their dispute resolution provisions to see how disputes can be more efficiently resolved. Parties may consider turning towards more specific arbitration provisions that modify standard contractual language. Since arbitration is a creature of contract, parties can essentially start negotiating the rules of arbitration within the parameters of the contract. Parties may demand pre-suit mediation provisions, executive settlement meetings, or partnering agreements as vehicles to efficiently resolve disputes and avoid delays or inefficiencies with the judicial system.

These are some talking points. There will be others based on the scope. I remain available to assist any party that wants to revisit their standard form contracts or needs help in drafting or negotiating contracts. A party should not rely on their same-ole contract forms. Also, a party should not rely on the same-ole negotiation as COVID-19 brought new issues to the table and highlighted the significance of other issues and contractual provisions.

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.

YOU CANNOT ARBITRATE CLAIMS NOT COVERED BY THE ARBITRATION AGREEMENT

Posted on December 21, 2019December 21, 2019 by Edward Garber

Regardless of the type of contract you are dealing with, “[a]rbitration provisions are contractual in nature, and therefore, construction of such provisions and the contracts in which they appear is a matter of contract interpretation.” Wiener v. Taylor Morrison Services, Inc., 44 Fla. L. Weekly D3012f (Fla. 1^st DCA 2019). This means if you want to preserve your right to arbitrate claims you want to make sure your contract unambiguously expresses this right. Taking this one step further, if you want to make sure an arbitrator, and not the court, determines whether the claim is arbitrable if a dispute arises, you want to make sure that right is expressly contained in the arbitration provision.

For example, in Wiener, a homeowner sued a home-builder for violation of the building code – a fairly common claim in a construction defect action. The homeowner’s claim dealt with a violation of building code as to exterior stucco deficiencies. The home-builder moved to compel the lawsuit to arbitration based on a structural warranty it provided to the homeowner that contained an arbitration provision. The structural warranty, however, was limited and did not apply to non-load-bearing elements which, per the warranty, were not deemed to have the potential for a major structural defect (e.g., a structural defect to load-bearing elements that would cause the home to be unsafe or inhabitable). The trial court compelled the dispute to arbitration pursuant to the arbitration provision in the structural warranty.

But, the First District Court of Appeal held the trial court was wrong to compel the dispute to arbitration. Why? The homeowner did not sue the home-builder for a breach of the structural warranty. Even if the homeowner was trying to navigate around the structural warranty, the warranty was limited in nature and would NOT apply to a claim dealing with defective stucco, which is not a load-bearing issue, to say the least. See Wiener, supra (“[C]onsidering the plain meaning of the structural warranty agreement, the [plaintiff’s] complaint does not raise claims subject to arbitration under that agreement.”). The home-builder could not have its cake and eat it too — it could not exclude claims from the warranty and then try to arbitrate those very excluded claims per an arbitration provision in the warranty.

Here, the issue of whether the claim was arbitrable (subject to arbitration), was decided by the court, as it typically is. The arbitrability of a claim is typically a question for the court. Wiener, supra. This does not mean that it needs to be that way. Parties can clearly include in their arbitration provision that the determination of the arbitrability of a claim is a determination for an arbitrator, and not the court.

GOOD-TO-KNOW POINTS REGARDING (I) MILLER ACT PAYMENT BONDS AND (II) PAYMENT BOND SURETY COMPELLING ARBITRATION

Posted on September 22, 2019September 22, 2019 by Edward Garber

Every now and then I come across an opinion that addresses good-to-know legal issues as a corollary of strategic litigation decisions that are questionable and/or creative. An opinion out of the United States District Court of New Mexico, Rock Roofing, LLC v. Travelers Casualty and Surety Company of America, 2019 WL 4418918 (D. New Mexico 2019), is such an opinion.

In Rock Roofing, an owner hired a contractor to construct apartments. The contractor furnished a payment bond. The contractor, in the performance of its work, hired a roofing subcontractor. A dispute arose under the subcontract and the roofer recorded a construction lien against the project. The contractor, per New Mexico law, obtained a bond to release the roofer’s construction lien from the project (real property). The roofer then filed a lawsuit in federal court against the payment bond surety claiming it is entitled to: (1) collect on the contractor’s Miller Act payment bond (?!?) and (2) foreclose its construction lien against the lien release bond furnished per New Mexico law.

Count I – Miller Act Payment Bond

Claiming the payment bond issued by the contractor is a Miller Act payment bond is a head scratcher. This claim was dismissed with prejudice upon the surety’s motion to dismiss. This was an easy call.

A Miller Act payment bond is a bond a prime contractor gives to the United States (US) for a public project. Here, the contractor entered into a contract with a private developer for a private apartment project. There was nothing to suggest that the private developer was, in fact, the US government or an agent of the US government. There was also nothing to suggest that the apartment project was, in fact, a public project. The roofer alleged that it believed the US Department of Housing and Urban Development provided funding for the project. The Court found this allegation as a big so-what: “The Court finds this allegation insufficient to demonstrate either the payment bond was furnished to the [US] Government as required by the [Miller Act], or that the apartment complex was a public building or public work as required by the [Miller Act].” Rock Roofing, LLC, 2019 WL at *3.

Count II – Foreclosure of Construction Lien Against Lien Release Bond

The surety moved to compel the roofer’s foreclosure claim against the lien release bond to arbitration pursuant to the contractor’s subcontract with the roofer. The roofer countered that arbitration was inappropriate since the surety was not a party to the subcontract.

The Court (relying on a Florida district court opinion I was intimately involved with) found that the doctrine of equitable estoppel applied to compel the roofer to arbitration because the roofer’s claim for payment was based on its subcontract that contains the arbitration provision. “Because [the roofer’s] claim on the payment bond depends on its subcontract with [the contractor], the arbitration clause in the subcontract must precede [the roofer’s] right to bring suit as provided by the payment bond.” Rock Roofing LLC at *7.

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

Posted on April 28, 2019April 24, 2020 by Edward Garber

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