ARBITRATION PROVISIONS ARE CHALLENGING TO CIRCUMVENT

Posted on April 13, 2019April 24, 2020 by Edward Garber

Arbitration provisions are enforceable and they are becoming more challenging to circumvent, especially if one of the parties to the arbitration agreement wants to arbitrate a dispute versus litigate a dispute. Remember this when agreeing to an arbitration provision as the forum for dispute resolution in your contract. There is not a one-size-fits-all model when it comes to arbitration provisions and how they are drafted. But, there is a very strong public policy in favor of honoring a contractual arbitration provision because this is what the parties agreed to as the forum to resolve their disputes.

By way of example, in Austin Commercial, L.P. v. L.M.C.C. Specialty Contractors, Inc., 44 Fla.L.Weekly D925a (Fla. 2d DCA 2019), a subcontractor and prime contactor entered into a consultant agreement that contained the following arbitration provision:

Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be subject to the dispute resolution procedures, if any, set out in the Prime Contract between [Prime Contractor] and the [Owner]. Should the Prime Contract contain no specific requirement for the resolution of disputes or should the [Owner] not be involved in the dispute, any such controversy or claim shall be resolved by arbitration pursuant to the Construction Industry Rules of the American Arbitration Association then prevailing, and judgment upon the award by the Arbitrator(s) shall be entered in any Court having jurisdiction thereof.

The prime contract between the owner and prime contractor did not require arbitration.

The prime contractor initially hired the subcontractor during the design phase of the project as a consultant. The consultant agreement contained the aforementioned arbitration provision. Then, during the construction phase, the prime contractor and subcontractor entered into a work order that incorporated the terms of the consultant agreement, meaning the arbitration provision was incorporated into the work order.

A payment dispute arose during the construction phase and the subcontractor sued the prime contractor. The prime contractor moved to compel the dispute to arbitration per the terms of the arbitration provision in the consultant agreement. The trial court denied the prime contractor’s motion to compel. This was reversed on appeal – and it was probably an easy reversal for three main reasons:

One: Florida has a strong public policy in favor of enforcing arbitration provisions, as mentioned above. Remember this.

Two: the work order between the prime contractor and subcontractor for the construction phase incorporated the terms of the consultant agreement that contained an arbitration provision. Thus, the consultant agreement with the arbitration provision had to be interpreted together with the work order. Remember that a document or contract can incorporate another document or contract.

Three: the dispute was between the subcontractor and prime contractor. The owner was NOT “involved” in the dispute because it was not a party to the lawsuit and the payment dispute the subcontractor initiated against the prime contractor did not involve the owner considering the owner did not need to participate in the dispute. “[O]ne would not ordinarily understand an entity to be ‘involved’ in a dispute where that entity is neither drawn into the dispute nor affected by the dispute. Only an impermissible, strained textual interpretation of ‘involved in the dispute’ would yield a conclusion that HCAA [Owner] would be affected by a financial dispute between Austin [Prime Contractor] and Mims [Subcontractor].” Austin Commercial, supra. Remember this that the word “involve,” as this word is used in the arbitration provision, is not going to be read so broadly to render inconsequential the prime contractor’s right to arbitrate disputes with its subcontractor.

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.

SUPREME COURT HOLDS ARBITRATOR CAN FULLY DECIDE THRESHOLD ARBITRABILITY ISSUE

Posted on January 19, 2019April 24, 2020 by Edward Garber

The United States Supreme Court recently decided parties to a contract can agree, under the Federal Arbitration Act, an arbitrator, rather than a court, can fully resolve the initial arbitrability question. Henry Schein, Inc. v. Archer and White Sales, Inc., 2019 WL 122164 (2019). The arbitrability question is whether the dispute itself is subject to arbitration under an arbitration provision. Parties that do not want to arbitrate try to circumvent this process by filing a lawsuit and asking the court to determine the threshold arbitrability question.

In Henry Schein, Inc., the contract at-issue provided:

This Agreement shall be governed by the laws of the State of North Carolina. Any dispute arising under or related to this Agreement (except for actions seeking injunctive relief and disputes related to trademarks, trade secrets, or other intellectual property) shall be resolved by binding arbitration in accordance with the arbitration rules of the American Arbitration Association. The place of arbitration shall be in Charlotte, North Carolina.

The plaintiff in this case asserted a claim for injunctive relief (among other claims) and argued that, therefore, the dispute is not subject to arbitration based on the exception in the provision. The initial, threshold issue became whether the dispute was subject to arbitration and, importantly, who decides this issue. The Court further looked at whether a trial court can resolve this issue under the “wholly groundless” exception, i.e.,the court can decide the issue if the argument for arbitration is wholly groundless.

The Supreme Court held that, “[w]hen the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract. In those circumstances, a court possesses no power to decide the arbitrability issue. That is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” Henry Schein, Inc, supra, at *4. Through this ruling, the Court rejected the wholly groundless exception that would allow a trial court to rule on an threshold arbitrability question if the argument for arbitration is wholly groundless.

The Court did not rule as to whether the arbitration provision at-issue delegated the arbitrability question to the arbitrator. However, the American Arbitration Association’s rules provide that arbitrators have the power to resolve such threshold arbitrability questions so there is an argument that the provision through reference to the American Arbitration Association gave this authority to the arbitrator. But, the best thing to do, as always, is to be clear. Include language in the arbitration provision that specifically states that an arbitrator is authorized to decide the arbitrability of issues, particularly if it is your arbitration provision and you want disputes resolved by arbitration. Conversely, if you want the initial, threshold issue of arbitrability to be decided by a court, make sure to specify that in the provision.

DRAFTING A CONTRACTUAL ARBITRATION PROVISION

Posted on December 24, 2018April 24, 2020 by Edward Garber

A recent Florida case discussing a contractual arbitration provision in a homebuilder’s contract discussed the difference between a narrow arbitration provision and a broad arbitration provision. See Vancore Construction, Inc. v. Osborn, 43 Fla.L.Weekly D2769b (Fla. 5th DCA 2018). Understanding the distinction between the two types of arbitration provisions is important, particularly if you are drafting and/or negotiating a contractual arbitration provision.

A narrow contractual arbitration provision includes the verbiage “arises out of” the contract such that disputes arising out of the contract are subject to arbitration. Arbitration is required for those claims the have a direct relationship with the contract.

A broad contractual arbitration provision includes the verbiage “arises out of or relating to” the contract such that disputes arising out of or relating to the contract are subject to arbitration. Arbitration is required for those claims that have a significant relationship to the contract. A significant relationship exists if there is a nexus between the claim and the contract meaning the “claim presents circumstances in which the resolution of disputed issues requires either reference to, or construction of, a portion of the contract.” See Vancore Construction, Inc., supra, (citation omitted).

When drafting or negotiating an arbitration provision, make sure you understand those claims that will be subject to arbitration and those potential claims that will not. Typically, if you want a arbitration provision in your contract, you more than likely prefer a broad arbitration provision such that claims arising out of or relating to the contract will be subject to arbitration.

OWNERS BOUND BY ARBITRATION CLAUSE ON ROOFING SHINGLES PACKAGING

Posted on November 11, 2018April 24, 2020 by Edward Garber

In today’s age, you are probably familiar with terms such as a shrinkwrap contract (terms and conditions), which is a boilerplate contract included with a retained product, or a clickwrap contract (terms and conditions), which is generally a boilerplate contract that is digitally accepted when purchasing software or an electronic product. These are are boilerplate terms from manufacturers or vendors of products or software. Arbitration provisions in these types of agreements have generally found to be enforceable.

In the recent ruling by the Eleventh Circuit Court of Appeals in Dye v. Tamko Building Products, Inc., 2018 WL 5729085 (11th Cir. 2018), the court held that an arbitration provision included in a product-purchase limited warranty agreement on the package of every roofing shingles binds a homeowner to arbitrating disputes over the opened and retained product with the manufacturer, irrespective of whether the shingles were purchased by an owner’s roofer. The shingles do not have to be purchased and opened by the owner for the arbitration provision to apply. If the roofer uses or retained the shingles for purposes of the owner’s home, such knowledge of the product-purchase limited warranty agreement on the packaging of the shingles is imputed to the owner (end-user of the shingles). In this manner, the court summarized:

At the end of the day, the point is simply this: modern consumers are on notice that products come with warranties and other terms and conditions of purchase. And they are free to research (or not), request (or not), and read (or not) those terms before unwrapping their purchases. As to the case before us, Florida law makes clear that providing conspicuously printed product packaging is an OK way to convey purchase terms. Florida consumers who purchase, open, and retain a product are thus bound in accordance with warranty terms conspicuously printed on that product’s packaging, whether they actually take the time to read them or not.

***

To summarize, then, acceptance of Tamko’s [roofing manufacturer] purchase terms—arbitration clause and all—was incidental to, and reasonably necessary to accomplish the homeowner’s express grant of agency authority to their roofers to purchase and install shingles, and in any event, the roofers’ notice of the terms printed on the shingle wrappers in properly imputed to the homeowners.

Dye, supra.

Arbitration clauses are favored. So, the next time you purchase or download a product and receive a boilerplate contract with terms and conditions, such as a limited warranty document that contains an arbitration provision, remember, the arbitration provision will likely be deemed enforceable.

QUICK NOTE: UNENFORCEABLE LANGUAGE IN ARBITRATION PROVISION

Posted on October 19, 2018April 24, 2020 by Edward Garber

Although arbitration is a dispute resolution provision provided for in a contract, the scope of judicial review of an arbitrator’s award is still governed by law. There are limited circumstances in which an arbitrator’s award can be challenged under the law. One of those circumstances is not because a party believes that an arbitrator applied the incorrect law.

In a recent construction case, discussed in more detail here, an arbitration provision provided that a party can essentially appeal/challenge an arbitrator’s award to the circuit court if the arbitrator applied the incorrect law. The appellate court held this language was unenforceable because it attempted to expand the legal scope of judicial review of an arbitration award. The issue, here, became more than just the unenforceable language but whether the entire arbitration clause should be deemed unenforceable. In other words, the issue became whether the unenforceable language that expanded the scope of judicial review of an arbitration award could be severed from the provision such that the parties would still be required to arbitrate (hence, the importance of a severability provision in a contract) OR the entire arbitration provision should be deemed unenforceable. This is a HUGE difference because in one instance the parties still can arbitrate absent the expanded scope of judicial review and in the other instance the arbitration clause is unenforceable in entirety and the parties would be required to litigate.

SUBCONTRACT REQUIRING ARBITRATION OUTSIDE OF FLORIDA

Posted on July 21, 2018April 24, 2020 by Edward Garber

Have you entered into a subcontract that requires you to arbitrate disputes? If so, does the arbitration provision require you to arbitrate your dispute outside of Florida? If so, the case of Sachse Construction and Development Corp. v. Affirmed Drywall, Corp., 43 Fla. L. Weekly D1622e (Fla. 2d DCA 2018) applies and reinforces the notion: Read and consider what you sign!

In Sachse Construction, a drywall subcontractor entered into a subcontract for a construction project in Miami with an arbitration provision. The subcontract provided that it shall be construed in accordance with Michigan law and required that arbitration shall take pace in Michigan per the Construction Industry Rules of the American Arbitration Association.

A dispute arose and, naturally, the drywall subcontractor did not want to arbitrate against the general contractor in Michigan. The subcontractor argued the arbitration provision was unenforceable pursuant to Florida Statute s. 47.025, which is a Florida venue statute that renders a venue provision in construction contracts void if it requires a resident contractor to initiate venue outside of Florida (see hyperlink for more on the statute). A clever argument. But…the venue provision in the subcontract at-issue involved arbitration, not litigation, and the appellate court held that if the arbitration provision was governed by the Federal Arbitration Act, then the Federal Arbitration Act would preempt the application of s. 47.025 and the venue provision would not be rendered unenforceable. “[A] Florida court must enforce an arbitration agreement that is valid and enforceable under the FAA even when the agreement would be unenforceable under Florida law.” Sasche Construction, supra.

The Federal Arbitration Act would apply if the contract involved interstate commerce. (Commerce, as defined under the Federal Arbitration Act, involves commerce among the states or with foreign countries). For this reason, the appellate remanded back to the trial court to determine whether interstate commerce applied. If interstate commerce did apply then the drywall subcontractor would be required to arbitrate its dispute in Michigan.

Two considerations:

First, it would seem that the general contractor should be able support the application of interstate commerce to trigger the application of the Federal Arbitration Act. It argued that its principal office was in Michigan, but it should be able to further argue accounting or other financial or insurance related issues were processed and performed in Michigan. It may also argue that the materials to be incorporated into the project (e.g., the drywall, etc.) were materials that flowed through interstate commerce. If this is the case, the drywall subcontractor will be required to arbitrate its dispute in Michigan—a huge advantage to the general contractor.

Second, even if interstate commerce did not apply and the application of s. 47.025 came into effect, it is uncertain why the parties would be required to litigate the dispute versus arbitrate the dispute in Florida, instead of Michigan. The appellate court did note that the contract did not contain a severability clause (reinforcing the importance of such a clause in a contract), but there was not any argument or real discussion regarding this issue and the invalidation of an arbitration provision as a whole.

Remember, read and consider what you sign! It can have huge implications, such as being required to arbitrate your dispute outside of Florida.

DOES ARBITRATION APPLY TO CONTEMPORANEOUSLY EXECUTED CONTRACTS (WHEN ONE OF THE CONTRACTS DOES NOT HAVE AN ARBITRATION PROVISION)?

Posted on January 6, 2018January 6, 2018 by Edward Garber

Binding arbitration is an alternative to litigation. Instead of having your dispute decided by a judge and/or jury, it is decided by an arbitrator through an arbitration process. Arbitration, however, is a creature of contract, meaning there needs to be a contractual arbitration provision requiring the parties to arbitrate, and not litigate, their dispute. Just like litigation, there are pros and cons to the arbitration process, oftentimes dictated by the specific facts and legal issues in the case.

What happens when a person executes two (or more) contemporaneous contracts, one with an arbitration provision and one without? Are the parties required to arbitrate the dispute arising out of the contract that does not contain the arbitration provision?

The reality is that this has become an unnecessary over-complicated situation that should be avoided by specifically incorporating all of the contracts into an operative contract or, conversely, expressing the intent in each contract whether arbitration applies. Being specific will avoid the over-compilation of this issue.

In an example of what really amounts to an over-complicated opinion regarding an arbitration provision, the case of Lowe v. Nissan of Brandon, Inc., 43 Fla. L. Weekly D103b (Fla. 2d DCA 2017) dealt with a consumer automobile transaction where a consumer challenged the sale price of an automobile. The consumer purchased a car and signed three contemporaneous contracts: a purchase agreement, an installment sale contract (i.e., the purchase was subject to the condition that the installment contract would be accepted by a financing institution), and an arbitration agreement. The purchase agreement incorporated the arbitration agreement. The arbitration agreement incorporated the installment contract. The installment contract (quite confusingly, in my opinion), however, did not incorporate the arbitration agreement or the purchase contract.

The consumer claimed that because the installment contract did NOT incorporate the arbitration agreement, arbitration did not apply to disputes involving the installment contract. Notwithstanding, the trial court compelled arbitration. The appellate court affirmed.

The general contract principle regarding construing contemporaneously executed documents together has been reiterated in many cases. See, e.g., Dodge City, 693 So. 2d at 1035; Phoenix Motor Co., 144 So. 3d at 696 (quoting Collins, 641 So. 2d at 459). “But if the parties execute ‘two separate contracts and only one contract contains an arbitration clause, the parties cannot be compelled to arbitrate disputes arising from the contract that does not call for arbitration.’ ” Phoenix Motor Co., 144 So. 3d at 696 (quoting Lee v. All Fla. Constr. Co., 662 So. 2d 365, 366 (Fla. 3d DCA 1995)). The exception is where the contract with the arbitration clause incorporates by reference the contract which does not contain an arbitration clause, such that the latter could be “interpreted as part of the [former] contract.” Id. at 697 (citing Affinity Internet, Inc. v. Consol. Credit Counseling Servs., Inc., 920 So. 2d 1286, 1288-89 (Fla. 4th DCA 2006)).

To incorporate by reference a collateral document, the incorporating document must (1) specifically provide “ ‘that it is subject to the incorporated [collateral] document’ ” and (2) the collateral document to be incorporated must be “ ‘sufficiently described or referred to in the incorporating agreement’ ” so that the intent of the parties may be ascertained. Kantner v. Boutin, 624 So. 2d 779, 781 (Fla. 4th DCA 1993) (quoting Hurwitz v. C.G.J. Corp., 168 So. 2d 84, 87 (Fla. 3d DCA 1964)). The [s]upreme [c]ourt set forth the second requirement for incorporation by reference in OBS Co. v. Pace Construction Corp., 558 So. 2d 404, 406 (Fla. 1990): “It is a generally accepted rule of contract law that, where a writing expressly refers to and sufficiently describes another document, that other document, or so much of it as is referred to, is to be interpreted as part of the writing.”

Lowe, supra.

Here, there was no dispute regarding the contemporaneous execution of the contracts. The appellate court found that while the installment contract did not incorporate the arbitration provision, this contract was a condition precedent to the purchase agreement. Thus, once the installment contract was accepted by a financing institution, the purchase agreement with the arbitration provision became the operative contract without any conditions precedent. (The case actually has a more complicated legal analysis to affirm the trial court’s ruling that the parties should be compelled to arbitration).

In my opinion, this is nothing more than a basis to compel the parties to arbitrate when the installment contract that was sued upon did not contain an arbitration provision or incorporate the arbitration agreement or purchase agreement. All of this could have been avoided had specificity occurred in the installment contract or had the purchase agreement specifically incorporated the installment contract. But, if arbitration is a creature of contract, and the dealership prepared (which it did) the contracts it wanted the consumer to contemporaneously execute, compelling the parties to arbitrate based on what is perceived to be the “operative contract” seems to go against the grain that parties cannot be compelled to arbitrate disputes arising from a contract that does not contain an arbitration provision.

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!).

QUICK NOTE: DO YOUR HOMEWORK WHEN IT COMES TO SELECTING YOUR ARBITRATOR

Posted on July 19, 2017July 19, 2017 by Edward Garber

Many construction contracts contain arbitration provisions. Instead of litigating a dispute arising out of the contract, the parties will arbitrate the dispute per the arbitration provision. There are advantages to arbitration and certain disputes bode well for arbitration. The key is you want to make sure you select the RIGHT arbitrator or arbitrators. Do your homework regarding the arbitrator list presented to you by, say, the American Arbitration Association. Strike out those on the list that either do not have the requisite experience you need to decide the dispute or you believe they are not going to be impartial. For instance, if you want an arbitrator that you think will specifically follow the letter of the law or the precise terms of a contract, select those on the list that meet this requirement; strike out others that do not. The same philosophy would apply if you want an arbitrator to have specific factual knowledge or a factual understanding regarding a driving issue in the dispute. Do not neglect the homework required to select –or try to select — the arbitrator you believe is the most qualified to understand the issues.

Now, why is this important? It is important because you need to arbitrate a dispute with the understanding that the arbitrator’s award (decision) is FINAL. There are no appellate rights. None. Vacating an arbitrator’s award is very challenging and the bases to vacate an award are limited and, most of the time, will NOT apply.

In a recent decision, a party tried to vacate an arbitration award. One of the arguments was that the arbitration panel failed to follow Florida law. Well, guess what? An arbitrator does not necessarily have to comply with Florida law. Legal error by an arbitration panel is not a basis to vacate an arbitration award. See Managed Care Ins. Consultants, Inc. v. United Healthcare Ins. Co., 42 Fla. L. Weekly D1599b (Fla. 4th DCA 2017).

ARBITRATION PROVISION IN HOMEBUILDER’S WARRANTY AGREEMENT WITH HOMEOWNERS IS UNENFORCEABLE

Posted on June 2, 2017June 2, 2017 by Edward Garber

Buying a new home from a homebuilder is an exciting time. How could you not be excited about buying and moving into a new home? It is a big milestone. When buying a new home from a homebuilder, it is common that you are provided a limited warranty agreement to sign that outlines your rights if there is a “warranty” claim, the length of the warranty period, what constitutes a valid warranty claim, and includes an arbitration provision requiring you to arbitrate claims arising out of the agreement or home. It is also common that such limited warranty agreement contains important disclaiming language. Homeowners should always consider what they sign, but the reality is that most homeowners are going to absolutely sign what the homebuilder wants them to sign (and the homebuilder may even be unwilling to sell a home without certain signatures that offsets their risks).

A recent case, Anderson v. Taylor Morrison of Florida, Inc., 42 Fla. L. Weekly D1232a (Fla. 2d DCA 2017), potentially changes certain business practices of a large homebuilder, and perhaps many homebuilders, when the arbitration provision in its limited warranty agreement was deemed void against public policy. The homebuilder’s limited warranty agreement is likely a standard form agreement that all of its homeowners sign with identical language. Thus, this ruling impacts not only the enforceability of the arbitration provision in this case, but of any claim by a homeowner that signed the same limited warranty agreement. This is certainly not what the homebuilder wanted when it thought it was containing disputes to arbitration and not litigation.

In this case, homeowners sued the homebuilder years after completion for a defect in the stucco system of their home. One of the claims was a statutory violation of building code claim. The homebuilder moved to compel arbitration pursuant to the limited warranty agreement that contained in material portion:

This Dispute Settlement provision sets forth the exclusive remedy for all disputes, claims or controversies arising out of, or in any manner related to, this Warranty or any alleged issues in your home or property. All disputes, claims or controversies which cannot be resolved between TM [the Builder] and you shall be submitted by you, not later than ninety (90) days after the expiration of the applicable warranty period, to the American Arbitration Association (“Arbitrator”) for resolution in accordance with the rules and regulations of the Arbitrator. The final decision of the Arbitrator shall be binding on all parties and shall include final decisions relating to enforcement of the terms and provisions of this Warranty.

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BUYER AGREES THAT THIS LIMITED WARRANTY SHALL BE THE EXCLUSIVE REMEDY FOR ANY ISSUES IN DESIGN, MATERIALS OR WORKMANSHIP. BUYER HERBY [sic] ASSUMES THE RISK OF ALL OTHER LOSS RESULTING FROM SUCH ISSUES, INCLUDING ANY CLAIMS FOR PROPERTY DAMAGE OR PERSONAL INJURY, AND WAIVE [sic] ALL OTHER CLAIMS, WHETHER IN CONTRACT, TORT OR OTHERWISE.

The trial court compelled arbitration per the limited warranty agreement. On appeal, however, the Second District Court reversed finding that the arbitration provision was unenforceable against public policy because it prohibited the homeowners from pursing a statutory building code violation claim (i.e., that the stucco system was not installed as required by the governing building code). See Anderson, supra (“The arbitration provision in the Warranty indicates that all issues related to the Warranty, the home, or the property are to be arbitrated. But read in context with other provisions in the Warranty, particularly the disclaimer provision, it is evident that the alleged building code violations cannot be remedied through arbitration because the claims are not covered by the Warranty and all non-Warranty claims are waived… Simply put, the arbitration provision here effectively limits the Andersons’ [homeowner] remedies to Warranty claims, as defined in the documents, and does not just substantially diminish the Andersons’ statutory remedy for a violation of the building code but totally eliminates it.”).

Here, the import of the issue, in my opinion, is not necessarily the arbitration provision, but the capitalized disclaiming language that ultimately operates to disclaim liability for latent defects – or defects not readily observable, particularly at the time of closing. A latent defect is a defect oftentimes discovered beyond the warranty period. A warranty period really pertains to the period where the contractor or builder agrees to show back up to the property to address post-punchlist related items. When this period expires (whether it is a contractual warranty period or statutory warranty period in the case of condominiums) does not mean a homeowner no longer has any recourse. That recourse is based on whether the defect is a latent defect. The disclaiming language in the limited warranty agreement limits a homeowner’s remedies for certain latent defects. When this language is read in conjunction with the arbitration provision, the homeowner is waiving rights for claims unrelated to true warranty claims, such as a statutory building code violation claim, while agreeing to arbitrate “permissible” claims under the limited warranty agreement arising out of the home. This has the effect of preventing homeowners from arbitrating certain, valid claims.

It is uncertain how a trial court or appellate court will treat such disclaiming language other than any dispute arising out of the home needs to be litigated and not arbitrated.