QUICK NOTE: STAYING, NOT DISMISSING, ARBITRABLE DISPUTES UNDER FEDERAL ARBITRATION ACT

Posted on June 23, 2024June 23, 2024 by David Adelstein

As you hopefully know from posted articles, arbitration is a creature of contract. Stated differently, there must be a contractual basis to have a dispute resolved through binding arbitration. The Federal Arbitration Act (FAA) applies to transactions involving interstate commerce. Oftentimes, lawsuits are filed despite an arbitration provision in a contract because parties can, if they desire, waive their rights to have their dispute resolved through binding arbitration.

In what should not be a shocker, the United States Supreme Court in Smith v. Spizzirri, 144 S.Ct. 1173, 1178 (2024), held that when a federal “district court finds that a lawsuit involves an arbitrable dispute, and a party requests a stay pending arbitration, section 3 of the FAA compels the court to stay the proceeding.” Dismissing the lawsuit should not be the option. Staying the lawsuit should.

[S]taying rather than dismissing a suit comports with the supervisory role that the FAA envisions for the courts. The FAA provides mechanisms for courts with proper jurisdiction to assist parties in arbitration by, for example, appointing an arbitrator; enforcing subpoenas issued by arbitrators to compel testimony or produce evidence; and facilitating recovery on an arbitral award. Keeping the suit on the court’s docket makes good sense in light of this potential ongoing role, and it avoids costs and complications that might arise if a party were required to bring a new suit and pay a new filing fee to invoke the FAA’s procedural protections.

Smith, supra, at 1178 (internal citations omitted).

If you have questions or concerns regarding an arbitration provision, the best time to ask is before you sign the contract that includes binding arbitration as the method to resolve disputes.

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.

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.

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.

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.

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.

ARE YOU SURE YOU WANT TO ARBITRATE?!?

Posted on July 14, 2014July 14, 2014 by Edward Garber

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

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

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