Legal pundits often debate the merits of arbitration versus litigation in State Court. Depending on the area of law, arbitration typically is the favored forum of resolution. Employment, securities and construction are three areas that are top of mind when talking about the two choices.
In the construction context, developers and general contractors typically will include arbitration as the forum for resolution in contract agreements with home purchasers. There is many reasons underpinning this school of thought, and resulting arbitration clauses can run the gamut. One common thread is the need to be vigilant in following the contractual language setting out the arbitration agreement.
Stated simply, the right to arbitration can easily be waived if actions taken or inconsistent with the contract language. This case reminds us of that outcome.
In a recent decision in the Florida courts, the issue of waiver was squarely on the proverbial table when the contractor was found to have waived its right to compel arbitration by failing to follow the contractual provisions agreed upon between the parties. This agreement set out the steps necessary to compel arbitration in the event of a dispute. The parties were required by their own agreement to seek resolution first from an the party agreed under the contract, which both failed to do before engaging in traditional litigation methods in an effort to resolve their differences.
Plaintiffs, Mauro & Patricia Leder (Owners) entered into a contract with Imburgia Construction Services, Inc. (Contractor) for the purpose of completing renovations to their home. The contract provisions indicated that arbitration would be used as binding dispute resolution should any issues arise. The contract also required that the parties first submit any claim to the Initial Decision Maker, who the parties agreed would be Miami Shores Building Department Official. According to the terms of the contract, a claim had to be submitted within 21 days of the occurrence of the event giving rise to the claim.
Importantly, the initial decision by the IDM was a condition precedent to mediation, and mediation a condition precedent to arbitration. Finally, the contract between parties indicated that their right to proceed to binding arbitration would be waived if the conditions pertinent to arbitration were not followed correctly.
The Owners brought a claim against the Contractor for monetary damages. They asserted that the Contractor abandoned the job after they refused to sign a fifth change order for structural work. The Owners had concerns over both the necessity for the change as well as the price. At no time did the Contractor file a claim with the IDM, or take any other action other than not showing up to the worksite to complete the project. The Owners also claim that the Contractor left unpaid subcontractor bills.
The Contractor filed a motion to dismiss the Owners' claims, but did not file a motion to compel arbitration.
Under section 682.181(1) of the Florida Statutes, the language provides that "a court of this state having jurisdiction over the controversy and the parties may enforce an agreement to arbitrate." The Contractor also delineated the factors a court should consider when ruling on a motion to compel arbitration:
- Whether a valid agreement to arbitrate exists;
- Whether an arbitrable issue exists; and
- Whether the right to arbitration was waived. Green Tree Servicing, LLC v. McLeod, 15 So.3d 682 (Fla.2d DCA 2009).
The trial court granted the Contractor's motion to dismiss the Owners' amended complaint. This left the Owners without any possible avenue for remedy. It found that the Owners failed to adhere to any of the dispute resolution provisions as provided by the contract and effectively cut off their right to pursue compensation for unfinished work under the contract.
The Owners appealed contending that the dispute resolution provisions of the contract were first waived by the Contractor when it left the job without consulting the IDM. The appellate court agreed.
When a dispute over the fifth change order arose between the parties, neither sought a determination from the IDM as was required by the contract. It is clear that a valid agreement to arbitrate existed between the parties and an issue arose that caused a dispute. The dispute over the fifth change order was a dispute that was arbitrable, but the parties did not follow the requirements of the contract to trigger arbitration. The first step was to consult the IDM regarding the dispute. This consultation was a condition to mediation, and mediation was a condition to arbitration.
Was the Provision to Arbitrate Waived?
The court looked to the totality of the circumstances to determine whether or not the defaulting party acted contrary to the provisions of the arbitration agreement. It is important to note that a party can waive their right to arbitration with both pre-suit and post-suit actions.
Here, the Court held that IDM waived its right to arbitrate because it had failed to satisfy the condition precedent to arbitration when the disputed change order arose. The Contractor, therefore, must file an Answer to the Owners' amended complaint and the case must proceed according to the normal litigation process.
Practice Pointers: Avoiding Waiver of Right to Arbitration
This case reminds us that dispute resolution starts with an analysis of the underlying contract documents. Here, the contract was express as to the steps required for dispute resolution, and those steps were ignored.
- Parties must follow the provisions of their own contracts and adhere to the requirements each agreed to therein.
- Contractors and owners should thoroughly understand the steps necessary to compel arbitration under their agreements and follow those steps to the letter.
- If the contract language goes beyond the standard language of AIA forms, it is important to ensure that the parties understand each clause contained in the contract.
The attorneys at WSHB are available to answer your questions on this issue to ensure that your business understands its rights and obligations. Please do not hesitate to reach out to the author of this article or any member of our team with further questions.
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