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Articles Posted in Arbitration and Mediation

Arbitration is one of the most common forms of dispute resolution in construction today, but the recent ruling by the Third District Court of Appeal illustrates some of the difficulties that parties to arbitration proceedings can face in appealing or vacating the arbitrator’s award.

In The Village of Dolphin Commerce Center, LLC v. Construction Service Solutions, LLC, the contractor was not licensed at the time of the contract and became licensed after the execution of the contract with the Dolphin Commerce Center. The contractor recorded a construction lien subsequent to a payment dispute along with a demand for arbitration with the American Arbitration Association pursuant to the contract. The property owner responded by asserting that the contract was unenforceable under Florida Statute s. 489.128 which provides: “As a matter of public policy, contracts entered into . . . by an unlicensed contractor shall be unenforceable in law or in equity by the unlicensed contractor.” Section 489.128 further provides that, “[i]f a contract is rendered unenforceable under this section, no lien or bond claim shall exist in favor of the unlicensed contractor.”

arblogo.jpgThe owner also filed suit in circuit court seeking to declare that that the contractor’s claim of lien was unenforceable because of the contractor’s unlicensed status at the time of contract. However, the court ruled that the parties were compelled to arbitrate the dispute.

The owner, at the start of the arbitration, never objected to the arbitrator’s jurisdiction to rule on whether the contractor’s unlicensed status at the time of contract prevented it from enforcing the contract and the construction lien. The contractor went on to succeed in the arbitration and then moved to enforce the arbitration award in circuit court. The owner asked the court to vacate the award based on the unenforceability of the contract and lien because the contractor was not properly licensed. When the trial court affirmed the arbitration award, the owner appealed.

The Third DCA was asked to determine whether the arbitrator had jurisdiction to determine the enforceability of the contract and the lien pursuant to s. 489.128. The unanimous opinion held that “the issue of enforceability was submitted to the [arbitration] panel and neither party objected. As such, based on the American Arbitration Association rules, the panel had jurisdiction to determine the issue. To ask the trial court to revisit the issue would require the trial court to step into an appellate position. The Florida Arbitration Statutes do not provide for such. Pursuant to section 682.13, Florida Statutes, the authority of the trial court to vacate an arbitration award is very narrow.”

3rd district court of appeal.jpgBased on the United States Supreme Court decision in Buckeye Check Cashing, Inc. v. Cardegna as well as other Florida appellate decisions, the Third DCA wrote that when a party is challenging the legality/enforceability of a contract as a whole (versus only the arbitration provision), that determination must go to the arbitrator and not the court. “Those cases make clear that a trial or appellate court’s view that an arbitration panel wrongly decided the issue of illegality of a contract, and specifically illegality of a contract under section 489.128, is not a basis to vacate an arbitration award.”

The lessons to be learned for owners and contractors from this decision are clear. Parties are free to determine the scope of the arbitration provision and the issues to be determined by the arbitrator. If an owner seeks to avoid an arbitrator deciding licensing issues, it should specifically exclude the issue from the arbitration provision and make it clear that any licensing issues or issues concerning the enforceability of the contract, as a whole, are to be decided by the court. Additionally, if an owner disputes the authority of an arbitrator, an objection must be made in order to preserve the owner’s rights. For contractors, the case is yet another reminder of the importance of ensuring that they are properly licensed.

Our other construction law attorneys and I write about important legal and business issues impacting the construction industry in Florida in this blog, and we encourage industry followers to enter their email address in the subscription box at the top right of the blog in order to receive all of our future articles.

Sobel 2010.JPGThis article by Stuart Sobel appeared in the Daily Business Review on Oct. 24:

Board of Contributors: Avoiding Disputes Altogether Saves Money, Time, Relationships

By Stuart Sobel

Much has been written about alternative dispute resolution techniques, such as arbitration or dispute review boards. They are alternatives to traditional litigation that are often viewed as preferable to litigation in some respects. They may be more private, final and streamlined, for example.

But they can also be inferior to litigation. There is a limited ability to discover opposing evidence and, because of limited appeal, mistakes cannot easily be remedied.

And like litigation alternative dispute resolution still only comes into play after a dispute has ripened.

Traditional and alternative dispute resolution both take a toll on the clients who spend time and money with lawyers instead of their business. They also damage the clients’ relationship. It is not likely that a dispute, played out through any resolution process, will leave the parties willing to continue doing business in the future.

Making matters worse, dispute resolution has become increasingly uncertain.

Courts have been clogged with foreclosures, distracting judges from devoting the time necessary to properly consider and adjudicate complex business disputes. Court clerk budgets have been slashed, making it more difficult for the court staff to have files up to date and hearing times promptly available.

Courts have more matters and less staff with which to address their increased case load. Results become more erratic, slower and less predictable. At its heart, an effective dispute resolution process must be predictable; a result — or at least a range of outcomes — given a set of facts should be likely.

Unfortunately, that is no longer the case in too many instances.

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With the financial difficulties that developers, contractors and community associations are undergoing during the worst economic downturn of the last generation, disputes regarding construction defects can take a very significant toll on their already strained resources. Florida law governing this type of construction dispute is very conducive to mediation between the parties, and the construction law attorneys in South Florida from our firm often advise our clients to consider mediation and make serious efforts to use it whenever possible to resolve these potentially costly and time-consuming claims.

By creating a process for construction defect claims that begins with providing notice of the specific defect and giving the contractor/developer an opportunity to investigate and respond, Florida Statute 558 serves as a de facto precursor to mediation. These legal requirements have traditionally made mediation a popular alternative dispute resolution option for these defect claims in the state, and the sour economy and real estate market have also combined to create greater incentives for all of the parties involved in these cases to find equitable and expedited settlements through mediation.

Unlike arbitration, which for construction defect cases is typically used only when called for in the contract between the parties, mediation is generally a voluntary and nonbinding option for construction defect disputes. In addition, it is likely to be mandated by the court after the filing of the lawsuit in an attempt to have the parties explore the possibility of finding a resolution outside of the courtroom.

Mediation.jpgMediation for defect cases has proven to be very effective in part because of the use of certified mediators who are familiar with construction law matters. The parties involved will select a neutral mediator who has a great deal of construction industry experience. This experience often enables resolution since the neutral is familiar with both the legal and construction issues involved in a matter. For example, Steven Siegfried and Stuart Sobel from our firm are regularly selected to serve as mediators for these cases.

Mediation, whether required as part of litigation or as a pre-condition to further legal action, can often result in a quicker and less expensive mechanism to resolve construction defect issues. While some discovery is usually necessary in order to reach a resolution through mediation, often times, mediation avoids significant litigation discovery costs. Moreover, in this current economic climate when many developers and contractors have reduced their staff, a prompt resolution through mediation reduces the hours of involvement required by developers and contractors in a prolonged litigation. Accordingly, developers and contractors can focus on business and not litigation.

Additionally, with mediation, the parties remain in control of the terms of resolution and decision-making process; whereas in litigation or arbitration, the decision is left to a judge, jury or arbitrator(s). This control, as well as the general nature of the mediation process, also helps to preserve business relationships which may be destroyed by prolonged and costly litigation.

In a mediation, each side will essentially present their case to the mediator, who then works with each of the parties to help broker a settlement. If the mediation fails to find a resolution to which the parties can agree, none of the discussions in the mediation process are admissible in a subsequent litigation.

In addition, mediation can be an effective means of engaging insurance carriers for contractors, subcontractors and suppliers into the process for cases in which there is insurance coverage based on the allegations of the complaint. If an insurance company is involved in the defense, engaging it in the mediation process can be critical to finding a fair resolution and avoiding continued litigation.

The vast majority of cases are resolved prior to trial. Ideally, mediation will often allow the parties involved to cut right to the heart of the matter and find a fair resolution. Thus, engaging in serious mediation proceedings with an effective mediator can be one of the best ways to resolve a construction litigation dispute in a timely and cost-effective matter, particularly in this economic climate.

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