Step-by-Step: Failure to Strictly Comply With Dispute Resolution Procedure Can Waive Contractual Right to Arbitrate
Construction and Procurement Law News, Q1 2022
Most state and federal courts have expressed a strong preference for parties to resolve their legal disputes via binding arbitration when there is an arbitration clause applicable to the dispute, but there are instances where courts will deny such a request – even when the parties have expressly agreed to this particular forum in their construction contract. For example, Florida courts consider the following three factors when considering whether to compel a dispute to arbitration after a party has initiated a lawsuit: (1) the existence of a valid arbitration agreement between the parties; (2) the existence of an arbitrable issue under that agreement; and (3) whether the right to arbitration has been waived by the parties either expressly or by their course of conduct before and/or after the lawsuit is filed. The third factor was front and center in the recent Florida case of Leder v. Imburgia Construction Services, Inc., an opinion which confirms that the contractual right to arbitration is not absolute and can be impliedly waived if the parties fail to closely follow the contractual procedure for invoking this specified dispute resolution forum.
Leder arose from a home renovation project located in Miami-Dade County. The property owners entered into a written construction contract with the general contractor which contained a mandatory arbitration provision. While the case does not specifically identify whether the parties’ agreement was a standard industry form contract, the dispute resolution procedure somewhat resembles the arbitral procedure located in AIA forms – i.e., a claim was required to be initiated within 21 days of the event giving rise to the claim and is then first submitted to an initial decision maker for determination, then to mediation, followed by binding arbitration if the prior two dispute resolution steps do not resolve the claim. In this particular contract, the initial decision maker was defined as the Miami Shores Village Building Department Official. The contract further provided that the general contractor was required to continue performing its contractual obligations during the pendency of any dispute/claim, and that the right to arbitrate would be waived if the contractual condition precedents to arbitration were not followed.
During the course of the project, disputes arose between the parties regarding a change order for structural work submitted by the contractor. The owners refused to execute the proposed change order on both price and necessity grounds, and the contractor subsequently abandoned the project. Neither party submitted a claim to the initial decision maker as mandated by the contract. The property owners later filed suit against the contractor in county court claiming that the contractual arbitration provision had been waived by the parties’ course of conduct. The contractor in turn filed a motion to dismiss the complaint asserting that the lawsuit was filed in direct contravention of the contractual arbitration provision, but notably did not separately move to compel the dispute to arbitration. The county court granted the contractor’s motion to dismiss the complaint, finding that neither party had properly complied with the specified claims/dispute resolution procedure in the contract. The court’s ruling interestingly left the owners with no legal recourse for their claims against the contractor.
The Florida Third District Court of Appeal reversed on appeal, finding that “based on its pre-litigation action and the language in the parties’ contract,” the contactor’s failure to strictly comply with the express dispute resolution procedure resulted in an implied waiver of the contractual arbitration clause. Specifically, the court held that because the disputed change order at issue affected both parties and was related to the construction contract, either side could have initiated the specified dispute resolution procedure by submitting a claim to the initial decision maker and yet failed to do so. Because the parties elected to ignore the strict conditions precedent necessary to invoke the contractual arbitration procedure, that process had been waived by their conduct before the lawsuit was filed.
Leder is just a reminder that parties must timely and closely follow the terms and procedural requirements articulated in their contracts, including, as in this case, the arbitration clause, or risk losing the right to have their disputes heard and resolved in the forum that they selected when the contract was originally negotiated and executed.