Arbitration Panel Misconstrues Contractor Licensing Law: Court Allows Decision to Stand

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If you’ve followed Burr’s e-note over the past year or two, then you know that the United States Supreme Court has issued recent opinions on the power of arbitration tribunals to make legal decisions.  Even if a review of the arbitration decision reveals an error in legal interpretation, the general rule of the land is that parties who contractually agree to resolve their disputes through arbitration accept the possibility that the arbitration panel may interpret the law or the facts (or both) in a final opinion that is very difficult to overturn on appeal.  A recent Florida appellate opinion on contractor licensure emphasizes this nuanced area of the law.

As background, Florida law is clear that a contractor unlicensed at the time of contract cannot maintain an action in a Florida court for unpaid work.  See 489.128(1), Fla. Stat. (2009).  Florida courts strictly construe these statutes.  As a result, litigants in Florida courts can anticipate that an entity that was technically unlicensed at the time it entered into the contract will have an uphill battle in a court of law trying to collect for unpaid work.

We also know that many construction contracts contain arbitration clauses.  A recent case from Florida’s Third District Court of Appeal wrestled with the conundrum of determining whether it had authority to overturn the decision of an arbitration panel that appeared to misconstrue Florida’s unlicensed-contractor law.  The Village at Dolphin Commerce Center, LLC v. Construction Service Solutions, LLC (Fla. 3rd DCA 2014).   In Construction Service Solutions the undisputed facts at arbitration showed that the contractor was not technically licensed under Florida law at the time of the contract.  Despite the fact that during the term of the contract the contractor cured the licensure defect, Florida law typically bars a contractor’s action for recovery of unpaid work when the licensure requirements were not met at the time of the contract.  The record also showed that neither the contractor nor the owner objected to the arbitration panel’s jurisdiction or authority to decide the issue.  If either side objected to the arbitration panel’s jurisdiction to decide the licensure issue, the AAA Construction Arbitration rules required the objecting party to object in the answering statement.  Both parties agreed to allow the arbitration panel to consider the issue.

Ultimately, the arbitration panel ruled in favor of the (technically unlicensed) contractor.  Unhappy with that decision, the owner sought a ruling from the Florida trial court seeking to overturn the panel’s decision.  The trial court refused.  Still unsatisfied, the owner appealed to the appropriate Florida appellate court.  The appellate court noted that Florida law would typically bar the contactor’s recovery.  Nonetheless, the appellate court further confirmed and upheld the arbitrator’s decision.

The Owner also argued that the arbitration panel had improperly neglected to consider the issue of the contract’s legality.  In the courtroom, the Owner argued that either (a) the parties never agreed to submit the lien claim to arbitration or (b) the arbitration award did not address the Owner’s affirmative defenses.  Id.  The Third District, however, agreed with the magistrate, holding that the enforceability issue was submitted to arbitration when the Owner filed its answer and raised enforceability as its first affirmative defense.  In its initial arbitration response, the Owner failed to dispute the scope of the arbitrator’s authority to decide the issue.  Id.

Despite an arbitration result that appeared to misconstrue Florida law, the Third District held that the parties willingly submitted to the arbitrator the issue of whether or not the contractor could legally enforce the contract.  Having chosen their preferred venue for dispute resolution, the parties were bound by the results.  And this isn’t a particularly unique position for Florida courts.  While the Florida Arbitration Act allows a court to review an arbitrator’s decision if the arbitration panel exceeded its authority, see Fla. Stat. § 682.13(1)(d), the Florida Supreme Court has refused to disturb an arbitration award for a “mere” factual or legal error.  See Schnurmacher v. Noriega  (Fla.1989).  The U.S. Supreme Court, not surprisingly, takes a similar stance.  SCOTUS’  well-known Buckeye Check Cashing, Inc. v. Cardegna (2006) opinion distinguishes challenges to the validity of an agreement to arbitrate from challenges to the validity of contractual interpretation.

The lesson is clear:  when agreeing to arbitrate a dispute, when responding to a demand to arbitrate, or when filing your formal response to an arbitration petition, it is imperative to analyze the scope of the arbitrator’s authority and to ensure the scope is in line with your client’s interests.  The other lesson, of course, is to make sure your lawyer knows this. 

Topics:  Arbitration, Arbitration Agreements, Construction Disputes, Construction Workers, Contractors, SCOTUS

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates, Construction Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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