Defense Digest, Vol. 29, No. 4, December 2023

Caution: The Potential Quagmire of Unwanted Arbitration Clauses Are Often Buried in the Details

By
Stephen R. Gross

Key Points:

  • Consider including third parties or remote parties to a complaint.
  • Arbitration clauses can appear in various contracts, including product warranties.
  • The potential dangers of agency relationships in construction.

Most parties follow a simple rule—if you don’t want to arbitrate, don’t agree to an arbitration provision as the means to resolve your dispute. More and more, arbitration provisions for dispute resolution are avoided as arbitration has become both costly and lengthy—the opposite of what had been intended. However, there are times and instances when you may not have a choice about arbitration because the choice has already been made. This is especially true in the context of construction. In construction matters, there are often complicated relationships between parties—owners, contractors, and subcontractors, materialmen, etc.—which establish duties and responsibilities that flow up and down the chain. 

One example that is often ignored or overlooked is an arbitration provision in a warranty from a manufacturer of a product. If you are procuring the product to incorporate into your project, you may be agreeing to the terms of an express warranty. Manufacturers do not typically negotiate their product warranties on a case-by-case basis, and arbitration provisions in a warranty or contract with other parties may attach without warning. 

One such instance was the recent case of SICIS North America, Inc. v. Sadie’s Hideaway, LLC, 368 So.3d 1052 (Fla. 1st DCA 2023), where a property owner elected to sue a tile manufacturer, SICIS North America, and the general contractor, Galvas Construction, Inc. The owner alleged that the exterior tiles installed at its project were defective. The tiles were procured from SICIS by Galvas for the owner. The owner sued Galvas under various theories and sued SICIS for breaches of warranty and negligence. Galvas, in turn, asserted a cross-claim for indemnification against SICIS. 

This scenario represents a typical construction litigation case that we might all find ourselves involved with. However, in Sadie’s Hideaway, since there was an arbitration provision in the warranty documents and Galvas’ indemnification claim arose from that transaction, SICIS moved to compel the owner’s claim and Galvas’ cross-claim to arbitration. The trial court denied the motion to compel arbitration. 

On appeal, the Appellate Court set forth the proper analysis relating to a motion to compel arbitration: “[T]he three elements for courts to consider in ruling on a motion to compel arbitration are: (1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitrate was waived,” citing CEFCO v. Odom, 278 So.3d 347 (Fla. 1st DCA 2019).

The appellate court ultimately reversed and stated:

First, because [the owner] was suing [SICIS] based upon the written warranty, it was bound by the arbitration provision contained in [Galvas’] agreement with [SICIS]. As the Florida Supreme Court has explained, ‘[W]hen a plaintiff sues under a contract to which the plaintiff is not a party . . . we will ordinarily enforce an arbitration clause contained in that contract, absent some other valid defense. ...’ [The owner] had no valid defense against arbitration, a fact which it apparently realized when it voluntarily dismissed its express warranty claim after the notice of appeal and initial brief were filed.

Second, the trial court erred in not compelling arbitration based upon the agency relationship that existed between [the owner] and [Galvas]. The essential elements of an actual agency relationship are: (1) acknowledgement by the principal that the agent will act for him; (2) the agent’s acceptance of the undertaking; and (3) control by the principal over the actions of the agent. 

SICIS North America, 368 So.3d at 1055 (internal citations omitted).

The appellate court further held that the evidence established that the owner authorized Galvas to act as its agent when purchasing the tiles from SICIS. Because Galvas’ purchase of the tiles was within the scope of work that the owner hired it to do, it was unnecessary for the owner to expressly authorize Galvas to enter into the arbitration agreement with SICIS. As such, the court held that the owner is bound by the agreement between SICIS and Galvas by virtue of the owner’s agency relationship with Galvas.

Ultimately, the owner did not need to sue SICIS. It could have just sued Galvas for the alleged defective tiles. Suing SICIS in this case was the owner’s choice, and in doing so, it complicated its claims between itself, Galvas, and SICIS, such that the arbitration clause in the warranty was ultimately held to apply to some of the owner’s claims—an arbitration provision the owner never agreed to. As a result, the owner and Galvas are tasked with arbitrating claims against a manufacturer under a warranty. 

The lesson is that, prior to bringing suit or a counterclaim or cross-claim, you should thoroughly evaluate the claims asserted, especially those against distant or removed parties. In doing so, you will not unwillingly stroll into an arbitration quagmire.

*Stephen is Special Counsel in our Fort Lauderdale, Florida, office. He can be reached at 954.233.5843 or SRGross@mdwcg.com.
 

 

Defense Digest, Vol. 29, No. 4, December 2023, is prepared by Marshall Dennehey to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2023 Marshall Dennehey. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.