Thursday, August 28, 2014

Construction Law: Arbitration Jurisdiction And Unlicensed Contractors

By J. Derek Kantaskas

Arbitration provides litigants the opportunity to resolve disputes by arbitrators who are, theoretically, experts in their field, and in a cost-effective and streamlined environment. As a forum, however, arbitration is certainly not without a downside for some, particularly those dealing with unlicensed contractors, as recently highlighted by The Village of Dolphin Commerce Center, LLC v. Construction Service Solutions, LLC, 2014 WL 2116361, (Fla. 3d DCA May 21, 2014). 

In Dolphin Commerce, an owner hired a contractor to build a warehouse. At the time of the contract, the contractor was not properly licensed under Chapter 489, Florida Statutes. During construction of the warehouse, disputes arose, the contractor claimed to be unpaid, and a construction lien was ultimately recorded. The contractor also filed a demand for arbitration based on its contract. In response to the arbitration demand, the owner asserted the defense of section 489.128(1), Florida Statutes, which provides “contracts entered into … by an unlicensed contractor shall be unenforceable in law or in equity by the unlicensed contractor.” Moreover, as raised by the owner, where “a contract is rendered unenforceable under this section, no lien or bond claim shall exist in favor of the unlicensed contractor.” § 489.128(2), Fla. Stat. In addition to the defenses asserted in arbitration, the owner concurrently filed suit in circuit court to dispense with the contractor’s claim based on the unlicensed status.

Because the contractor was unlicensed, the owner’s position was two-fold: (i) the contract and its arbitration provision were unenforceable; and (ii) the lien based on the contract was equally unenforceable. In response to the owner’s circuit court action, the contractor moved to compel arbitration, which was granted by the trial court. The parties then proceeded to arbitrate.  

During arbitration, the owner asserted the contractor’s lack of licensure as a defense as set forth by section 489.128 but apparently failed to object to the arbitration panel’s jurisdiction to hear the issue. Under the Construction Industry Arbitration Rules of the American Arbitration Association, a party must object to the jurisdiction of the panel at the outset, or the panel is deemed to have jurisdiction. See Rule 9(c), AAA. The contractor prevailed at arbitration and sought to confirm its award in circuit court. The owner moved to vacate the award on several grounds, but namely because the underlying contract ― the basis for arbitration and the contractor’s claim ― was unenforceable because of the contractor’s unlicensed status.

The owner’s motion to vacate was denied because the issue of enforceability of the contract in light of section 489.128 was at least properly submitted to arbitration and decided upon by the panel. The Third District Court of Appeal noted the “very narrow” authority trial courts have in vacating arbitration awards and affirmed the trial court. Simply put, “[t]o ask the trial court to revisit this issue would require the trial court to step into an appellate position.” Dolphin Commerce, 2014 WL 2116361, at *3. But for narrow bases, trial courts lack authority to re-litigate the issues presented and decided in arbitration, and here, the enforceability of the contract despite licensure issues had already been decided by the arbitration panel.  

Dolphin Commerce serves as a bright-line reminder for parties of the limited appealability of an arbitrator’s decision and that failing to object to the jurisdiction of the arbitrator may ultimately waive this defense (even if it was presented at arbitration).