First Quarter 2003

Alternative Dispute Resolution Update: Federal Law Applies to Florida Arbitration Waiver Claim

Holland & Knight Newsletter
Fred J. Lotterhos III

Construction contracts typically contain mandatory arbitration clauses, requiring the parties to arbitrate all disputes arising under the contract. Not uncommonly, one of the parties will file suit instead of demanding arbitration, or will take some other action that is inconsistent with an intent to arbitrate the dispute. If that party later tries to demand arbitration of the same dispute, the other party may claim that the right to arbitration has been waived.

Until recently, it was well established in cases decided under the Florida Arbitration Code that acts inconsistent with an intent to arbitrate may indeed constitute a waiver of arbitration. Under Florida law, the party claiming waiver need not demonstrate that it would be prejudiced in any way by having to proceed with arbitration. Merely showing that the other party acted inconsistently with an intent to arbitrate is enough to establish waiver and avoid arbitration.

A recent decision from the Florida First District Court of Appeal would change that rule in virtually every case. In GLF Construction Corporation v. Reechi-GLF, 27 Fla. L. Weekly D1610a (Fla. 1st DCA, July 9, 2002), GLF Construction Corporation (GLF) and Reechi – GLF (Reechi) entered into a construction contract containing two separate arbitration clauses. Clause (a) mandated arbitration by a named arbitrator, Mr. Sutton, for certain kinds of disputes. Clause (b) mandated arbitration by the American Arbitration Association for all other disputes.

When a dispute arose, GLF demanded arbitration pursuant to clause (a). Mr. Sutton arbitrated that dispute and issued his ruling, which involved interpretation of the contract but no monetary award. After receiving Mr. Sutton’s ruling, GLF demanded a second, “phase two,” arbitration pursuant to clause (a), in which GLF sought an award of damages from Mr. Sutton. Reechi had no objection, so the parties proceeded with the phase-two arbitration process before Mr. Sutton.

When Mr. Sutton denied GLF’s request for pre-hearing depositions and other discovery, however, GLF filed a demand with the American Arbitration Association for arbitration of the same phase-two dispute, attempting at that late date to invoke clause (b) of the contract. Reechi objected, arguing that GLF had waived its right to arbitrate the dispute before the AAA under clause (b) of the contract by initiating and actively participating in arbitration of the dispute before Mr. Sutton under clause (a).  GLF filed a motion with the Circuit Court to compel arbitration under clause (b).

The trial court sided with Reechi, holding that GLF’s actions in initiating and actively participating in arbitration under clause (a) waived GLF’s right to demand arbitration under clause (b). Reechi did not make a showing that it would be prejudiced by having to arbitrate under clause (b), but no such showing was required under Florida law. The trial court’s ruling in Reechi’s favor was entirely consistent with long-standing precedents under Florida law. The appellate court, however, reversed. The Court’s reasoning merits careful attention.

The Court began with the statement that, “[i]t is undisputed that the parties’ contract involves interstate commerce.” From that premise, the Court reasoned that “the contract is controlled by the Federal Arbitration Act to the extent that Florida law is inconsistent.” The Court then examined the federal law on waiver of arbitration. Under federal law, a party claiming waiver of arbitration must show that it would be prejudiced in some way if it is compelled to proceed with arbitration. Since Florida law does not require a showing of prejudice, the Court reasoned that Florida law is inconsistent with federal law and that federal law must control. Given that Reechi had made no showing of prejudice in its arguments before the trial court, the appellate court held that Reechi had not satisfied this prerequisite to a finding of waiver under federal law. Accordingly, it reversed the trial court’s decision and held that GLF had not waived its right to demand arbitration under clause (b), even though GLF had initiated and participated in arbitration under clause (a).

The effect of the GLF decision is essentially to overrule the long-standing Florida case law holding that a party arguing waiver of arbitration need not show prejudice. Why is this the effect? Because virtually every Florida construction contract is going to “involve interstate commerce,” no matter how “local” the parties or the project. Some of the materials used in the project likely will have been manufactured out-of-state and shipped through interstate commerce; some of the subcontractors may be from a different state; payments may be sent across state lines. In short, there are myriad ways in which a construction project can “involve interstate commerce.” It follows, then, that in every Florida case that involves interstate commerce, the GLF decision will apply.

Critics may question whether the Court was correct in applying the federal law of waiver based on an alleged inconsistency between the Federal Arbitration Act and the Florida Arbitration Code. Neither the federal nor the Florida arbitration codes address the question of whether a showing of prejudice is a prerequisite to a finding of waiver. The codes themselves are, therefore, not inconsistent on this point. It is only the rulings of courts interpreting the codes that create the inconsistency between federal and Florida law on the question of prejudice. Federal courts have reasoned that a showing of prejudice is necessary, while Florida courts have not. Arguably, the level of “inconsistency” necessary to find that federal law supersedes Florida law is an inconsistency between the express terms of the arbitration codes themselves, not an inconsistency in judicial interpretations of the codes. Nevertheless, unless and until it is reversed or overruled, GLF is valid law in Florida.

For Florida practitioners and businesses, the lessons of GLF are clear. A party seeking to arbitrate a dispute that is already in litigation or as to which other circumstances exist that, under prior Florida law, would have constituted a waiver of the right to arbitrate, should establish in the trial court record that the construction contract “involves interstate commerce.” That showing will now impose on the party arguing waiver of arbitration a new burden to prove that it will be prejudiced by being compelled to participate in arbitration. If the party arguing waiver cannot establish prejudice, the trial court will be precluded from finding a waiver.

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