Public Contracts and Procurement Regulations
Robbins Equitas Attorney Gary Butler, in conjunction with Lorman Education Services, conducted a seminar about "Public Contracts and Procurement Regulations in Florida". The seminar was designed for people in the construction and development industries and government officials. Mr. Butler spoke on issues faced in litigation involving public works contracts and on the various techniques of alternative dispute resolution often found in public works contracts.
ARTICLE: Alternative Dispute Resolutions in the Public Works Contract
ARTICLE: Litigating the Public Works Contract
Alternative Dispute Resolutions in the Public Works Contract
Disputes are a part of human nature. They can range from the trivial to the monumental. But even a trivial dispute, if not managed and resolved promptly and efficiently, can bring a multi-million dollar construction project to a stand-still. Litigation is the government-sponsored means to resolving disputes. However, no one will contend that litigation is either prompt or efficient. Thus, there is a need to find ways to promptly and efficiently resolve disputes on construction projects.
Where needs arise, solutions are often not far behind. Multiple procedures, commonly called alternate dispute resolution procedures or "ADR", have arisen to provide owners, contractors, and other parties a means to resolve disputes. Each has its strengths and pitfalls, each are more applicable in certain circumstances than others. The common element to each, however, is that everyone involved in the ADR process must agree to that particular process somewhere along the line before they can be bound by the results. Often times the contract between the parties will spell out the ADR procedures to be used during the project. If the contract is silent on using ADR, then the parties are left to their litigation remedies. However, if the contract is silent, the parties are still free to use any or all of the ADR techniques discussed below if all parties involved agree to do so.
The most common ADR techniques are resolution by a third-party; binding arbitration; non-binding arbitration; and mediation. This article will deal with each in turn.
THIRD PARTY RESOLUTIONS.
Some contracts provide that certain disputes will be resolved by a specifically named third party, typically the architect, engineer, or other contract professional involved in the project. If a contract designates such a third person to resolve disputes or certify performance, that person's certification is final and binding on the parties. Duval County v. Charleston Engineering and Contracting Co., 101 Fla. 341, 134 So. 509 (1931); May v. Arnold Construction Company, 78 So.2d 705 (Fla. 1955). This determination can be binding even if the individual granted final authority is an employee or agent of one of the parties. See United States f/u/b Construction Products Corp. v. Bruce Construction Corp., 272 F.2d 62 (5th Cir. 1959), holding that the determination of the government's contracting officer was final and binding on the parties as was stipulated in the contract.
In May, the Florida Supreme Court quoted 12 Am.Jur. Contracts §342 approvingly for the reason behind this rule:
the approval of the party so designated becomes a condition precedent to a recovery for the price. In the absence of fraud or bad faith in the conduct of such party in respect of his approving or withholding his approval, his judgment or determination is to be accepted as final and conclusive. No mere error or mistake of judgment will vitiate his determination. The very object of his appointment is to prevent and exclude contention and litigation; and hence nothing short of fraud or mala fides in the exercise of his power to reject or approve the article contracted for will dispense with the strict legal effect of the condition precedent
78 So.2d at 709.
In a more recent case, the court held that "[i]n the absence of fraud, or such mistake as would amount to fraud, the determination made by the architect shall be final." James A. Cummings, Inc. v. Federal Insurance Company, 589 So.2d 950, 954 (Fla. 3d DCA 1991), rev. denied 599 So.2d 1278 (Fla. 1992). See also Arkin Construction Co. v. Reynolds Metals Co., 310 F.2d 11 (5th Cir. 1962).
However, the decision of the designated third party will be final only on those decisions that the contract expressly states are subject to the determination. For example, in Franklinville Realty Co. v. Arnold Construction Co., 120 F.2d 144 (5th Cir. 1941), the parties' contract provided that the architect's decision was final as to "matters relating to artistic effect". 120 F.2d at 148. Therefore, the appellate court reversed the trial court's determination based upon the architect's certificate regarding the amount due for work done and materials furnished. Id.
This technique is best suited for circumstances that require a quick, non-ambiguous decision. For instance, if there is a dispute between the general contractor and a carpentry sub-contractor regarding whether the door installed by the carpenter is in the right location. It makes sense to have the architect or some other individual designated by the contract to make a decision, as opposed to slowing down or even stopping the project to litigate or even arbitrate such a dispute.
BINDING ARBITRATION
Statutory and Procedural Overview. Binding arbitration is a process where the parties voluntarily submit their dispute to a neutral third person or persons (called "arbitrators") to make a decision that is binding on all parties. Typically a hearing is held before the arbitrator or panel of arbitrators where all parties submit evidence and argument supporting their position. The arbitrator or panel then enters its ruling which will be binding on the parties.
Arbitration is controlled by three statutes. First is the federal statute, referred to as the Federal Arbitration Act (the "FAA"), 9 U.S.C. §2, et seq. Second is the Florida Arbitration Code (the "Florida Code") Fla. Stat. Chapter 682. Finally is the Florida International Arbitration Act (the "International Act"), Fla. Stat. Chapter 684. Any contract that affects interstate commerce is governed by the FAA. Terminix International Co. v. Ponzio, 693 So.2d 104, 105 (5th DCA 1997). Therefore, when facing a contract with an arbitration provision, one should first analyze whether the contract affects interstate commerce. If it does, any further analysis must be done under the FAC; if it does not, further analysis should be under the Florida Code.
The procedures that govern arbitration conducted under the auspices of Florida state courts are set forth in Florida Rules of Civil Procedure 1.700, 1.800, 1.810, and 1.830. The exact procedures that are followed depend upon the terms of the contract. Many contracts, particularly those in the construction industry, state that the arbitration will be conducted in accordance with rules issued by the American Arbitration Association (the "AAA"). The AAA has developed rules of procedure for arbitrations that are specifically tailored to the needs of the construction industry. Information about AAA arbitrations or their rules can be found at www.adr.org.
Typically, whether by AAA rules, rules established by the contract, or Rules of Florida Civil Procedure, an arbitration begins with one party asserting a claim and demanding the claim be resolved by arbitration. The parties then select an arbitrator they can both agree upon. If the parties cannot agree upon an arbitrator, the judge in the pending litigation (if a case has been filed) will appoint the arbitrator. Discovery is often, but not always allowed in arbitration. Whether it is allowed or not will depend upon the agreement of the parties. If there is discovery, any discovery disputes will be resolved by the arbitrator. Once discovery, if any, is complete, a final hearing is held before the arbitrator, who will then issue a ruling. The prevailing party may then file that ruling in the existing litigation or, if no suit was filed before the arbitration was commenced, can file suit based upon the award if the losing party does not timely comply with the award. Fla.Stat. §682.12.
Common Legal Issues. A brief history lesson could prove instructive. Prior to enactment of the Florida Code, Florida courts did not uniformly enforce arbitration provisions, particularly broad arbitration provisions that submitted all disputes to arbitration. For example, in Duval County v. Charleston Engineering and Contracting Co., 101 Fla. 341, 134 So. 509 (1931), the Florida Supreme Court stated that a contractual provision referring "all disputes as to liability and loss which arise in the performance of such contracts shall be arbitrated, is void as an executory covenant as far as it attempts to oust the courts of jurisdiction and will neither be enforced or recognized in equity nor allowed to be pleaded at law as a bar." 134 So. at 514 (emphasis in original). Subsequent enactment of the Florida Code changed that public policy, to the point where the Florida Supreme Court has stated "[u]nder Florida law, . . . arbitration is a favored means of dispute resolution and courts indulge every reasonable presumption to uphold proceedings resulting in an award." Roe v. Amica Mutual Insurance Co., 533 So.2d 279, 280 (Fla. 1988). Another court stated that "all doubts as to the scope of an arbitration agreement are to be resolved in favor of arbitration rather than against it." Advantage Dental Health Plans v. Beneficial Administrators, 683 So.2d 1133, 1134 (Fla. 4th DCA 1996).
Courts will enforce a contract provision referring disputes to arbitration. The Florida Supreme Court has held that "because arbitration provisions are contractual in nature, construction of such provisions and the contracts in which they appear remains a matter of contract interpretation." Seifert v. U.S. Home Corp., 750 So.2d 633, 636 (Fla. 1999). Therefore, courts will require parties to arbitrate their dispute only if the dispute involves issues that are covered by the arbitration provision.
When faced with whether a case should be referred to arbitration, the trial court should look at three issues: (1) whether there is a valid, written agreement to arbitrate; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration has been waived by the party seeking to compel arbitration. See, e.g., Terminix International Co. v. Ponzio, 693 So.2d 104, 105 (Fla. 5th DCA 1997).
In Kincaid Construction Co. v. Worsham Underground Utility Construction, 566 So.2d 600, (Fla. 5th DCA 1990), the court was faced with a dispute over whether certain work was covered by the contract price. One of the parties moved to compel arbitration, which the trial court denied. The appellate court upheld the trial court's refusal to refer the case to arbitration on the grounds that the contract provision only referred to disputes regarding pricing. 566 So.2d at 601. See also Insignia Homes Inc. v. Hinden, 675 So.2d 673 (Fla. 4th DCA 1996), where the court referred some of the claims to arbitration and denied arbitration as to others because the language of the contract was limited as to the scope of arbitration.
Another case dealing with limitations of arbitration is Roe v. Amica Mutual Insurance Co., 533 So.2d 279 (Fla. 1988). In that case, the contract provided that either party could demand a jury trial if, after arbitration, the arbitration award exceeded $10,000. The Florida Supreme Court held that such an agreement is valid and affirmed the lower court's allowance of the insurance company's rejection of the arbitration award. 533 So.2d at 281.
Perhaps the most case law on the scope of the arbitration agreement exists on the issue of whether an arbitration provision in a contract applies to tort actions, particularly actions involving personal injury. The appellate opinions demonstrate that the result will depend upon the exact language of the contract and the exact nature of the injury alleged. For instance, in Seifert v. U.S. Home Corporation, 750 So.2d 633 (Fla. 1999), the plaintiff's claim was for wrongful death, where plaintiff, who had contracted with the defendant to build a home, died allegedly as a result of the air conditioning system picking up the carbon monoxide fumes from the garage and circulating them into the main living area. In that case, the Florida Supreme Court held that a claim for wrongful death was not covered by the contract's arbitration provision that referred to arbitration "any controversy or claim arising under or related to this Agreement or to the Property." 750 So.2d at 635. The court reasoned that the contractor's obligations to the owners in this particular case arose out of its general obligations to the public at large and not out of the contract.
Contrast that case with Sears Authorized Termite and Pest Control v. Sullivan, 816 So.2d 603 (Fla. 2002), where the Florida Supreme Court held that plaintiff's claim for personal injuries resulting from spider bites was subject to the contract's arbitration provision. The contractual provision in that case provided that the parties "agree that any controversy or claim between them arising out of or related to the interpretation, performance or breach of any provision of this agreement shall be settled exclusively by arbitration." 816 So.2d at 604. This time the Supreme Court held that controlling spiders was the purpose of the contract; therefore, the injuries from the defendant's failure to control the spiders arose out of the performance of the contract.
For other cases dealing with whether or not a tort claim is covered by an arbitration provision, see Terminix International Company v. Ponzio, 693 So.2d 104 (Fla. 5th DCA 1997) (holding a personal injury claim was subject to arbitration); Gimelstob Realty, Inc. v. The Sechrest Company, 676 So.2d 83 (Fla. 4th DCA 1996) (holding claims for conspiracy, conversion, and tortuous interference were covered by an arbitration provision); and Terminix International Company v. Michaels 668 So.2d 1013 (Fla. 4th DCA 1996), rev. denied 679 So.2d 774 (Fla. 1996) (holding a personal injury claim not subject to the arbitration clause). Both of the Terminix cases cited herein were discussed by the Florida Supreme Court in Sullivan as the Court attempted to harmonize the results. From the language in Sullivan, it appears that the holding in Michaels should be limited to cases involving the use of ultra-hazardous materials. Sullivan, 816 So.2d at 606.
Whether or not a claim is subject to arbitration, i.e., whether there is an "arbitable" claim, is a question for the court to decide. Howsam v. Dean Witter Reynolds, 537 U.S. 79, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002) (decided under the FAA); O'Keefe Architects v. CED Construction Partners Ltd., 944 So.2d 181 (Fla. 2006) (decided under the Florida Code).
An issue that can frequently arise, particularly in the context of the public construction project, is whether or not an interested party that has not signed the contract with the arbitration provision is bound by the arbitration provision. As a general rule, non-signatories to the contract containing the arbitration clause are not bound by the arbitration clause. In re: Interactive Video Resources, Inc., 170 B.R. 716, 722 (S.D. Fla. 1994). However, there are ways in which a non-party can be held bound by the arbitration provision. For instance, if a surety bond (either performance or payment bond) expressly incorporates the terms of the relevant contract and that contract contains an arbitration provision, the surety will be bound by the arbitration provision. See, e.g., USF&G v. West Point Construction Co., 837 F.2d 1507 (11th Cir. 1988); St. Paul Fire & Marine Insurance Co. v. Wooley/Sweeney Hotel #5, 545 So.2d 958 (Fla. 4th DCA 1989) rev. denied 553 So.2d 1166 (Fla. 1989), limited on other grounds by American Home Assurance Co. v. Larkin General Hospital, 593 So.2d 195 (Fla. 1992). Again, the precise language of the relevant documents will govern the result. The court in Interactive Video did not require the surety to arbitrate the dispute as the surety bond in that case did not incorporate the terms of the underlying contract. 170 B.R. at 722.
As with any other right, the right to compel arbitration based upon a contract provision can be waived. If the arbitration provision provides a specific time period in which to demand arbitration, failure to demand arbitration within that time period will constitute a waiver of the right. Lyons v. Krathen, 368 So.2d 906, 908 (Fla. 3d DCA 1979), cert. denied 378 So.2d 346 (Fla. 1979). On the other hand, if the contract only requires the demand to be filed within a "reasonable time", it will be up to the arbitrator to determine if the demand was made within a reasonable time. The Hillier Group, Inc. v. Torcon, Inc., 932 So.2d 449 (Fla. 2d DCA 2006); Rinker Portland Cement Corp. v. Seidel, 414 So.2d 629 (Fla. 3d DCA 1982). Thus, once again, the exact language of the arbitration provision will dictate the results.
A right to arbitrate can also be waived by action taken that is inconsistent with the right to arbitrate. Finn v. Prudential-Bache Securities, Inc., 523 So.2d 617, 618 (Fla. 4th DCA 1988). The filing of an answer that does not include a request for arbitration has been deemed to be a waiver of the right to arbitrate the dispute in question. See, e.g., Bared and Company, Inc. v. Insurance Company of North America, 610 So.2d 1, 3 (Fla. 2nd DCA 1992). However, the court in Graham Contracting, Inc. v. Flagler County, 444 So.2d 971 (Fla. 5th DCA 1983), rev. denied 451 So.2d 848 (Fla. 1984), the court held that filing a motion to dismiss that alleges the complaint fails to state a cause of action is not an action inconsistent with the right to arbitrate. Therefore, the court held the defendant had not waived its right to insist on arbitration of the dispute. 444 So.2d at 973.
In Klosters Rederi A/S v. Arison Shipping Company, 280 So.2d 678 (Fla. 1973), the plaintiff filed a complaint asserting a number of contractual theories as well as several counts in tort. In addition, plaintiff sought equitable remedies such as an accounting and appointment of a receiver. Accompanying the complaint was a motion without notice for appointment of a receiver over the defendant as well as a motion to compel arbitration. The court appointed the receiver based upon the plaintiff's motion. However, the Florida Supreme Court held that the plaintiff had waived its right to arbitration by seeking the appointment of a receiver and other equitable remedies. 280 So.2d at 681.
The issue of waiver is one of the few areas in which the case law has developed a different result depending upon whether the Federal law or the Florida Code applies. In GLF Construction Corp. v. Recchi-GLF, 821 So.2d 372 (Fla. 1st DCA 2002), the court was dealing with an arbitration provision in a contract that affected interstate commerce, thus, the FAA applied. In that case, the court stated that "[f]or there to be a waiver under the Federal Arbitration Act, federal courts consistently require prejudice to the opposing party." 821 So.2d at 374. In contrast, under the Florida Code, "a showing of prejudice [to the other party] is not required if waiver is based upon inconsistent acts." Finn, supra, 523 So.2d at 619-620.
Once the arbitrator or panel issues its findings, those findings and conclusions are binding on the parties and courts will enforce them. A party aggrieved by an arbitration award has very limited recourse. According to the court in Verzura Construction, Inc. v. Surf-side Ocean, Inc., 708 So.2d 994 (Fla. 3d DCA 1998):
The law is clear that awards made by arbitration panels cannot be set aside for mere errors of judgment either as to the law or as to the facts; if the award is within the scope of the submission, and the arbitrators are not guilty of the acts of misconduct set forth in the statute, the award operates as a final and conclusive judgment.
708 So.2d at 996.
The Florida Code provides only the following bases for attacking an arbitration award:
(1) Upon application of a party, the court shall vacate an award when:
(a) The award was procured by corruption, fraud or other undue means.
(b) There was evident partiality by an arbitrator appointed as a neutral or corruption in any of the arbitrators or umpire or misconduct prejudicing the rights of any party.
(c) The arbitrators or the umpire in the course of her or his jurisdiction exceeded their powers.
(d) The arbitrators or the umpire in the course of her or his jurisdiction refused to postpone the hearing upon sufficient cause being shown therefor or refused to hear evidence material to the controversy or otherwise so conducted the hearing, contrary to the provisions of s. 682.06, as to prejudice substantially the rights of a party.
(e) There was no agreement or provision for arbitration subject to this law, unless the matter was determined in proceedings under s. 682.03 and unless the party participated in the arbitration hearing without raising the objection.
But the fact that the relief was such that it could not or would not be granted by a court of law or equity is not ground for vacating or refusing to confirm the award.
Florida Statute §682.13.
Court opinions interpreting this provision and the matching FAA provision (9 U.S.C. §10(a)) have deferred to the arbitrators' ruling absent a showing of abuse of discretion. For instance, several cases have held that the arbitrator's failure to continue the final hearing is not an abuse of discretion, in one particular case even though one of the parties could not attend because of an alleged illness. 8300 Newburgh Road Partnership v. Time Construction, Inc., 43 F.3d 1041, 1045 (6th Cir. 1995) ("The party seeking to vacate the arbitration award carries the burden of proving by 'clear and convincing evidence' that the arbitrators abused their discretion."). In Lee v. Dean Witter Reynolds, Inc., 594 So.2d 783 (Fla. 2d DCA 1992), the court refused to overturn the arbitrator's award even though he did not continue the hearing upon the death of one party's expert witness. In that case, the court held that it was constrained to look at the record presented to the arbitrators and could not look at evidence proffered by the challenging party to the trial court but not the arbitrators. 594 So.2d at 785.
Further, courts have held that the arbitrator's use of the wrong legal standard is not a basis for overturning the award. City of Tallahassee v. The Big Bend Police Benevolent Assoc., 710 So.2d 214 (Fla. 1st DCA 1998).
Challenging an award on the basis of fraud is no easy task. In Regalado v. Cabezas, 959 So.2d 282 (Fla. 3d DCA 2007), the court held that:
a party seeking to vacate an award by alleging that the award was procured "by corruption, fraud[,] or other undue means" must (1) establish the fraud by clear and convincing evidence, (2) demonstrate that the fraud was not discoverable by the exercise of due diligence before or during the arbitration hearing, and (3) demonstrate that the fraud was materially related to an issue in the arbitration959 So.2d at 285-286. The same standard applies to challenges under the FAA. See Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1383 (11th Cir. 1988). In fact, the court in Regalado relied in part on the holding in Bonar, finding that the Florida Code was virtually identical to the FAA on this point. 959 So.2d at 286.
In discussing the phrase "undue means" in 9 U.S.C. §10(a), the court in Sorren v. Kumble, 578 So.2d 836 (Fla. 3rd DCA 1991) held that "undue means" "refers to such matters as ex parte communications or undisclosed relationships between an arbitrator and one of the contestants." 578 So.2d at 836. Thus, the court concluded that "undue means" do not include consideration of evidence the objecting party thought to be "irrelevant and unfairly prejudicial." Id.
Of course, this does not mean that arbitration awards cannot be challenged. If the arbitrator grants a remedy neither party requested, the award could be reversed. Laniewicz v. Ruttenberg Construction Company, 580 So.2d 203 (Fla. 5th DCA 1991). On the other hand, if the parties voluntarily submit an issue to arbitration and try that issue without objection, the arbitrator's decision will be binding, even if that issue was not within the scope of the parties' original agreement. Harris v. Haught, 435 So.2d 926, 928 (Fla. 1st DCA 1983).
Further, if the arbitrator's award is too ambiguous to enforce, the award should be vacated. Dade County Police Benevolent Assoc. v. City of Homestead, 642 So.2d 24 (Fla. 3d DCA 1994). However, the appropriate remedy is for the trial court to vacate the award and remand the case back to the arbitrator for a more complete or clearer ruling. 642 So.2d at 25.
At least under Federal law, cases in the Eleventh Circuit have recognized three additional, non-statutory bases for challenging an arbitrator's award. They are (1) if the award is in manifest disregard of the law; (2) the award is arbitrary and capricious; or (3) the award violates public policy. See, e.g., Rosati v. Bekhor, 167 F.Supp.2d 1340, 1346 (M.D.Fla. 2001). To be in "manifest disregard of the law", the award must (1) apply a legal principle that is "clearly defined and not subject to reasonable debate and (2) the arbitrators refused to heed that legal principal". 167 F.Supp.2d at 1346, quoting Dawahare v. Spencer, 210 F.3d 666, 668-669 (6th Cir. 2000). An award is arbitrary and capricious if the basis for the arbitrator's decision cannot be inferred from the facts of the case. 167 F.Supp.2d at 1346. Finally, an award is contrary to public policy if the award requires a party to take an action that conflicts with generally recognized public policy. Id.
A repeating theme is that arbitration is a function of the written contract between the parties; thus, one should always look to the language of the arbitration provision to determine other bases for attacking an award. For example, it is generally recognized that errors of law by the arbitrator are not a basis for vacating an award. Baird v. Camp City of Orlando, Inc., 760 So.2d 285, 287 (Fla. 5th DCA 2000). However, in Baird, the parties' arbitration agreement specifically provided that either party could appeal issues of law for judicial review. Therefore, in Baird the court allowed a party to challenge an arbitrator's award on the basis that the arbitrator allegedly did not follow the appropriate legal standards. Id.
Practical Aspects of Arbitration. In deciding whether to include an arbitration clause in your contract or to waive the right to arbitration, a number of factors should be considered based upon the discussion above. Some of these factors are always advantages to arbitration, some are always disadvantages, and others depend upon the circumstances.
The biggest "selling point" often made by believers in arbitration is that arbitration is designed to reach a decision sooner with less expense. Whether or not that actually happens depends on the parties and how cooperative they are in the process, as well as the arbitrator. Parties can still engage in dilatory practices in arbitration and, unless the arbitrator keeps a close reins on the process, the delays can be as long as if the case were filed with the court.
The process is designed to allow the final decision to be made by someone with extensive experience in the industry. Construction arbitrators are often either lawyers with extensive construction litigation background, or are construction professionals, such as engineers, architects, contractors, construction managers, or the like. The theory is that someone with both formal and experiential training in the industry is more likely to reach the "right" result than a jury or judge who has little to no exposure to the construction industry.
Other factors to consider include the fact that arbitrators are not bound by the rules of evidence. They can allow in evidence that a judge may not allow at trial. Further, as mentioned above, the inability to appeal an arbitrator's decision makes the decision nearly the end of the process. Of course, that is a good thing if you win, not so good if you lose. Further, any limitation on discovery can result in "trial by ambush": a final hearing where you see documents or hear testimony for the first time. This may prevent a party from offering a rebuttal to important evidence simply because they did not have the time to develop countervailing evidence. Another factor is the potential inability to bind all relevant parties to the arbitrators' decision as there may be other relevant parties that have not signed a contract binding them engage in arbitration.
NON-BINDING ARBITRATION
As the name suggests, non-binding arbitration is nothing more than arbitration where the resulting award of the arbitrator is not binding on the parties. Non-binding arbitration can be ordered by Florida state courts under Florida Rule of Civil Procedure 1.700 and 1.820 or can be agreed upon by the parties.
One can legitimately ask why any party would want to go through the entire arbitration process, including a final hearing before an arbitrator or panel of arbitrators (who are paid by the parties) if the result of the arbitration is not binding on either party. There are several reasons. First, the decision by the arbitrator(s) could be a good indication of the result to expect at trial. Further, it can give the parties a better sense of the strengths and weaknesses of each party's case. Additionally, the results of the arbitration could help winnow down the issues that are actually tried before the ultimate trier of fact. This can be accomplished either because the parties agree to accept some, but not all, of the arbitrator's findings or the parties may jettison some of their weaker arguments as revealed at the arbitration hearing.
While none of this information will necessary lead to a resolution, all of this information can lead to more fruitful settlement discussions. Thus, while risky and potentially expensive if not successful, non-binding arbitration can give the parties those last few pieces of information that may be needed to move them past an impasse and into a settlement.
MEDIATION
Mediation is probably the most used ADR technique, at least in Florida. All trial courts that the author has practiced before throughout the state require, as part of their form order scheduling a trial, all cases be sent to mediation before trial. More and more contracts include mandatory pre-suit mediation clauses, similar to arbitration clauses, requiring a dispute be mediated prior to a lawsuit being allowed to progress.
In mediation, a trained mediator works to facilitate a binding settlement agreement between all parties involved. Unlike binding arbitration, the results of the mediation are not binding on any party unless that party expressly agrees to the results. Unlike non-binding arbitration, the mediator does not make findings or recommendations. The mediator's only role is to facilitate discussions and offers between the parties.
Mediations ordered by a court are governed by Florida Rule of Civil Procedure 1.700 et seq. These rules contain some very important points to keep in mind during mediation. First, anything that is said during a mediation is presumed to be said for the purposes of settlement and is therefore not admissible in any subsequent proceeding. Further, anything that is said in confidence to the mediator by one party cannot be disclosed by the mediator to the other party. These privileges are designed to facilitate an open and frank discussion of the case in order to get to a settlement.
It should be noted that these privileges and the mediator's immunities established by these rules do not automatically apply if the mediation is not conducted pursuant to a court order. Therefore, if the parties elect to engage in pre-suit mediation before a lawsuit is filed, the parties should prepare a written agreement that adopts these provisions, either expressly or by incorporation of Rule 1.700 et seq. Most experienced mediators will have a form agreement that accomplishes these important objectives.
If the mediation does result in an agreement between the parties, the agreement must be reduced to a written document signed by all parties at the mediation. Fla.R.Civ.P. 1.730(b). If the agreement is not signed, it is not enforceable. Scott v. Tischler, 882 So.2d 461 (Fla. 4th DCA 2004). The signed document then becomes the agreement between the parties, enforceable as any other contract. Lazy Flamingo U.S.A., Inc. v. Greenfield, 834 So.2d 413 (Fla. 2d DCA 2003). If there is already a lawsuit pending, it would be wise for the agreement to provide for court adoption of the agreement, with the court retaining jurisdiction to enforce the agreement. If the court retains jurisdiction, the parties will not have to file a new lawsuit in the event one of the parties does not comply with its obligations under the agreement. Further, if the obligations involve more than just the payment of money, the court may be able to enforce the agreement by way of its contempt powers, as long as the order dismissing the case specifically states that the court retains jurisdiction to enforce the agreement.
There are several advantages to the mediation process. First, all of the parties control the result. At trial and arbitration, the final result will be decided by someone none of the parties knows and that knows nothing about the case until they spend a few days listening to testimony and reviewing documents. At mediation, the parties, who have lived the case for months, if not years, will decide how the dispute will be resolved, if it is to be resolved. Further, mediation allows the parties to craft a resolution that a court or arbitrator may not be empowered to create. For example, in most cases, the only remedy available to a court in a construction case is to award one side or the other money. In a mediation, however, the parties' only limitation is their imagination and willingness to agree. Occasionally mediations will result in a rebuilding of trust between the parties that will allow them to resume doing business together, and that continued business relationship can be the basis of solving the existing problem. Such results are not always available because the relationship may have deteriorated to the point of no return, but at least mediation creates the opportunity to explore that option. In addition, while mediators are not suppose to express their own opinions about a case, a skilled mediator can help parties and their attorneys see aspects of their case they may have missed. Such revelations can lead to a settlement that may not have been reached had the parties been left to their own devices.
Litigating the Public Works Contract
Litigation of a construction dispute involves a large number of issues that cannot possibly be covered exhaustively in a one-hour presentation or one-chapter of written materials. What follows are highlights of some of the issues that the parties to a construction litigation dispute will face during the litigation, focusing on issues that are more prevalent in disputes involving public works.
"Material" or "Non-Material" Breach
When one party has breached the contract, the threshold issue to be determined is whether the breach is a "material" breach or a "non-material" breach. That classification will dictate what remedies the non-breaching party has available to it.
A "material" breach is a failure to perform that "go[es] to the essence of the contract." Beefy Trail, Inc. v. Beefy King International, Inc., 267 So.2d 853, 857 (Fla. 4th DCA 1972). Stated another way, a material breach occurs "when an injured party has sustained a substantial injury due to the breach." Bland v. Freightliner LLC, 206 F.Supp.23 1202, 1210 (MD Fla. 2002). Relying on §241, Restatement (Second) of Contracts, the Court in Bland went on to list several factors to consider when determining whether a breach is material or not:
(1) the extent to which the injured party will be deprived of the benefit which can reasonably be expected; (2) the extent to which the injured party can be adequately compensated for the part of the benefit of which she will be deprived; (3) the extent to which the breaching party will suffer forfeiture; (4) the likelihood that the breaching party will cure; and (5) the extent to which the behavior of the breaching party comports with the standards of good faith and fair dealing.
206 F.Supp.2d at 1210.
The key difference created by the determination of whether a breach is a material breach or not is the remedy available to the non-breaching party. The non-breaching party, when "faced with a material breach by the other party, may treat the contract as totally breached and stop performance." City of Miami Beach v. Carner, 579 So.2d 248, 251 (Fla. 3d DCA 1991). See also, e.g., Marshall Construction, Ltd. v. The Continental Insurance Company, 569 So.2d 845 (Fla. 1st DCA 1990). In Marshall, the owner and the roofing contractor agreed that the roof the contractor replaced on one of the buildings was defective and needed repair. However, the contractor stated it could not afford to repair the roof unless it was paid for the work already done. The owner refused payment. The contractor then not only refused to repair the defective roof, but also refused to install a roof on another building that was part of the same contract. The court held that the contractor's failure to repair the roof constituted a material breach of the contract, thereby discharging the owner of its obligation to pay. 569 So.2d at 848.
From the contractor's perspective, if the owner fails to pay in accordance with the terms of the contract, the contractor may cease work. See, e.g., Bryan and Sons Corp. v. Klefstad, 237 So.2d 236, 238-239 (Fla. 4th DCA 1970). Ceasing work is obviously the most dramatic and risky remedy available to the contractor. If the contractor ceases work, the owner will be placed in the precarious position of either paying the contractor or finding another contractor to complete the work, usually at a much higher price. Thus, this tactic gives the contractor a point of leverage that can wrest payment from the reluctant owner.
However, there are significant risks in using this tactic. On the one hand, if the owner wrongfully fails to pay, the contractor may rightly cease work and not resume again until it is paid or, if never paid, never resume. In that circumstance, the contractor will not be liable for damages and will still retain the right to sue for the unpaid sums. See, e.g., Bryan and Sons, supra. However, on the other hand, if the owner rightfully ceased paying (see Marshall Construction, supra), then the contractor will be the party in breach of the contract. The contractor will lose its ability to recover for money it believes is owed and will owe the owner for damages for wrongfully stopping work. Thus, before stopping work for the owner's failure to pay, the contractor needs to be confident that it is correct in its position.
Substantial Performance
The critical issue in determining whether a contractor is owed the full contract price is whether or not the contractor has "substantially performed" its obligations under the contract. If the contractor has "substantially performed", the contractor is entitled to payment in full of the contract price, less any costs necessary to repair any non-conforming work. On the other hand, if the contractor has not "substantially performed", then the contractor is not entitled to the contract price.
"Substantial performance" has been defined as:
performance of a contract which, while not full performance, is so nearly equivalent to what was bargained for that it would be unreasonable to deny the promisee the full contract price subject to the promisor's right to recover whatever damages have been occasioned him by the promisee's failure to render full performance.
Ocean Ridge Development Corp. v. Quality Plastering, Inc., 247 So.2d 72, 75 (Fla. 4th DCA 1971). Thus, substantial performance is not perfect performance, but it is performance such that the other party has essentially received what it bargained for under the contract.
For example, in J.M. Beeson Company v. Sartori, 553 So.2d 180 (Fla. 4th DCA 1989), the court held that the contractor had substantially performed the construction project because the owner was able to occupy and use the premises constructed by the contractor, even though there was some additional contract work that was not completed according to the terms of the contract. In addition, the court held that another definition of "substantial performance" was whether or not the work needed to bring the performance into compliance with the contract could be completed by "payment from the contract price" remaining due to the contractor. In that case, the contractor was owed $157,392 under the contract and the work necessary to complete the project would cost $68,939.70. 553 So.2d at 183. Therefore, the court found substantial performance. It is also interesting to note that the contract defined "substantial performance" as work "sufficiently complete in accordance with the Contract Documents, so the owner can occupy or utilize the work or designated portion thereof for the use for which it is intended." 553 So.2d at 181. The court observed that the contract definition of substantial performance was effectively identical to that of Florida law.
If a contractor materially breaches the contract by failing to perform the work in accordance with the terms of the contract, the owner may withhold payment or terminate the contractor. See, e.g., Marshall Construction, supra. However, termination bears substantial risks to the owner, not the least of which is that a judge or jury may later second guess the decision of the owner in the relatively sterile environs of the courthouse years after the fact. Additional practical considerations an owner should analyze before terminating a contractor include such factors as:
1) Substitute contractors are always leery about undertaking a project that was started by another contractor because of the unknown quality of work already done. Such uncertainties will be incorporated into the pricing; thus, it will always be more expensive for another contractor to start a job "mid-stream" and finish it than to have the original contractor finish the job.
2) Costs of materials and/or labor may have increased significantly since the bids were originally submitted which set the price of the original contract.
3) There will be a time delay between the date the original contractor leaves the site and the date work resumes with the new contractor. That length of time will depend on a number of factors, including the time necessary to solicit bids for the completion work and the time for the new contractor to ramp up the project.
To some extent, the requirement of a performance bond (see below) will assist the governmental entity to managing these factors. However, even a performance bond cannot stop the clock.
Owner's Damages for Contractor's Breach
The general principal governing any party's liability on a breached contract is that the court will attempt to put the non-breaching party in the position it would have been had the contract been performed as written. Grossman Holdings Ltd. v. Hourihan, 414 So.2d 1037, 1039 (Fla. 1982).
Consistent with that theory, if the contractor breaches the contract by not "perfectly" performing its obligations but has substantially completed its performance, the owner will be entitled to the costs it would incur to complete the work, but as a set-off against the remaining portion of the contract price that remains unpaid. Sartori, 553 So.2d at 183.
However, if repair or completion of the project would be so extensive as to be economically wasteful, the measure of damages is the difference between the value of the property had the contract been performed as written and the value of the property as constructed. Grossman Holdings, supra, 414 So.2d at 1039. In Grossman Holdings, the owners contracted with a contractor to build a home substantially the same as the model home, including the plans and specifications. The model and plans showed a southeast exposure. However, the contractor, over the objections of the owner, built a home facing the opposite direction. In all ways the home was the mirror-image of the plans and specifications. The court eventually held that the contractor had breached the contract by building a "mirror-image" home, but that it would be economically wasteful to tear the home down and rebuild it in accordance with the contract. Therefore, the court ruled that the owners were entitled to the difference in value between the home as planned and the home as built. Id.
Contractor's Damages for Owner's Breach
As discussed above, if the contractor has substantially completed its work on the project and has gone unpaid, the contractor is entitled to recover the full contract price, less any costs the owner will incur to complete the contract work. Ocean Ridge Development Corp. v. Quality Plastering, Inc., 247 So.2d 72, 75 (Fla. 4th DCA 1971).
The measure of damages is different, if, prior to substantial completion, the contractor is either wrongfully terminated or rightfully walks off the job. In that event, the contractor has option to either treat the contract as rescinded or treat the contract as breached. See, e.g., Ballard v. Krause, 248 So.2d 233, 234 (Fla. 4th DCA 1971).
If the contractor treats the contract as rescinded, the contractor is entitled to recover the reasonable value of the work completed. Ballard, supra, 248 So.2d at 234; Puya v. Superior Pools, Spas, and Waterfalls, Inc., 902 So.2d 973, 975 (Fla. 4th DCA 2005). Evidence of percentage of completion is not adequate evidence to establish the value of the work completed. Nico Industries, Inc. v. Steel Form Contractors, 625 So.2d 1252 (Fla. 4th DCA 1993), rev. denied 637 So.2d 237 (Fla. 1994).
The contractor's other option is to affirm the contract and sue on the theory of breach of contract. Under that theory, the contractor is entitled to recover the cost of the work completed plus the lost profit anticipated on the job. See, e.g., Ballard, supra; Nico Industries, supra. Lost profits "must be proven with reasonable certainty. Reasonable certainty in this instance applies, not to the amount of profits expected, but to uncertainty as whether the loss was the result of the breach and whether any profits would have been earned at all." Adams v. Dreyfus Interstate Development Corp., 352 So.2d 76, 78 (Fla. 4th DCA 1977). While the evidence of the amount of lost profits must include some degree of certainty of the amount, exact precision is not required. All that is required is that the "degree of certainty simply requires that the mind of a prudent impartial person be satisfied with the damages." Id. A portion of the overhead can be allocated to the job and thus recovered, though the courts recognize such an allocation can be difficult task. Tech Corp. v. Permutit Co., 321 So.2d 562 (Fla. 4th DCA 1975).
Damages for Delay
When an owner contracts to build a new building or substantially renovate an existing building, the owner obviously wants to occupy the building and use it as soon as practical. This is no less true for governmental entities than it is for businesses that generate income from their properties. On the other side of the transaction, contractors also prefer to do the work when planned and to complete the job as soon as possible. Bids are prepared and submitted based upon material and labor costs as they are known at the time the bids are prepared. The longer the time delay between the date the bids are prepared and date the costs are actually incurred the greater the chance that the pricing used by the contractor to set the bid price will be out-dated. A supply disruption or unanticipated change in even one component of a project's costs can turn a comfortably profitable project into a break-even proposition, if not a loss. Thus, substantial delays in the construction of a building often lead to finger-pointing and litigation.
The terms of the contract will, of course, guide the final result. It is not uncommon in public contracts to provide that the governmental entity/owner will not be liable for damages, commonly called a "no damage for delay" clause. Courts have held that such "clauses providing for 'no damages for delay,' except in the case of fraud, bad faith, or active interference by the owner, are legal and enforceable." Triple R Paving, Inc. v. Broward County, 774 So.2d 50, 54 (Fla. 4th DCA 2000). In that case, the appellate court affirmed a trial court's denial of the County's motion for directed verdict, holding that there was a jury issue as to whether or not the County had engaged in interference that would vitiate the "no damages for delay" clause. The basis of the jury issue was the evidence that the County knew of a defect in the plan but the county failed to notify the contractor of the defect.
The converse problem is when the owner needs the property by a certain date but the contractor, through no fault of the owner, fails to deliver on time. If time is critical (such as a Board of Education wanting to complete construction of a school in time so that it can be used when the school year begins), the contract may provide that the project must be completed by a given date and, failing completion by then, the contractor will be charged a specific dollar amount per day against the contract price. Courts will enforce such provisions "if it is not so excessive as to constitute a penalty, and if damages resulting from failure to perform were not ascertainable at the time the contract was entered into by the parties." Osceola County v. Bumble Bee Construction, 479 So.2d 310, 311 (Fla. 5th DCA 1985).
A trap contractors should avoid is not having matching contractual provisions. In Commercial Mechanical v. State, 260 So.2d 540 (Fla. 1st DCA 1972), the contract between the State and general contractor to install air conditioning equipment had a $75.00 per day delay damages clause. The contractor contracted with an air conditioning equipment supplier, but that contract did not have a delay damages clause. The project was delayed because the supplier delayed delivery of the equipment. The State assessed the delay damages against the general and the general sued the supplier. The court held that the general contractor could not simply visit the penalty upon the supplier because the supplier had not signed the contract establishing the delay damages clause. 260 So.2d at 541.
Performance Bonds
A performance bond is essentially an agreement by one entity (the "surety") to, generally speaking, "back up" the performance of another entity (the "Principal", usually the contractor) for the benefit of the owner. Under Florida statutes, all contractors that enter into a contract with the State of Florida, any county, any municipality or any other political subdivision for the purpose of construction of a public building must post a performance bond for the work. Fla.Stat. §255.05(1)(a). The terms of the bond (as well as a more detailed listing of the types of projects which require a performance bond) are spelled out in Fla.Stat. §255.05(1)(a). A form performance bond that complies with the minimum requirements of the statute is provided in Fla.Stat. §255.05(3).
The surety's liability to the owner is strictly determined by the terms of the bond. American Home Assurance Company v. Larkin General Hospital, Ltd., 593 So.2d 195 (Fla. 1992). In the event the principal/contractor defaults on the construction contract, the surety will be obligated to finish the contract in a manner as required by the bond. See, for example, School Board of Broward County v. The Great American Ins. Co., 807 So.2d 750 (Fla. 4th DCA 2002), where the appellate court held that the surety had not fulfilled its obligations under the bond by simply tendering a substitute general contractor and demand for release from the bond. 807 So.2d at 752.
Payment Bonds
A payment bond is a bond wherein the surety agrees to pay any lawful debts of the principal (usually the contractor) that are not paid. Florida Statute §255.05(1)(a) requires all substantial contracts for the construction of public buildings have a payment bond. The purpose of a payment bond is to replace the construction lien. Sub-contractors, sub-sub-contractors, materialmen, suppliers, and laborers can look to the payment bond if the contractor does not pay, instead of the public lands that were improved.
Given this policy, the public entity can be held liable if it does not require the contractor obtain the required payment bond. Palm Beach County v. Trinity Industries, 661 So.2d 942, 944 (Fla. 4th DCA 1995). In that case, the County did not require a general contractor to post a payment bond. The general failed to pay a subcontractor. The subcontractor sued the general, obtained a default judgment, but, as the general had no assets, the judgment went unpaid. The subcontractor then sued the County for its failure to require the general to post a payment bond. The appellate court found that the County was responsible by statute for requiring the general to have the payment bond and therefore held in favor of the subcontractor against the County. 661 So.2d at 944.
The procedure for a party to recover against the payment bond is very similar to that of the construction lien. First, the party must provide notice to the contractor of its intention to look to the bond for payment upon default either before the first work or materials are provided or within 45 days of the provision first work or materials. Then, upon default of payment, the party must provide written notice that work has been performed and payment has not been made. Such notice must be served on the contractor and the surety within 90 days of last work on the project. A suit for non-payment must be brought within one year of the last furnishing of labor, services, or materials. Fla.Stat. 255.05(2)(a)2.
As with the construction lien law, it is not difficult to lay out these particulars in a simple way. But, applying these generalities to the specific facts of any given situation will not always be simple or clear. The practitioner should carefully research the most recent case law on any specific issue before taken any action.
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