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Reminder to Small Business: Understand Contract Before Signing

Posted: October 4, 2009 Filed under: Case Law

A decision released by Florida’s Fifth District Court of Appeal on October 2, 2009, provides an opportunity to remind small business owners of the unintended consequences that may result from the use of forms or signing of contracts that are not fully understood.

The Fifth District’s decision addresses the limited circumstances in which a trial court can overturn an arbitrator’s ruling, even if the arbitrator’s ruling is legally wrong. Arbitration is one form of Alternative Dispute Resolution (ADR). Many parties to disputes, especially businesses, have turned to ADR over the past three decades as a means of achieving a final outcome faster and less expensively than litigation in courts whose dockets are backlogged and whose procedures are time consuming and expensive to navigate. Mediation, a form of negotiation facilitated by a neutral third party, is another form of ADR.

Because mediation requires the agreement of all parties before an outcome becomes binding, it provides fewer opportunities for dissatisfied parties. Arbitration, on the other hand, usually yields a winner and a loser, and as the Fifth District’s opinion highlights, the loser may be the party who required arbitration by including an arbitration clause in its contract. Parties who agree in a written contract to resolve their cases through arbitration are bound by that agreement if one of the parties requests the trial court to send the case to arbitration. Such was the case in Commercial Interiors Corporation of Boca Raton v. Pinkerton & Laws, Inc.

Commercial Interiors arose from subcontracts for interior painting and other work on a Hampton Inn hotel being constructed by P&L in Pinellas County. P&L drafted the subcontracts on its own form, a form that contained an arbitration provision requiring arbitration in the event of a dispute. P&L failed to pay $51,209, and Commercial Interiors filed suit. P&L filed a motion to compel arbitration as the contracts required, so the case moved to arbitration. P&L then moved to have the case dismiss, but the arbitrator denied P&L’s motion. P&L thought the arbitrator had misapplied the law and, therefore, asked the trial court to overturn the arbitrator’s decision and dismiss the case, which the trial court did.

Commercial Interiors appealed the trial court’s decision, and the Fifth District agreed with Commercial Interiors and reversed the trial court’s order. The Fifth District framed the issue as “what standard the trial court should use if asked to review the arbitrator’s ruling on illegality.” The court of appeals then looked to section 682.13, Florida Statutes, which addresses the circumstances in which a trial court may vacate an arbitration award. As the appellate court wrote:

That statute dictates that a court shall vacate an award when: (a) the award was procured by corruption, fraud or other undue means; (b) there was evident partiality by the arbitrator appointed, 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 exercising 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 or refused to hear evidence material to the controversy or otherwise so conducted the hearing, contrary to the provisions of section 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 a proceeding under section 682.03, and unless the party participated in the arbitration hearing without raising the objection.

The Fifth District noted that it had decided in an earlier case that parties desiring to overturn an arbitrator’s decision must establish one of the five grounds described in section 682.13. Accordingly, the court reaffirmed that “‘neither a circuit court nor a district court of appeal has the authority to overturn the award,’” if a party fails to establish a statutory basis for doing so. This is so even if a judge disagrees with the arbitrator’s application of law to the facts of the case, as occurred in P&L’s case. Quoting the Florida Supreme Court, the district court of appeal said, “An award of arbitration may not be reversed on the ground that the arbitrator made an error of law.”

One can argue that the rule followed by the court of appeals is harsh. On the other hand, any other rule would undermine the basic principle of contract law that parties should get what they bargain for – in this case, the decision of an arbitrator instead of the decision of a judge.

The moral of the story is simply this: Be careful what you ask for (or agree to) because you might get it.

Admitted: Florida, Kansas, New Mexico (inactive)