“Sticks and stones will break my bones …but words will (also) hurt me!”
Business and commercial contract negotiations can be daunting. Each side, believing it has assessed every transaction risk, struggles to gain financial advantage. Contract provisions are drafted to make every word count. Contract language must mitigate risk and secure benefits. The arbitration clause is usually the last clause to be considered; and at times, with little or no reflection.
The Florida Supreme Court recently decided Jackson v. Shakespeare (SC11-1196, January 31, 2013). The Court’s opinion brings into sharp focus the critical importance of contract draftsmanship; and especially for arbitration provisions to be well-crafted and transaction-specific. In that case, the Justices determined the arbitration provision to effectively operate as a “limitation of remedies” clause. The result: the aggrieved party could be denied forum of choice for its claim and potentially substantial financial relief.
Florida’s Arbitration Code (Florida Statutes Title 39, Chapter 682) allows parties great flexibility in fashioning a suitable dispute resolution process that is unique to their specific contractual relationship. The parties may, for example, select ad hoc arbitration (creating applicable procedural rules) or institutional arbitration (applying American Arbitration Association or another organization’s rules). Moreover, the parties can “ring-fence” arbitrable issues. That is, delineate those issues that will or will not be subject to arbitration.
In Jackson, the Florida Supreme Court interpreted the language of the arbitration clause by applying what U.S. Supreme Court Justice Antonin Scalia and Bryan A. Garner (in their latest book, Reading Law (Thomson/West, 2012)) have called a “fair reading approach.” That is:
“In determining the application of a governing text to given facts on the basis of how a reasonable reader, fully competent in the language, would have understood the text at the time it was issued…It also requires an ability to comprehend the purpose of the text, which is a vital part of its context. But the purpose of the text is to be gathered only from the text itself, consistently with the other aspects of its context.” (emphasis in the original)
It determined that, although not specifically in the contract language, an action for common law fraud was within the scope of and subject to the provisions of the arbitration clause.
Before negotiating the transaction, Jackson (Seller) had posted a Multiple Listing Service advisement indicating that its real property for sale had been the subject of a wetlands study that “verified no wetlands” After executing the contract, Shakespeare’s (Buyer) builder reported that “wetlands constituted 26% of the entire tract which was equal to nine of the twenty-seven units that the (Buyer) had intended to develop.”
The Buyer’s legal action against the Seller was based on fraudulent misrepresentation. Its Complaint alleged that the Seller “knowingly and falsely misrepresented that the property was suitable for the construction of thirty units, and that the Buyer relied (to its detriment) on these representations when entering into the contract…(It) contended that if it had known that 26% of the property constituted wetlands, the property would have never been purchased because the percentage of wetlands made the property “economically unfeasible”
The parties ostensibly negotiated arbitration clause provided, in part, that:
“All controversies and, claims, and other matters in question arising out of or relating to this transaction or this contract or its breach will be settled…through neutral binding arbitration….The arbitrator may not alter the Contract terms or award any remedy not provided for in this Contract.” (emphasis added)
At the trial level, the Buyer successfully moved to dismiss the Seller’s Complaint by “assert(ing) that the fraud claim arose out of, and was related to, the contract and, therefore within the arbitration provision of the contract.”
The First District Court of Appeal subsequently reversed, finding “that the fraud…did not come within the broad scope of the arbitration provision because the fraud claim arose from a general duty under the common law; not from an obligation arising under the contract”. The Appellate Court then certified the case to the Supreme Court after determining its holding conflicted with McGuire v. King (917 So. 2d 264 (Fla. 5th DCA 2005)); a decision of the Fifth District Court of Appeal. In that case, faced with somewhat similar issues, the Appellate Court reversed and remanded, directing the trial court to compel arbitration. It found that: “the fraudulent misrepresentation and fraud in the inducement claims arose from conduct pertaining to the agreement — i.e., the misrepresentation regarding the drainage rights which had been specifically incorporated into the written contract.”
Reaffirming and clarifying its earlier decision in Seifert v. U.S. Home (750 So. 2d 633, 636 (Fla. 1999)), the Florida Supreme Court in Jackson noted that:
“Generally, three fundamental elements that must be considered when determining whether a dispute is required to proceed to arbitration are: (1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived.”
The threshold question for the Court then was relatively simple: Was the arbitration provision narrow or broad in scope? Was common law fraud “ring-fenced” in or out as a arbitrable claim?
In Seifert, the Court, examining the contract language, held that arbitrable claims are those that “arise out of” the contract; language giving the provision narrow scope. Conversely, where arbitrable claims are said to be “related to” the contract, the provision is broad in scope. The former requires that the claim have a more direct relationship to the contract’s terms and provisions. In the latter case, where claims do not “arise out” of the contract, claims may still be arbitrable if they have a “significant relationship” to the contract or the overall transaction. A claim is arbitrable where such “contractual nexus” is present.
The Supreme Court in Jackson determined that the common law fraud claim was arbitrable. That the claim was “inextricably intertwined with the circumstances that surrounded the transaction from which the contract emanated and the contract itself.” And, because “the contract does not mention the parties’ remedial rights in the event of a fraud or a tort action,” the clause effectively operates as a limitation of remedies provision. At arbitration, “(t)he arbitrator may not alter the Contract terms or award any remedy not provided for in this Contract.”
The Jackson real property purchase and sale contract’s only allowable emedy: return of the Buyer’s deposit!
Of Counsel to the Firm