Florida Court Holds that Arbitrator, Rather Than Court, Should Determine Validity of Contract

Charles Boyd Construction Inc. v. Vacation Beach, Inc.
No. 5D06-2168, 2007 Fla. App. LEXIS 9597 (Fla. Dist. Ct. App., June 22, 2007)

Following the precedent of the United States Supreme Court in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (U.S. 2006), the Fifth District Court of Appeal of Florida reversed its prior decision and held that whether a contract is illegal in its entirety and, thus, an arbitration provision contained therein would be unenforceable, must in the first instance be decided by the arbitrator, and not a court.

The case arose out of the construction of a project where Vacation Beach, Inc. (the “Owner”) hired Boyd Construction (the “Contractor”) to build a condominium project. The contract between the Owner and the Contractor contained a provision requiring claims arising out of or related to the contract to be arbitrated pursuant to the American Arbitration Association after first being submitted to mediation.

During the Project, the Owner discovered that the building permit for the structure had been obtained by an entity known as “Charles Boyd Homes, Inc.,” a corporation that had been dissolved and never reinstated, and not by the Contractor with whom the Owner had contracted. The Owner alleged that the Contractor never had a primary or secondary qualifying agent as required by Florida law and thus was an unlicensed Contractor. Disputes arose between the parties concerning the construction of the Project that culminated in the Contractor filing a lien against the property and a demand for arbitration. The owner, in response, filed an action for declaratory relief seeking a declaration concerning the legality of the construction contract in view of the lack of a qualifying agent for the Contractor.

The trial court granted the Contractor’s motion to dismiss and compelled the parties to arbitrate. Upon appeal, the Court of Appeals of Florida reversed the trial court based largely on the Florida Supreme Court’s decision in Cardegna v. Buckeye Check Cashing, Inc., 894 So.2d 860 (Fla. 2005). The Court of Appeals held that contracts entered into by an unlicensed contractor were unenforceable by the contractor. Because the Contractor lacked a qualifying agent and a certificate of authority, it was unlicensed and thus the Contractor could not enforce the contract in an arbitration proceeding. Following the Cardegna holding, the Court of Appeals held that “a claim by a party asserting that a contract is illegal is first required to be presented to the trial court for disposition before arbitration of other disputes under the contract could proceed.”

Upon remand, the trial court accordingly entered an order denying the Contractor’s motion to compel arbitration and granted the Owners’ motion to stay the arbitration. Shortly thereafter, the Contractor requested that the court take into consideration the opinion of the Supreme Court in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (U.S. 2006), reversing the decision which had been relied upon on the first appeal. In Cardegna, the US Supreme Court held that under the Federal Arbitration Act the issue of a contract’s validity, as a whole, should be decided by the arbitrator, rather than a court in the first instance, in the first instance. The trial court, however, held that it could not change the law of the case as it had been decided by the Court of Appeals, and thus declined to send the matter to arbitration.

On a second appeal, the Court of Appeals held that in view of the reversal of the Florida Supreme Court’s decision in Cardegna by the United States Supreme Court, it was required to reverse the trial court and direct that the trial court order the matter to arbitration.

Click here to view full opinion as PDF (provided with the permission of LexisNexis).

(Where, however, the allegations of illegality or unenforceability pertain specifically to the arbitration clause itself, as on a theory of fraudulent inducement, rather than to the entire contract, the courts have typically held that the issue of the validity of the arbitration clause is for a courts rather than an arbitrator to decide. See J.A. Walker, Inc. v. Excel Metals, Inc. 2007 Colo Lexis 447, (Colo. S.Ct. May 29, 2007).)

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