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When Federal Preemption Can — and Cannot — Save Your Arbitration Clause from Being Declared Void as a Matter of Florida Public Policy

Negotiating effective commercial contracts involves many considerations. You must achieve terms that are mutually acceptable. Then you also have to be certain that the terms that end up in black and white comply with the law. Including a provision that violates federal or state law can ultimately lead to an outcome far different than what your contract document says, and different that you want. The key is to get a contract that meets your needs and meets the law’s requirements. At every step in the process, make sure you have an experienced Florida business and commercial representing your interests.

A failure to ensure that all provisions of a contract comply with the law can result in a term in your document being declared void. A case where that was a potential outcome was the dispute that arose after a Coral Gables drywall company signed a subcontractor agreement to perform drywall services for an improvement of a property in Naples. The contractor was an LLC from Detroit, Michigan. The contract included a paragraph that declared that disputes between the two sides “may be submitted to mediation and/or arbitration pursuant to the Construction Industry Rules of the American Arbitration Association.” The provisions also stated that any such arbitration would occur in, or within 20 miles of, Southfield, Michigan.

A dispute eventually did occur, and the subcontractor sued the contractor in Florida for breach of contract. Based upon the contract document, it might seem that the contractor would be entitled to demand arbitration in Michigan. However, as the subcontractor argued, Florida has a statute that says that any term in a contract for improvement of real property that requires legal action against a Florida contractor or subcontractor in someplace other than Florida is “void as a matter of public policy” and unenforceable. Based on that Florida statute, the trial court sided with the subcontractor and declared the arbitration paragraph void.

After an appeal, though, the contractor won a renewed opportunity to resolve the case through arbitration. The problem for the subcontractor was the existence of a federal law, the Federal Arbitration Act (FAA) and the concept of federal preemption. The legal doctrine of preemption, which is founded upon the Supremacy Clause of the U.S. Constitution, says that if a federal law and a state law are in conflict, then the federal law preempts, or trumps, that state law.

In other words, if the FAA applied to this subcontractor’s claim, then the federal law preempted the state statute (Section 47.025) and the contractor was entitled to the arbitration it sought. If the FAA didn’t apply, then the state statute controlled the outcome, the arbitration provision was void and the subcontractor was entitled to proceed in litigation.

The key to deciding if the FAA applied was determining if interstate commerce was involved in the drywall subcontractor’s agreement and work. Contrary to the contractor’s arguments, the simple fact that it was a Michigan entity did not automatically make the contract interstate commerce. The subcontractor was a Florida entity and all of the services were provided in Florida. Additionally, the subcontractor alleged that the contractor was a “Florida Corporation… doing business in Collier County.” The appeals court decision explained that the trial court would have to resolve this as-yet unresolved question of interstate commerce before deciding whether or not the arbitration agreement was enforceable.

For reliable advice and effective advocacy in all of your commercial contract needs, contact the skilled South Florida commercial litigation attorneys at Stok Folk + Kon. Our experienced team has been skillfully helping clients advance and safeguard their business interests for many years.

Contact us online or by calling (954) 237-1777 to schedule your consultation and find out how this firm can help you.

More blog posts:

The Impact of an Arbitration Clause on Your Florida Real Estate Litigation, Florida Business Lawyers Blog, June 30, 2017

What Does (and Doesn’t) Trigger a Waiver of Your Right to Compel Arbitration in Your Florida Commercial Contract Dispute, Florida Business Lawyers Blog, May 19, 2017