Be Careful Not to Waive Your Right to Arbitration

I have previously written about how arbitration provisions have to be carefully written in order for them to be enforceable. The recent case of Andre Franklin, Inc. v. Wax, 39 Fla. L. Weekly D 2107 (October 8, 2014 Fla. 2d DCA) demonstrates the importance of properly preserving your right to arbitration in the event the other party to the agreement files a lawsuit.

In this case Herb and Jill Wax contracted with Andre Franklin, Inc. (“Franklin”) for the restoration of a historic home they purchased. The contract required that all disputes be resolved through arbitration. Five years after the project started Franklin recorded a claim of lien on the Waxes property after disputes arose about payments.

The Waxes filed a lawsuit against Franklin which included a show cause action pursuant to Section 713.21, Florida Statutes requiring Franklin to show cause why the claim of lien should not be vacated. In response, Franklin filed a motion to enforce arbitration, a motion to dismiss for failing to comply with the pre-suit requirements of Chapter 558, Florida Statutes, an answer and affirmative defenses, and a counterclaim to foreclose on its claim of lien and for breach of contract. The trial court held a hearing on these motions and partially granted Franklin’s motion to dismiss and granted the Waxes leave to amend to comply with the pre-suit requirement of Chapter 558, Florida Statutes.

The Waxes filed an Amended Complaint and Franklin responded by filing a renewed motion to enforce arbitration. At the hearing on the motion to enforce arbitration, the Waxes argued that Franklin had waived its right to arbitrate by initially filing a counterclaim and arguing its motion to dismiss during the first hearing. The trial court agreed with the Waxes and ruled that Franklin waived its right to arbitration by seeking affirmative relief from the court by filing its counterclaim and seeking to enforce the contract.

On appeal, the Waxes relied primarily on the case of Coral 97 Associates, Ltd. v. Chino Electric, Inc., 501 So. 2d 69 (Fla. 3d DCA 1987) to support its argument that Franklin had acted inconsistently with its right to arbitrate by filing a counterclaim. The Second District Court of Appeal relied on Design Structures, Inc. v. P.L. Dodge Foundation, Inc., 532 So. 2d 1334 (Fla. 3d DCA 1988) which clarified “it was the act of implementing discovery” following the filing of a counterclaim that acted a waiver of arbitration rights in in Coral 97 Associates. Based on these prior decisions, the Second District Court of Appeal reversed the trial court’s ruling and held that Franklin did not waive its contractual right to arbitrate by filing a counterclaim simultaneously with its motion to compel arbitration because Franklin did not implement discovery.

The Franklin case demonstrates the legal minefield that a litigant faces when they are faced with a lawsuit and want to preserve their contractual right to arbitrate. Typically, I would not recommend filing a counterclaim along with a motion to compel arbitration. However, one important issue that the was not addressed in the appellate opinion is that because the Waxes filed a show cause action under Section 713.21, Florida Statutes, Franklin had to timely file a counterclaim to enforce its claim of lien or it would have it lost its lien rights. In retrospect, Franklin’s counterclaim should not have included the breach of contract claim to avoid the argument that they were seeking to enforce the contract.