FORT LAUDERDALE BUSINESS LITIGATION: ENFORCEABILITY OF ARBITRATION CLAUSE WHEN PARTY SEEKS RESCISSION OF CONTRACT

The enforceability of arbitration provisions is a prevalent issue in business litigation involving disputes arising from commercial contracts. Arbitration provisions are not always enforceable under Florida law. Under Florida law, the arbitration provision must provide litigants with the same legal remedies that are otherwise available to them in civil litigation. To enforce an arbitration agreement in Florida, a court must find that the party resisting arbitration entered into an arbitration agreement that is enforceable, and that the subject claims fall within the scope of the agreement. Lambert v. Austin Ind., 544 F.3d 1192 (11th Cir. 2008). If certain terms of the arbitration provision violate Florida law, then a litigant may attempt to sever the unlawful terms from the provision, and pursue arbitration pursuant to the contract’s remaining terms. In commercial litigation, arbitration clauses are not severable if the dispute’s sole cause of action seeks to rescind the entire contract. Peter Mavrick is a Fort Lauderdale business litigation attorney, and represents clients in business litigation in Miami, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

An arbitration provision is unenforceable if the contract violates public policy or precludes a party from recovering in arbitration what would be otherwise available in civil court. In Shotts v. OP Winter Haven, Inc., 86 So. 3d 456 (Fla. 2011), the Florida Supreme Court explained that “any arbitration agreement that substantially diminishes or circumvents [statutory] remedies stands in violation of the public policy of the State of Florida and is unenforceable.” Shotts found the arbitration agreement at issue violated public policy. The Supreme Court based its holding on the fact that the agreement eliminated statutory remedies available to the plaintiff under certain Florida statutes. Nonetheless, a party can still seek to compel arbitration if the agreement contains a severability clause whereby the offending terms can be severed without altering the parties’ intent.

As a general rule, contractual provisions are severable when the unlawful portion of the contract does not go to the contract’s essence, and, where the remaining contract provisions are valid and lawful after the unlawful portion is removed. Gold, Vann & White, P.A. v. Friedenstab, 831 So. 2d 692 (Fla. 4th DCA 2002). “Severability has long been recognized in Florida’s law of contracts and is determined by the intent of the parties.” Gessa v. Manor Care of Fla., Inc., 86 So. 3d 484 (Fla. 2011). However, severability is not available when the entire contract or arbitration is unlawful. Rescission is one remedy available in business litigation between contracting parties who were fraudulently induced to enter a contract. The effect of rescission is to render the contract abrogated and of no force and effect from the beginning. “If there is no contract, there can be no arbitration clause ‘of the contract.’” Borck v. Holewinski, 459 So. 2d 405 (Fla. 4th DCA 1984).

Courts should not compel arbitration when the only claim for relief seeks rescission of a contract. R.B.F. Mgmt. Co. v. Sunshine Towers Apartment Residences Ass’n, 352 So. 2d 561 (Fla. 2d DCA 1977). In Beazer Homes Corp. v. Bailey, 940 So. 2d 453 (Fla. 5th DCA 2006), Florida’s Fifth District Court of Appeal held that, “where a party seeks to rescind a contract based on fraud in the inducement, the arbitration provision itself is not enforceable.” Beazer also discussed Florida precedent holding that “[i]f there is not contract, there can be no arbitration clause ‘of the contract.”‘ Beazer held that this rationale applied “where only rescission is sought, and where the controversies between the parties have no relation to the contract itself.”

Under Florida law, it is therefore inappropriate for the court to compel arbitration where the arbitrator’s task would be to rescind the same contract that granted it authority. Arbitration is not warranted if “the complaint clearly seeks rescission of the contract in its entirety” and rescission is not sought “in conjunction with a claim for damages and other relief.” Borck v. Holewinski, 459 So. 2d 405 (Fla. 4th DCA 1984). In Hymowitz v. Drath, Florida’s Fourth District Court of Appeal found arbitrators exceeded their powers by cancelling the very agreement that contained the arbitration clause from which the arbitrators derived their authority. 567 So. 2d 540 (Fla. 4th DCA 1990). Hymowitz determined that cancellation of the agreement was tantamount to rescission and stated, “‘[t]he effect of rescission is to render the contract abrogated and of no force and effect from the beginning. If there is no contract, there can be no arbitration clause ‘of the contract.’” Accordingly, Florida law requires the trial court to make an initial finding as to whether a prima facie case is made to support a claim for “true” rescission before compelling the parties to submit their lawsuit to be decided in arbitration. This determination is critical when seeking to compel arbitration because there can be no basis for arbitration if the court rescinds the entire agreement.

Peter Mavrick is a Fort Lauderdale business litigation lawyer, and represents clients in Miami, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.