What Happens When an Arbitrator or Judge Finds a Construction Contract Is Void?
A well-drafted construction contract can protect a contractor in the event a client refuses to pay. But what happens when the client commits fraud to obtain the contract in the first place? Is the contract void? And if so, what legal remedies does the contractor have to mitigate their losses?
Bankruptcy Court Refuses to Enforce Legal Fee Provision of Invalidated Contract
The U.S. 11th Circuit Court of Appeals recently addressed such a scenario. The case before the Court, In re Lazarus Holdings LLC, actually involved the appeal of a bankruptcy court decision. The bankrupt debtor operated a veterinary clinic in Florida. The debtor hired a contractor to perform interior work on the clinic. The parties signed an agreement, in which they not only agreed to arbitrate any dispute, but also to allow an arbitrator to award legal fees to the prevailing party.
After the debtor filed for bankruptcy, it also claimed the contractor committed breach of contract. The bankruptcy court ordered arbitration of this issue, as provided by the contract. The arbitrator, however, determined the contract itself was void, as it was “fraudulently procured by [the debtor’s] managing member.” Nevertheless, the arbitrator made an equitable award to the contractor for approximately $137,000.
The contractor insisted it was also entitled to an award of legal fees, as provided for in the contract. But the 11th Circuit, upholding a lower court’s decision on this matter, held that since the contract itself was invalid, the contractor could not rely on its provisions to obtain an award of legal fees. Nor could the contractor claim such fees as an “administrative expense” in connection with the debtor’s bankruptcy case.
The bankruptcy court noted that the arbitrator in this case did not apply Florida law. This proved to be critical. As noted above, the arbitrator found the contract was “procured” through fraud. In Florida, a “contract procured by fraud may be subject to an election of remedies, either rescission or ratification.” Yet the arbitrator, citing law from different jurisdictions, decided the only remedy was to declare the contract void. By doing so, the contractor could no longer rely on the contract’s legal fees provision.
As for the argument regarding administrative expenses, the 11th Circuit noted such awards are limited to “actual, necessary costs and expenses of preserving the [bankruptcy] estate,” which was not the case here. Nor was there any “independent basis” for a bankruptcy court to award legal fees under these circumstances. Again, the arbitrator’s decision to void the contract–a position the contractor supported at arbitration–made such a claim untenable.
Speak with a Florida Construction Contract Attorney Today
Construction contracts are designed to protect the parties in the event something goes wrong. That is why it is crucial to carefully review any contract before signing on the dotted line. If you need advice or representation in connection with any contractual matter from a qualified Florida construction lawyer, contact Linkhorst & Hockin, P.A., today at 561-626-8880 to schedule a case analysis with a member of our team.