Florida Dispute Resolution Update: Arbitration or Litigation of a Fraud Dispute Stemming from a Real Property Purchase Transaction?

Posted on: February 8, 2013

The Florida Supreme Court ruled that an action for fraud was within the scope of an arbitration provision in a contract for the purchase and sale of real property.  George Jackson, et al. v. The Shakespeare Foundation, Inc., et al., No. SC11-1196 (Fla. Jan. 31, 2013). 

The underlying facts of the case are summarized as follows:  In 2006, George Jackson, Kerry Jackson, and the Jackson Realty Team, Inc. decided to sell the real property that was the subject of the contract forming the basis of the dispute.  An advertisement was posted on the Bay County Multiple Listing Service making certain representations regarding the use of the land; however, at the time that the advertisement was posted, the Jacksons had in their possession a land use analysis that was contrary to the advertisement, and which indicated that 25% of the property constituted wetlands.  Subsequently, the Jacksons and the respondents entered into contract negotiations, and during the negotiations, the Shakespeare Foundation told the Jacksons of their intention to develop the property into a 27-unit low income housing development. The Shakespeare Foundation relied upon the Jacksons’ representations and entered into a contract to purchase the property. After closing, the Shakespeare Foundation discovered that wetlands constituted 26% of the entire tract which was equal to 9 of the 27 units that were going to be developed.  The Shakespeare Foundation filed an action against the Jacksons for fraudulent misrepresentation.  The Jacksons moved to dismiss the action asserting that the matter fell within the arbitration provision of the contract, which provided for arbitration of “all controversies, claims, and other matters in question arising out of or relating to” the transaction or the contract.  The trial court granted the motion to dismiss, and the Shakespeare Foundation appealed.  On appeal, the First District Court of Appeal, determined that while the subject arbitration provision was broad in scope, the specific fraud claim did not come within that scope, because the fraud claim arose from a general duty established under the common law, and not from an obligation arising under the contract.  The First District Court of Appeal reversed the trial court’s order, and then certified conflict with the decision of the Fifth District Court of Appeal in Maguire v. King, 917 So. 2d 263 (Fla. 5th DCA 2005). 

On appeal, the Florida Supreme Court determined that the action based on fraud was within the scope of the arbitration provision.  In so ruling, the Florida Supreme Court relied on what is known as the “significant relationship” test.  Generally, there are two types of arbitration provisions: those that are narrow in scope and application, and those that are broad.  A narrow arbitration provision is one that typically requires arbitration of claims “arising out of” the contract, whereas a broad provision is one that requires arbitration of claims “arising out of or relating to” the contract; the addition of the words “relating to” broadens the scope, thereby including those claims that are described as having a “significant relationship” to the contract, regardless of whether the claim sounds in contract or tort.  A “significant relationship” exists between the arbitration provision and a claim if there is a “contractual nexus” between the claim and the contract.  Such a contractual nexus exists if the claim presents circumstances that would require either reference to, or construction of, a portion of the contract.

Applying these principles to the case before it, the Florida Supreme Court held that the arbitration provision passed the “significant relationship” test because the fraud claim was inextricably intertwined with both the circumstances surrounding the contact and the contract itself, and the resolution of the fraud claim required consideration and construction of the duties arising under the contract.  The decision below was quashed, and remanded for further consideration, and the decision in Maguire was approved to the extent that it was consistent with the court’s opinion.