Making the Case for Arbitration of Commercial & Construction Disputes

Hurricanes Laura and Delta caused substantial damage in Louisiana, resulting in extensive litigation that continues to develop. In a July 8, 2024 blog post, we reported that the U.S. Fifth Circuit Court of Appeals, in Bufkin Enterprises, LLC v. Indian Harbor Ins. Co., affirmed that equitable estoppel applied to allow domestic insurers to compel arbitration under the New York Convention even where the insured dismissed the foreign insurers with prejudice. Click here to read more.

New case law from the LA Supreme Court warrants supplementation of our prior blog post. The Police Jury of Calcasieu Parish (“Calcasieu”) filed suit in federal court to recover alleged underpaid and untimely insurance claim payments. Various domestic insurers moved to compel arbitration pursuant to arbitration clauses found in two foreign insurers’ policies. The foreign policies required all claims be submitted to arbitration in New York under New York law. The insurers relied upon Bufkin Enterprises, LLC v. Indian Harbor Ins. Co., and Calcasieu moved to certify questions to the LA Supreme Court.

The U.S. District Court for the Western District of LA certified questions to the Louisiana Supreme Court to address this issue. In Police Jury of Calcasieu Parish v. Indian Harbor Insurance Co., the Louisiana Supreme Court held:

1. Arbitration is prohibited by statute. The case involved the interpretation of La. R.S. 22:868, as amended in 2020. Generally, La. R.S. 22:868(A) prohibits the use of arbitration clauses in insurance policies. The Court held this prohibition is rooted in public policy because compulsory arbitration clauses deprive courts of jurisdiction over actions against insurers. The Court noted it historically has held arbitration clauses within insurance policies are unenforceable, and it did not deviate from its historical position.

2. As a matter of first impression, an insurance policy with a political subdivision is a “public contract” within meaning of the statute banning any provision in public contracts which requires a suit or arbitration proceeding to be brought in a forum or jurisdiction outside of the state. It was undisputed that Calcasieu is a political subdivision of this state. Also, it was undisputed the Defendants contracted with Calcasieu to provide insurance coverage for approximately 300 properties that Calcasieu owned for the benefit of the public. No private actors involved. Thus, the Court found, “The Defendants’ insurance policies clearly covered public properties owned by Calcasieu, purchased with public funds––taxpayer dollars. As such, we easily find insurance contracts with political subdivisions, like the policies at issue, are public contracts within the meaning of La. R.S. 9:2778.” Thus, the statute precludes arbitration or venue outside of LA, or the application of foreign law, in claims involving the State and its political subdivisions.

3. A domestic insurer may not use equitable estoppel to enforce arbitration via a foreign insurer's policy. Citing its disagreement with the Federal Court’s ruling in Bufkin Enterprises, L.L.C. v. Indian Harbor Ins., the Court held “[E]quitable estoppel is not available under these circumstances because it conflicts with the positive law of La. R.S. 22:868, which prohibits the use of arbitration clauses in Louisiana-issued insurance policies. As such, domestic insurers may not employ this common law doctrine to compel arbitration through the clause of another insurer's policies, as it clearly contravenes La. R.S. 22:868(A)(2). A contrary finding would (1) violate Louisiana's positive law prohibiting arbitration in Louisiana-issued insurance policies; and (2) invite domestic insurers’ misuse a doctrine of ‘last resort’ to ceaselessly rely on insurance policies of foreign insurers to compel arbitration.”

References:

Police Jury of Calcasieu Parish v. Indian Harbor Insurance Co., 2024 WL 4579035 (La.), 9, 2024-00449 (La. 10/25/24).

Bufkin Enterprises, L.L.C. v. Indian Harbor Ins. Co. 96 F.4th 726 (5th Cir. 2024).

Generally, a provision in a construction contract for private work limiting the contractor's right to recover additional costs arising from delays outside of the contractor's control may be enforceable. However, under the Public Bid Law, such a provision has been found to be against public policy. La. R.S. 38:2216 prohibits any public contract provision that purports to waive, release or extinguish the rights of a contractor to recover delay damages if the delay was caused in whole or in part by the acts or omission of the public entity.

A recent First Circuit decision struck down a contract provision that purported to limit a contractor's right to damages in a public contract. In F.H. Myers Const. Corp. v. State, Div. of Admin. Office of Facility Planning & Control, 2013-2153 (La.App. 1 Cir. 6/18/14), reh'g denied (July 22, 2014), a general contractor brought an action against the State for breach of contract, seeking payments for extended-fixed job site overhead.

The State argued that the contract contemplated that the contractor could recover extended-fixed job site overhead only if there was a complete stoppage of work solely attributable to the State. The contractor argued that the contract provision was in violation of La. R.S. 38:2216.

The court found that La. R.S. 38:2216 contemplates that a contractor who is a party to a public contract shall be able to recover for any delay they may suffer from the fault of the State entity. Because the contract waived the contractor's rights to seek damages for extended-fixed job site overhead for any delay short of a complete stoppage of work, the contract imposed a stricter limit on damages than the statute allows. The court also noted that the contract only allowed for damages where the State was 100% at fault, whereas the statute allows recovery even if the State is only partially at fault. As such, the provisions at issue were held to be void and unenforceable.

Whether you are building a new home, buying a new home, or a residential construction contractor, there is one Louisiana law that you should know: The New Home Warranty Act (“NHWA”).The NHWA provides the exclusive remedies, warranties, and peremptive periods between a builder and owner relative to home construction. The NHWA provides a warranty for new home purchases and defines the responsibilities of the builder during the warranty periods.What warranties are provided?

• 1 year: For one year following the warranty commencement date, the builder warrants that the home will be free from defects due to noncompliance with the building standards or other defects not regulated by building standards;

• 2 years: For two years after the warranty commences, the builder warrants the plumbing, electrical, heating, cooling, and ventilation systems or other defects not regulated by building standards; and,

• 5 years: For five years following the warranty commencement, the builder warrants that the home will be free from major structural defects, including foundation systems, or other defects not regulated by building standards.

However, the builder’s warranty will exclude certain items, including, but not limited to: fencing, landscaping, insect damage, bodily injury, and mold damage.The homeowner is also required under the NHWA to give written notice to the builder by registered or certified mail within one year of knowledge of the defect. Failure to give this required notice may forfeit any claims the homeowner may possess against the builder.Once notice is given to the builder, if the builder fails to perform as required by the warranties, the owner may bring a claim against the builder for damages, including a claim for attorney fees. This cause of action must be brought within 30 days of the expiration of the applicable warranty period. The damages available to a homeowner cannot exceed the reasonable cost of the repair of the defect, and cannot exceed the original purchase price of the home.While the NHWA provides certain “bright-line” rules and clarifies the rights and remedies available when a problem arises with new construction, litigation of these claims and the defenses provided to builders can present difficult issues. When an issue arises, you should consult an attorney experienced in this area of practice.