By Tim Warner
Rightly or wrongly, arbitration has been touted as a cure-all for the business community over the years. As part of the arbitration push, businesses have been urged to add clauses to contracts mandating the arbitration of all or specific disputes. Having taken the trouble to add them, it is troubling to see those provisions sometimes ignored by companies either overly eager to have a dispute litigated before a court or anxious to respond to a complaint that had been filed.
By inadequately considering options before racing to the courthouse or responding to a filed complaint, many businesses inadvertently waive the arbitration rights they worked hard to have added to their contracts.
It is the intent of this article to help educate businesses about this issue and assist in the preservation of arbitration clauses.
While there are many cases that demonstrate different scenarios by which a company may lose its right to arbitrate, they can be summarized by observing that such a situation will occur when an organization acts in a way contrary to its contractual right to arbitrate. When a party files a complaint with a court, rather than with an arbitrator or an arbitration panel, that act will typically be deemed contrary to an arbitration clause, and the right to arbitration will be waived. As alluded to earlier, this can happen when a representative of a company – perhaps a hasty attorney – races to a courthouse without having fully read and considered the contracts involved and any remedies available under the terms of those contracts.
Complete consideration of all contractual provisions should be considered prior to seeking the jurisdiction of a court of law.
As can be imagined, it is common for a business defending a complaint filed against it to inadvertently waive an arbitration clause. In responding to a complaint, a company should immediately move to stay court proceedings in light of an applicable arbitration clause or, at the very least, reference the need for arbitration somewhere in the response to the complaint. The failure to at least mention the need for arbitration will typically be deemed by a court as a waiver of the right to arbitrate.
Even if the right to arbitrate is stated in an answer to a complaint, a lengthy delay in the request to the court to arbitrate, demonstrated by an extensive involvement in the litigation process, will also typically be deemed a waiver of the right to arbitrate. There isn’t an actual pivot point in any litigation for which an application to preserve a right to arbitrate can be determined, so a court is usually left to opine upon the circumstances and actions of the defending party.
When that defending party invokes the jurisdiction of the court by filing a counterclaim or a third-party complaint, the right to arbitration is typically waived. A court will not usually allow the defending party to state in an untimely manner that it is seeking arbitration while aggressively responding with counterclaims or third-party complaints. Effectively, a company will not be allowed to forum shop by gauging its position in the litigation prior to moving to mandate arbitration.
As part of its inquiry, a court may attempt to determine whether the company that is not requesting arbitration has been prejudiced by the requesting party’s inconsistent acts.
Tim Warner is a partner with Cavitch Familo & Durkin, and serves as a trusted advisor and legal resource to corporate entities and individuals. He is a member of the Board of Directors for The Gathering Place and is also a member of the Community Advisory Committee of WVIZ/ideastream. He can be reached at firstname.lastname@example.org