Arbitration has been touted as a cure all for businesses over the years. As part of the arbitration push, the business community has been urged to add clauses into contracts mandating the arbitration of all or specific disputes. Having taken the trouble to add arbitration clauses into their contracts, it is concerning to occasionally see the clauses ignored by businesses either overly eager to get their dispute before a court or overly eager to respond to a complaint filed against it. By inadequately considering options either prior to racing to the courthouse or prior to responding to a filed complaint, many businesses inadvertently waive the arbitration rights they worked hard to add to their contracts. This article is designed to educate the business community about this issue and assist in the preservation of arbitration clauses.
Right to Arbitration Typically Waived When Filing Complaint in a Court of Law
While there are multiple cases addressing scenarios by which a party loses its right to arbitrate, the cases can be summarized by stating that a party will lose its right if the party acts in a way contrary to its contractual right to arbitrate. Obviously, then, a party’s filing a complaint in a court of law, rather than with an arbitrator or arbitration panel, will typically be deemed an act contrary to an arbitration clause, and the right to arbitration will be waived. As alluded to earlier, this can happen when a party, and perhaps a hasty attorney, races to the court house without having fully read and considered the contracts implicated and the remedies available pursuant to the contract terms. Complete consideration of all contractual provisions should be considered prior to seeking the jurisdiction of a court of law.
Defendants Inadvertently Waive Arbitration in Their Response to a Complaint
It is often more common for a party defending a complaint filed against it to inadvertently waive an arbitration clause. In responding to a complaint, a party is expected to 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 party’s 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. The court will typically conduct a fact specific analysis to make this determination.
Counterclaims and Third-Party Complaints Remove Arbitration as an Option
When a 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 allow the defending party to state that it is seeking arbitration while also aggressively pursuing counterclaims or third-party complaints. A party will not be allowed to effectively forum shop by testing its position in the litigation prior to moving to mandate arbitration. As part of its inquiry, a court will consider whether the other party has been prejudiced by the requesting party’s inconsistent acts.