Arbitration – Use It or Lose It

As part of a general policy of easing the courts’ workload, the law strongly favors agreements to arbitrate disputes. Federal law specifically encourages agreements to arbitrate in disputes affecting interstate commerce, and defendants who ask the courts to enforce an agreement usually get their wish granted. A recent case from Washington (Schuster v. Prestige St, Mgt.., L.L.C., No. 33242-0-III, Wash. Ct. App., Apr. 28, 3016), <www.courts.wa.gov/opinions/pdf/332420.pub.pdf>), however, highlights one major exception. Waiting too long to long to ask for arbitration after a case has been started will usually result in the court ruling that the arbitration clause has been waived.

The case was a lawsuit for negligent care of a senior housing resident. The resident’s care agreement included an arbitration clause identifying a national organization as the arbitration administrator. Several months before the resident was found to be in a medical crisis, the arbitration administrator settled a suit by the Minnesota Attorney General for consumer protection violations, in which it agreed to no longer serve in consumer cases. This disqualified it from the dispute at issue.

The resident, on being found in a crisis, was taken to a hospital and died several months later. His estate notified the owners of the residence that they were considering a suit, and settlement negotiations continued for over a year. Over a year after negotiations broke off, and almost three years after the crisis was discovered, a suit for negligence was filed (a few weeks before the statute of limitations ran). The defendants did not assert the arbitration clause in their first answer. Lengthy discovery, including motions to compel discovery and payment of discovery sanctions by the defendants, was engaged in, and the estate amended its complaint four times. Not until the fifteen months after the case was filed did the defendants’ lawyer even mention the arbitration clause to the estate’s lawyer, and not until the fourth amendment to the complaint did they formally assert it to the court in an answer, twenty months after the initial complaint. Another month passed before they finally moved to have the arbitration clause enforced.

By that time, the estate had expended $10,000 for out of pocket expenses and incurred $70,000 of attorney time. The attorneys had located nine witnesses and prepared statements in a form for use in a trial context. Thee statements would have to be rewritten and re-signed to be usable as evidence in arbitration. The discovery strategy would have been substantially different had the case been arbitrated, as the administrator named in the agreement limited discovery to 25 questions. The plaintiff also notified the court that the stated arbitration administrator had been disqualified by the Minnesota settlement.

The Washington Court of Appeals agreed with the parties that federal law controlled the enforcement of the arbitration clause, but noted that the Supreme Court has never ruled on the application of waiver to an arbitration agreement. It also noted that Washington state courts are not bound by the rulings of any federal appellate court. The Washington Supreme Court also has not resolved application of waiver in the context of federal law, but its case law as a matter of state law was consistent with federal precedents. The court considered, therefore, cases from across the country to analyze the case, resulting in a thorough review of the issue.

A waiver can be inferred from conduct without an express statement. Generally speaking, to prove a waiver of an arbitration agreement, the party seeking to enforce arbitration mus  know of its right, act inconsistently, and cause prejudicial harm to the other party. Knowledge of the arbitration agreement was obvious and not disputed. The questions in the case were whether the conduct was inconsistent and whether the estate was prejudiced.

Generally speaking, inconsistent conduct is found when a party acts substantially in litigation before asserting an arbitration agreement. This could be as little as filing an answer without asserting the agreement, but usually involves delay of two or more months, participation in discovery, or filing motions that would end the dispute. The court easily found that the fifteen month delay in even mentioning the arbitration agreement, coupled with extended discovery, was inconsistent with arbitration.

Prejudicial harm is not required to show a waiver of a right in other contexts. This is the primary practical impact of the policy favoring arbitration. The various federal Courts of Appeals do not agree on the exact criteria for determining prejudice, but the court concluded that most, if not all, of them showed prejudice to the estate in this case. As a result, it didn’t adopt a clear rule for Washington.

Among the factors the court considered were the extended delay, the additional expense required to rewrite witness statements, expense incurred by the estate, the fact that the discovery engaged in exceeded that available in the procedural rules of most major arbitration services, and the change in litigation strategy that would result if the estate had started by going to arbitration. Therefore, the court ruled that the case should go forward in court.

If you have an agreement with someone and you want to enforce an arbitration clause, you should make that decision as soon as possible after the dispute arises. Among the factors you may want to consider are the reduced cost of arbitration, the limited access to discovery to both parties, savings in time, and all parties’ experience with the probable pool of arbitrators. A careful conversation with a lawyer is likely to be advisable. Remember, however, that if you wait too long, you may be barred from arbitration.

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