WAIVING THE RIGHT TO ARBITRATE UNDER FEDERAL LAW

If there is an arbitration provision in your contract that you want to enforce, you do not want to take action inconsistent with those rights as this could give rise to a waiver argument, i.e., that you waived your rights to arbitrate, particularly if the other party has been prejudiced.

Under federal policy and law, establishing waiver requires the party arguing waiver to “bear a heavy burden of proof.  U.S. f/u/b/o John Wayne Construction, G.S.A. Division, LLC v. Federal Ins. Co., 2021 WL 4526727 (M.D.Fla. 2021) quoting Stone v. E.F. Hutton & Co., 898 F.2d 1542, 1543 (11th Cir. 1990).

“To determine whether the right to arbitrate has been waived, courts apply a two part test: i) whether, “‘under the totality of the circumstances,’ the party ‘has acted inconsistently with the arbitration right’”; and ii) “whether, by doing so, that party ‘has in some way prejudiced the other party.’”  Id. quoting Ivax Corp. V. B. Braun of Am., Inc., 286 F.3d 1309, 1315-16 (11th Cir. 2002).   Substantial participation in litigation prior to invoking the right to arbitrate supports a party acting inconsistent with the right to arbitrate.  Id.   And, “‘[p]rejudice has been found in situations where the party seeking arbitration allows the opposing party to undergo the types of litigation expenses that arbitration was designed to alleviate.’”  Id. quoting Morewitz v. W. of Eng. Ship Owners Mut. Prot. & Indem. Ass’n (Luxembourg), 62 F.3d 1356, 1366 (11th Cir. 1995).

Hence the heavy burden for a party to support to prove waiver– establishing both substantial participation in litigation that is inconsistent with the right to arbitrate AND prejudice.

An example of this heavy burden to support waiver can be found in the Federal Magistrate’s Report and Recommendation in U.S. f/u/b/o John Wayne Construction, G.S.A. Division, LLC.  Here, a prime contractor on a federal project in Louisiana hired a drywall subcontractor.  The subcontract contained a detailed provision to address disputes with the final process as follows:

[I]t may choose to pursue the matter in court, subject to the requirements on venue and alternative dispute resolution agreed to herein. Any claim by[subcontractor] filed in state or federal court against [prime contractor] and/or [prime contractor’s] surety shall only be filed and/or resolved in anycourt within the exclusive venue of Duval County, Florida. At [prime contractor’s] sole option, [prime contractor] may require Alternative DisputeResolution (ADR) methods to be used to resolve the dispute, including binding arbitration in accordance with the Construction Industry Rules ofthe American Arbitration Association, instead of litigation in a court of law. In the event [prime contractor] elects binding arbitration, any claimsthat [subcontractor] may have against any bonds provided by [prime contractor] shall be stayed, pending the result of such binding arbitration.

(As an aside, an arbitration provision is enforceable if it gives one party – perhaps the prime contractor—the sole option to select arbitration as the binding dispute resolution procedure, as was the situation in this arbitration provision.)

Due to a dispute between the drywall subcontractor and prime contractor, the prime contractor filed a lawsuit in state court in Louisiana.  The subcontractor, after a mediation between the parties reached an impasse, moved to dismiss the lawsuit and contemporaneously filed a lawsuit in Florida federal court against the prime contractor and Miller Act payment bond surety (based on venue provision in the subcontract).  The prime contractor did not dispute the dismissal contending it was formally invoking its right to arbitrate with the subcontractor. The prime contractor further moved to compel arbitration of the subcontractor’s Florida federal court lawsuit pursuant to its rights under the subcontract’s dispute resolution procedure.

The subcontractor argued that the prime contractor waived its right to compel arbitration by virtue of it initially filing a lawsuit against the subcontractor in Louisiana state court.  The prime contractor countered that the subcontractor cannot meet the required heavy burden to support waiver and, nonetheless, it did not act inconsistent with its rights to arbitrate.  The Federal Magistrate agreed with the prime contractor finding that waiver did not occur recommending the parties be compelled to binding arbitration.

First, the Magistrate found that the prime contractor filing the Louisiana lawsuit where there was limited litigation was insubstantial and did not result in the substantial participation in litigation to demonstrate it was acting inconsistent with its right to arbitrate. Further, once the subcontractor filed its lawsuit in the Florida federal court, the prime contractor filed its motion to compel the lawsuit to arbitration and did not substantially participate in litigation in the Florida federal court.  “Under the ‘totality of circumstances,’ it does not appear that the Louisiana Lawsuit or the current case [in Florida federal court”] before this Court amount to ‘substantial participation in litigation’ to a point that was inconsistent with the intent to arbitrate.” U.S. f/u/b/o John Wayne Construction, G.S.A. Division, LLC, supra.

Second, the Magistrate found that even if the prime contractor acted inconsistent with its right to arbitrate by initiating the Louisiana lawsuit, this would not matter because there was no prejudice to the subcontractor. The Magistrate noted that while the subcontractor incurred costs due to the Louisiana lawsuit, the subcontractor filed only one motion, a hearing was not held on the motion, and the dispute was dismissed without prejudice; thus, the expenses were not so prejudicial to the subcontractor.   Moreover, “looking at the totality of circumstances (along with the finding that the Louisiana Lawsuit amounted to insubstantial litigation), the undersigned [Magistrate] find that [the subcontractor] is not so prejudiced to satisfy its heavy burden.” U.S. f/u/b/o John Wayne Construction, G.S.A. Division, LLC, supra.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

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