Isabella Carter
Arbitration clauses are common in many types of contracts, including business contracts. They require parties to settle disputes through mediation instead of through the courts. However, the mere act of answering a complaint does not necessarily equate to a waiver of the right to arbitrate. Nevertheless, it may contribute to an overall appearance of litigation participation, which courts have found constitutes a waiver of arbitration rights. In Morgan v. Sundance, Inc., the Supreme Court held that the right to arbitration can be waived like any other contractual right – even if the other party was not prejudiced by the delay.
| Characteristics | Values |
|---|---|
| Does answering a lawsuit constitute a waiver of the agreement to arbitrate? | It depends on the jurisdiction and the specific circumstances of the case. Simply answering a complaint does not automatically waive the right to arbitrate, but it may contribute to an overall appearance of litigation participation, which courts have interpreted as a waiver of arbitration rights. |
| Waiver of the right to arbitrate | Occurs when a party consciously and intentionally gives up its right to arbitrate a dispute, choosing litigation as the preferred method of resolution. |
| Legal consequences of waiver | In most cases, the arbitration agreement becomes "inoperative", ceasing to have contractual effect. Occasionally, it has been held that a waiver could render the agreement "null and void" or "incapable of being performed". |
| Common law waiver | "Waiver by election" applies when a choice must be made between two mutually exclusive courses of action. The party claiming waiver must show that the other party was aware of the facts leading to the need to make a choice. |
| Contractual waiver | Parties can include an explicit waiver clause within a contract that is subsequently signed. |
| Determining waiver | Courts consider the totality of the circumstances, including answering a complaint, failing to invoke the arbitration clause, engaging in discovery, and delaying resolution. The Sixth Circuit Court of Appeals formulated a two-element test: (1) taking actions inconsistent with reliance on an arbitration agreement, and (2) delaying assertion to the extent that the opposing party is prejudiced. |
| Supreme Court guidance | The Supreme Court has held that the right to arbitration can be waived like any other contractual right, regardless of prejudice to the other party. The Court also clarified that federal courts should apply ordinary procedural rules when interpreting arbitration clauses. |
| Impact of arbitration fees | Refusal to pay arbitration fees by one party may constitute a waiver of the right to arbitrate, as it indicates an intention to abandon the arbitration process. |
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What You'll Learn
Answering a complaint and failing to invoke the arbitration clause
Answering a complaint without invoking an arbitration clause can have serious consequences for a defendant. In the United States, there is considerable jurisprudence on waiver and the right to invoke an arbitration agreement.
A defendant who wants to convince a court to dismiss the plaintiff’s lawsuit should refrain from engaging in discovery. By participating in significant discovery, a defendant may waive their right to compel arbitration and lose their ability to have the case dismissed. In Davis v. Continental Airlines Inc. (1997), the court found that the defendant had waived its right to argue for arbitration by participating in extensive discovery. The court rejected the defendant's assertion that it had preserved its right to compel arbitration by raising the arbitration agreement as an affirmative defense in its answer.
A defendant must first attempt to convince the plaintiff to arbitrate the dispute. If this fails, the defendant must then include the duty to arbitrate in its answer to the complaint. This can be done by raising arbitration as an affirmative defense, with a motion to compel arbitration following soon after. Alternatively, a defendant can file a motion to compel arbitration instead of a substantive answer, as long as this is done within the deadline for a substantive answer.
If a defendant fails to preserve its arbitration rights during litigation, it may implicitly consent to the court's jurisdiction and waive its ability to have the case dismissed or even to compel arbitration. In Morgan v. Sundance, Inc., the defendant first filed a motion to dismiss, answered the complaint, asserted affirmative defenses, and engaged in mediation, before finally moving to compel arbitration. The Supreme Court held that the right to arbitration can be waived like any other contractual right, and that a federal court interpreting an arbitration clause must apply ordinary procedural rules.
Therefore, a defendant who answers a complaint and fails to invoke an arbitration clause may risk waiving its right to arbitrate, and should be vigilant about asserting this right as soon as a lawsuit begins.
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Delaying the assertion of arbitration rights
Delaying the enforcement of arbitration agreements can lead to undesirable consequences, as courts routinely find a waiver where there have been long delays, significant litigation in court, or where the defendant used arbitration as a strategic tool of last resort. In Garcia v. Haralambos Beverage Co., the California Court of Appeal concluded that an employer waived its right to arbitrate wage-hour claims by delaying two years to seek arbitration as a last resort and waiting to locate the plaintiffs' signed arbitration agreements.
In Morgan v. Sundance, Inc., the defendant, Sundance, owned a Taco Bell franchise and signed an arbitration agreement with its employee, Robyn Morgan, stating that she would arbitrate any employment dispute. However, instead of immediately moving to compel arbitration, Sundance first filed a motion to dismiss, answered the complaint, asserted affirmative defenses, and engaged in mediation. The Supreme Court held that the right to arbitration can be waived like any other contractual right, even if the other party was not prejudiced by the delay.
In another case, the Court of Appeal focused on three key factors: the employer's actions, the delay, and whether the plaintiffs suffered prejudice. The Court held that the employer unreasonably delayed by waiting two years to seek arbitration and that the employer's actions suggested that it "raised arbitration as a belated strategy, if not as a strategy of last resort."
To avoid waiving their right to arbitrate, parties should consider their preferred forum as soon as a lawsuit begins and be vigilant about asserting their right to arbitrate. They should also be mindful of the different approaches taken by courts in different jurisdictions regarding waiver and the right to arbitrate.
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Commencing and/or participating in court litigation
A waiver has legal consequences on an arbitration agreement, rendering it "inoperative" and ceasing to have contractual effects under the general law of contract. In the context of arbitration, waiver falls within Article II(3) of the New York Convention.
In commercial disputes, parties often choose arbitration as an alternative method of resolving their disputes outside of traditional court proceedings. Despite the existence of an arbitration agreement, it is widely accepted that a party's right to arbitrate may be waived by either an explicit contractual provision or its subsequent conduct.
The mere act of answering a complaint does not equate to a waiver of the right to arbitrate. However, it may contribute to an overall appearance of litigation participation, which courts have found constitutes a waiver of arbitration rights. In other words, by commencing and/or participating in court litigation, a party may unintentionally waive their right to arbitrate without raising the arbitration agreement as a defence or requesting a stay of the court proceedings.
The Sixth Circuit Court of Appeals has formulated a two-element test to determine whether a party's conduct constitutes a waiver of a contractual agreement to arbitrate disputes. The Court ruled that a party may waive an agreement to arbitrate by engaging in two courses of conduct: taking actions that are completely inconsistent with any reliance on an arbitration agreement, and delaying its assertion to such an extent that the opposing party incurs actual prejudice.
In Morgan v. Sundance, Inc., the defendant, Sundance, owned a Taco Bell franchise and signed an arbitration agreement with its employee, Robyn Morgan, stating that Morgan would arbitrate any employment dispute. Instead of immediately moving to compel arbitration, Sundance first filed a motion to dismiss, answered the complaint, asserted affirmative defenses, and engaged in mediation. The Supreme Court disagreed with the Eighth Circuit's analysis, holding that the right to arbitration can be waived like any other contractual right – even if the other party was not prejudiced by the delay.
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Refusing to pay arbitration fees
Arbitration is an alternative method of resolving disputes outside of traditional court proceedings. It is a streamlined and cost-effective system. However, the process is not without its financial requirements, and parties must pay arbitration fees for it to proceed. If one party refuses to pay their share of the fees, the other party is faced with a difficult choice: they can either allow the arbitration to be terminated and file a lawsuit in court, claiming that the non-paying party
While refusing to pay arbitration fees does not automatically result in losing the case by default, there are consequences to non-payment. The arbitrator and administrator will not proceed with the arbitration without receiving payment, and the non-paying party will receive persistent phone calls and letters demanding payment. If the fees remain unpaid, the arbitration will be suspended and, soon after, terminated.
In the United States, there is considerable jurisprudence on waiver and the right to invoke an arbitration agreement. Waiver generally refers to the "voluntary relinquishment" or "abandonment of a known right, claim, or privilege". In the context of arbitration, this occurs when a party consciously and intentionally gives up its right to arbitrate a dispute, instead choosing litigation as the preferred method of resolution.
A party's right to arbitrate may be waived either by an explicit contractual provision or by its subsequent conduct. An example of explicit contractual provision is including a waiver clause within a contract. On the other hand, waiver by conduct can occur when a party commences and/or participates in court litigation without raising the arbitration agreement as a defence or requesting a stay of court proceedings.
In the case of Morgan v. Sundance, Inc., the defendant, Sundance, owned a Taco Bell franchise and had signed an arbitration agreement with its employee, Robyn Morgan. However, when Morgan filed a collective action against Sundance, they did not immediately move to compel arbitration. Instead, Sundance filed a motion to dismiss, answered the complaint, asserted affirmative defences, and engaged in mediation. The Supreme Court held that the right to arbitration can be waived like any other contractual right, even if the other party was not prejudiced by the delay.
Therefore, it is essential for parties to be vigilant about asserting their right to arbitrate and to consider their preferred forum as soon as a lawsuit begins.
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Invoking arbitration after engaging in mediation
Mediation and arbitration are both means of resolving conflicts or legal issues outside of the courtroom. They are non-judicial forms of dispute resolution that are more cost-effective and less complex than litigation. In most cases, mediation and arbitration involve attorneys and are faster and less costly than litigation.
Mediation is a good choice if both parties believe they can work together to come to an agreement on their own. It is a flexible, informal, and voluntary process in which a trained, neutral mediator facilitates negotiations and helps the disputing parties reach a mutually acceptable solution. The mediator divides the parties into separate groups and engages in "shuttle diplomacy", moving from room to room with offers, counteroffers, and arguments. The mediator may also offer their own views on the arguments presented and the strength of each side's case. Importantly, the mediator is not a judge or jury and has no power to make a judgment or impose a solution. Instead, the disputants must voluntarily decide to settle, and the mediation will have no effect if they do not.
Arbitration, on the other hand, grants a neutral third party, the arbitrator, the authority to make a final decision about the issue. The arbitrator analyzes the case details and reaches a verdict, which can be binding or non-binding depending on the arbitration contract. The process is more structured and similar to a court case, with each party making an opening statement and presenting their side.
Med-arb is a hybrid mediation-arbitration approach that combines the benefits of both techniques. In this process, the parties first attempt to reach an agreement through mediation, and if they are unable to do so, they then move on to arbitration. The mediator can assume the role of arbitrator (if qualified) and render a binding decision, or a different arbitrator can take over the case after consulting with the mediator. This approach has proven to be effective in getting disputes resolved relatively quickly and amicably. However, it is important to consider the potential concern of sharing confidential information with the mediator, who may ultimately decide the outcome in the arbitration phase.
To invoke arbitration after engaging in mediation, the parties must consent to the transition. This typically occurs when the mediation reaches an impasse and issues remain unresolved. The mediator may suggest mediation, but both parties should be receptive to the idea to avoid the possibility of improper pressure. Once arbitration has been invoked, either party normally has the right to insist that the process be continued to a decision.
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Frequently asked questions
Answering a complaint does not necessarily equate to a waiver of the right to arbitrate. However, it may contribute to an overall appearance of litigation participation, which courts have found can constitute a waiver of arbitration rights.
In the context of arbitration, waiver refers to the voluntary relinquishment or abandonment of a known right, claim, or privilege. A waiver can render the arbitration agreement inoperative, or occasionally null and void.
Courts consider the totality of the circumstances. When considered together—answering a complaint, failing to invoke the arbitration clause, engaging in discovery, and delaying resolution—will likely satisfy a court that the defendant has waived the right to arbitrate.
The Sixth Circuit Court of Appeals formulated a two-element test: (1) taking actions that are completely inconsistent with reliance on an arbitration agreement, and (2) delaying its assertion to the extent that the opposing party incurs actual prejudice.
