By: Thomas S. Tripodianos Published: May 2016

Can the Arbitration Clause be Enforced if Plaintiff is Suing?

Question. My contract provides for arbitration as the dispute resolution motion but plaintiff has sued me.  Can I still enforce the arbitration clause?

Answer. Yes, but you must do so quickly and without extensive participation in the litigation.

The parties entered into an "Agreement for Services" (hereinafter the Agreement). Defendant subsequently terminated the Agreement. Plaintiff sent defendant two separate invoices both of which pertained to work done prior to termination of the Agreement. These invoices went unpaid, as the result of which plaintiff commenced an action to recover the amounts due and owing. Defendant contends that it is entitled to dismissal of the complaint because plaintiff failed to comply with the dispute resolution provision in the Agreement. This provision states as follows:

"The parties desire to resolve certain disputes, controversies and claims arising out of this Agreement without litigation. Accordingly, except in the case of (i) a dispute, controversy or claim relating to a breach or alleged breach on the part of either party of the provisions of [s]ection 11, 'CONFIDENTIAL INFORMATION,' (ii) a suit, action or proceeding to compel [plaintiff] to comply with its obligations to indemnify [defendant] and [its c]ustomers pursuant to [s]ection 18, 'INDEMNIFICATION'…, or (iii) a suit, action or proceeding to compel either party to comply with the dispute resolution procedures set forth in this [s]ection 26, 'DISPUTE RESOLUTION,' the parties agree to use the following alternative procedure as their sole remedy with respect to any dispute, controversy or claim arising out of or relating to this Agreement or its breach….

"At the written request of a party, each party shall appoint a knowledgeable, responsible representative to meet and negotiate in good faith to resolve any [d]ispute arising under this Agreement. The parties intend that these negotiations be conducted by nonlawyer, business representatives. The discussions shall be left to the discretion of the representatives. Upon agreement, the representatives may utilize other alternative dispute resolution procedures such as mediation to assist in the negotiations…..

"If the negotiations do not resolve the [d]ispute within sixty (60) days of the initial written request, the parties may pursue their available remedies in law or equity."

Although it is well established that this State favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties like contract rights generally, a right to arbitration may be modified, waived or abandoned.

Accordingly, a litigant may not compel arbitration when its use of the courts is clearly inconsistent with its later claim that the parties were obligated to settle their differences by arbitration.

The crucial question is what degree of participation by the defendant in the action will create a waiver of a right to stay the action. In the absence of unreasonable delay, so long as the defendant's actions are consistent with an assertion of the right to arbitrate, there is no waiver. However, where the defendant's participation in the lawsuit manifests an affirmative acceptance of the judicial forum, with whatever advantages it may offer in the particular case, his actions are then inconsistent with a later claim that only the arbitral forum is.

Under the circumstances, the defendant has waived its right to compel arbitration under the dispute resolution provision of the Agreement. Defendant clearly reviewed the Agreement upon commencement of the action and — rather than proceeding with a motion to dismiss based upon plaintiff's failure to comply with the dispute resolution provision — defendant moved to change venue under the forum selection clause. Then, when that motion was denied, defendant participated in a preliminary conference, exchanged discovery and established a date for depositions. These actions are not consistent with an assertion of the right to arbitrate. Rather, defendant's participation in this litigation manifests its affirmative acceptance of the judicial forum.

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