Arbitration Provisions in Contract May be Waived by Inconsistent Acts

Arbitration Provisions in Contract May be Waived by Inconsistent Acts

By Michael R. Fortney, Esq.

Generally speaking, disputes between parties can be resolved through courts (also known as litigation), or through alternative dispute resolution (ADR, which could mean arbitration or mediation). While mediation is non-binding (meaning neither party is forced to accept the resolution proposed by the mediator), arbitration is binding (meaning the decision of the arbitrator carries the same weight as the decision of a judge).

Arbitration differs from litigation (court) in two important ways that many companies find appealing. First, arbitration is private, meaning the proceedings and the outcome are typically shielded from the public. Many companies prefer this type of dispute resolution because companies can achieve legally binding resolution without airing their dirty laundry to the public. Second, arbitration generally proceeds at a much quicker pace than litigation in court. Litigation often takes over a year to achieve a final resolution (and sometimes multiple years) while arbitration proceedings typically take less than six months from start to finish (and sometimes less than three months). For these reasons, many companies choose to include arbitration provisions in their agreements.

However, arbitration provisions can be waived when companies act “inconsistently” with the provision. Most of the time, inconsistency simply means the company engages in litigation, as opposed to arbitration, either by filing a complaint or some other claim in court, or by failing to ask a court to push the case out of court and into arbitration. But companies can also act “inconsistently” by refusing to engage in the arbitration process altogether.

In a recent Ohio Court of Appeals, a company case did that. In Fayette Drywall, Inc. v. Oettinger, 2020-Ohio-6641, Flapjack Holding Company was the owner/developer of a construction project and involved in a dispute with its general contractor, RSI. The contract between them contained an arbitration provision. After RSI sued in court, Flapjack initially did everything right and acted “consistently” with its right to arbitration. Flapjack did not respond substantively to RSI’s claims, and instead asked the court to postpone the case in favor of arbitration.

However, once the matter was sent to arbitration, Flapjack then failed to act consistently. Flapjack failed to timely execute an arbitration agreement, failed to pay the required arbitration deposit, and failed to timely secure new counsel after its original counsel withdrew. Taken together, the trial court found that Flapjack acted “inconsistently” with its contractual right to arbitrate, and the trial court held that Flapjack waived the arbitration provision.

If companies wish to use the arbitration process as a means to avoid litigation and courtrooms, those companies must do everything they can to assert their right to arbitration at the initial stages and throughout any dispute. Failure to act consistently with the right to arbitrate – even after a Court has referred a matter to arbitration – could lead a court to find a waiver of the arbitration provision.

 

This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.