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Company Can't Assert Arbitration Clause After Filing Lawsuit

By Mark Wilson, Esq. on December 03, 2014 | Last updated on March 21, 2019

When Joca-Roca Real Estate and Robert Brennan entered into a contract back in 2005, the contract contained an arbitration clause. No biggie: Arbitration clauses are everywhere, especially now that we know they trump state contract law in some important ways.

But what else do they trump? Do they trump the common law doctrine of waiver? No, they don't, said the First Circuit Court of Appeal in a case decided Monday.

An About-Face

When there was a dispute about the purchased property, Joca-Roca sued Brennan in federal court under diversity jurisdiction. Still no problem there. Defendant answered the complaint, there was some discovery, and seven months later, everyone was instructed on the deadlines for trial and for their summary judgment motions.

Then Joca-Roca threw a wrench into the machine, filing a motion to stay the proceedings pending arbitration. That's right: Eight months into the process, Joca-Roca decided it wanted to pursue arbitration instead.

Too bad, so sad, that's no longer an option, said the First Circuit, agreeing with both a federal district judge and a magistrate judge. "Generally speaking, what contracting parties take they can give away -- and parties to a contract normally are free to waive the right to arbitration," the court said.

Judge Selya Is Not Amused

Even though federal law favors enforcing arbitration agreements, failure to assert a right to arbitration isn't dispositive; "[t]hat determination is informed by a salmagundi of factors" (thanks, Judge Bruce Selya, for again using what's apparently your favorite word). Many of these factors deal with prejudice to the party claiming waiver. Selya wasn't impressed with Joca-Roca's "belated resort to arbitration" eight months after filing the suit, especially given that a trial was two months away and summary judgment motions were set to be filed at the end of the month.

But more to the point, because Joca-Roca didn't explain why it suddenly wanted to resort to arbitration, Selya inferred what we've all been thinking: "[T]he change in direction may well reflect the plaintiff's dissatisfaction with the way the court case was proceeding -- and we do not condone the use of an arbitration clause as a parachute when judicial winds blow unfavorably."

Joca-Roca argued there was no prejudice, because Brennan would have undergone the same types of discovery in arbitration that he did in federal court. Selya didn't like that argument either, noting that "the plaintiff's belated about-face deprived the defendant of any opportunity to tailor his discovery strategy to the much different demands of arbitral proceedings." And even if discovery weren't an issue, the time and money Brennan already spent defending in court "would support a finding of prejudice, whether or not the scope of discovery was the same in arbitration as in federal court."

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