Don’t wait to arbitrate! Progressing too far down the litigation pathway can waive your right to arbitration. However, not filing a lawsuit may not toll or pause the statute of limitations in Federal Miller Act or State Little Miller Act scenarios. To preserve your rights, and your options, you may need to concurrently litigate and arbitrate. Considering the prevalence of arbitration clauses in construction contracts, the story in this case is worthwhile.
In the U.S. Supreme Court case of Morgan v. Sundance, 142 S. Ct. 1708 (2022), one party waited too long before asserting its right to arbitrate, so the right was waived, despite no harm to the other party. As part of an employment agreement, an employee agreed to arbitrate instead of litigating disputes. Nevertheless, the employee sued the employer for failure to properly track and pay overtime.
In any litigation, after a complaint is filed by the plaintiff, the defendant must respond. Here, the employer sought dismissal of the lawsuit, but arbitration was not used as a reason for the requested dismissal. After the trial court denied the request, the employer proceeded as it would in any lawsuit by answering the plaintiff’s allegations, asserting written defenses, and scheduling future deadlines.
However, none of the written defenses mentioned that the parties had agreed to arbitrate instead of litigating. After eight months of litigation, the employer sought to arbitrate the dispute.
The Federal District Court of the Southern District of Iowa applied the rule that a party waives its right to arbitration if that party knew of its right, acted inconsistently with that right, and if the other party was prejudiced thereby (i.e., suffered harm). The trial court found there was prejudice. The intermediate appellate court found there was no prejudice.
In a unanimous decision, the U.S. Supreme Court decided it did not matter whether the other party was prejudiced. The Supreme Court resolved a difference of opinions among the Federal Appellate Circuit Courts.
Before this decision, nine Circuits (there are 13 total Circuits across the U.S.) required a showing of prejudice to prove waiver of a right to arbitrate and two Circuits held prejudice was not necessary to prove waiver. Two Circuits had not expressly decided the issue. The federal law is now uniform – no prejudice is required to prove waiver of a right to arbitrate.
The Supreme Court’s rationale was quite simple. Waiver is the “intentional relinquishment or abandonment of a known right.” A right to arbitrate is no greater than any other right. Waiver of an arbitration right is the same as determining waiver of any other right. No special rules or additional elements are needed. Prejudice to the other party is not a necessary part of waiver. The actions of the party asserting the right are relevant. In the waiver context, the effect(s) on others rarely, if ever, matter.
The Supreme Court’s “sole holding” in this case was that federal courts “may not create new procedural rules” for arbitration. This decision did not address waiver of an arbitration right created under state law. Federal courts applying the Federal Arbitration Act are now indifferent to prejudice as an element of arbitration waiver. Federal courts applying a state arbitration act may yet have to determine if there has been any prejudice before deciding if an arbitration right has been waived. As always, the choice of law per the contract will help to determine the applicable rules.
Although this case involved an employee vs. employer, the lessons are the same for any construction contract with an arbitration clause. To preserve your right to arbitrate, assert it early and often. You can usually waive it later. Even if you want to arbitrate, you may need to file a lawsuit to avoid running over a statute of limitations.
After merely filing a lawsuit, courts should then stay (pause) the lawsuit while the parties arbitrate. Progressing too far down the lawsuit path can foreclose the arbitration route.
Jon Straw is a partner with Kraftson Caudle, PLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Straw can be contacted via e-mail at [email protected].
