Arbitration Article No. 9

A LIMITATIONS DEFENSE IS FOR ARBITRATORS TO DECIDE

Recently decided Wagner Construction Company v. Pacific Mechanical Corporation (2007) 41 Cal.4th 19 held that a statute of limitations defense in contractual arbitrations is for the arbitrator and not the court to decide. The opinion is more useful for the primer it provides on the waiver of arbitrable rights. It also threw out a one-liner that presages a further Supreme Court decision as to arbitration procedure.

After filing a long-delayed breach of contract action against Pacific Mechanical, Wagner Construction moved to compel arbitration of the dispute. The trial court, finding that Wagner’s claims were barred by the statute of limitations, denied the petition. The Court of Appeal affirmed the denial on the ground that Wagner had waived its right to demand arbitration within a reasonable time pursuant to C.C.P. sec. 1281.2, subdivision (a) (which permits a court to deny a petition to compel if it determines that “[t]he right to compel arbitration has been waived by the petitioner …”), notwithstanding that the parties had not argued and the trial court had not considered the issue.

The Supreme Court quickly resolved the limitations question, finding the argument “[t]hat the statute of limitations has run on the underlying claims … is not among the legislatively or judicially recognized justifications for denying a petition to compel. Instead, (it) is an affirmative defense that falls naturally within the plain language of the parties’ broad agreement to submit to arbitration ‘any dispute arising out of’ their contract.” (Id. at p. 26.)

The Court then reminded practitioners that delay in demanding arbitration and the running of statutes of limitations for the underlying substantive claims are quite different, with the former possibly justifying the denial of a petition to compel and the latter creating only an affirmative defense. To make that point clear, it reviewed some of the reasons for denying a petition to compel, including that it must be brought within four years after the opposing party has refused to arbitrate (id. at p. 30) and that a party waives the right to compel arbitration by failing to demand it within statutory or contractual time limits. (Ibid.) Moreover, even “[w]hen no time limit for demanding arbitration is specified, a party must still demand arbitration within a reasonable time.” (Ibid.) “[W]hat constitutes a reasonable time is a question of fact, depending upon the situation of the parties, the nature of the transaction, and the facts of the particular case.” (Ibid.)

Wagner criticized the Court of Appeal for concluding that Wagner Construction’s failure to demand arbitration before the statute of limitations had run on the contract cause of action justified a waiver finding. “[N]o single test delineates the nature of the conduct that will constitute a waiver of arbitration. (Citations omitted.) A wide range of factors are relevant, as we have explained: ‘In determining waiver, a court can consider “(1) whether the party’s actions are inconsistent with the right to arbitrate; (2) whether ‘the litigation machinery has been substantially invoked’ and the parties ‘were well into preparation of a lawsuit’ before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) ‘whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place’; and (6) whether the delay ‘affected, misled, or prejudiced’ the opposing party.”‘” (Id. at pp. 30-31; citations omitted.)

Wagner reaffirmed as well that the burden on the party attempting to establish a waiver of arbitration is high: “[W]aivers are not lightly to be inferred and the party seeking to establish a waiver bears a heavy burden of proof” (id. at p. 31) and “California law, ‘like [federal law], reflects a strong policy favoring arbitration agreements and requires close judicial scrutiny of waiver claims.’” (Ibid).)

The Supreme Court also suggested, in recognizing the possibility that some arbitrators may rely on “broad principles of justice and equity” rather than legal principles, that “The parties may avoid this risk, if they wish, by specifically agreeing that the arbitrators must act in conformity with rules of law.” (Id. at p. 29.) The Court, however, did not take the next step and discuss the remedy if arbitrators fail to abide by the requirement that they follow the law. This omission, as analyzed below, may have been intentional.

In Arbitration Insight no. 5, I wrote that Baize v. Eastridge Companies (2006) 142 Cal.App. 4th 293 held that the parties’ agreement to judicial review of questions of law is an exception to the rule of finality of an arbitrator’s decision. Then, in Arbitration Insight no. 6, I observed that Cable Connection, Inc. v. DIRECTV, Inc. (2006) 143 Cal.App.4th 207, which was decided shortly after Baize, provides otherwise – “that parties cannot contractually expand the jurisdiction of the trial courts to permit review of arbitration awards for legal error.” I concluded that “Since the Supreme Court has not decertified either Baize or Cable Connection, it would appear that it is comfortable with the status of the law, which is that a majority of appellate decisions interpreting Moncharsh have found that it does not allow parties to an arbitration to contractually allow a trial court to review an arbitrator’s reasoning or legal conclusions.” Therafter, the Supreme Court granted a hearing in Cable Connect. My guess, based on the Court’s strong preference for both arbitration and the finality it brings, is that it will affirm Cable Connect and disapprove Baize. Stay tuned.

Copyright Michael D. Marcus, August 2007

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