When Is a Mandatory Arbitration Provision Waived?

Arbitration is consensual, meaning the parties must agree to arbitrate a dispute. The typical means of agreeing to arbitrate is through the contract itself, which could have a mandatory arbitration provision. However, since arbitration is generally not a legal requirement, the parties may waive their right to arbitration.

A recent court of appeals case arising in El Dorado had a very good discussion of the waiver of the arbitration provision. Although the case dealt with a purchase and sale, and a lease, the law would be the same in construction contracts.

You should note that there are certain things arbitrators can't decide. As an example, an arbitrator cannot order the foreclosure on a mechanics' lien.

Therefore, when there is a recorded mechanics' lien and an arbitration provision, in order to foreclose on the mechanic's lien, one must file a civil suit. The attorney must place somewhere in the complaint (typically the prayer) a request to "stay" the civil court proceeding pending the mandatory arbitration. One must also make a motion asking for the foreclosure matter to be "stayed" pending contractual arbitration.

In this way, the lawsuit will not proceed while the parties arbitrate the other issues. After the arbitration, the award of the arbitrator will then be taken to the court, which should do whatever is appropriate, based on the award with respect to the mechanic's lien. As an example, if there is a mechanics' lien in the amount of $10,000 but the arbitrator only awards $8,000, then the judgment on the mechanics' lien foreclosure action would be to sell the property and pay the claimant from the proceeds, up to $8,000.

The Vicki Simms et al. v. NPCK Enterprises Inc. et al. case concerned a contract between the parties that had a mandatory arbitration provision. There were certain things that the plaintiff wanted to do that may or may not have been available in arbitration. Therefore, the plaintiff put in her complaint an arbitration allegation but did not ask for a stay and asked that superior court make certain orders that may or may not have been within the power of an arbitrator. The plaintiff then sought mandatory arbitration.

The defendant argued that by filing the complaint in court and requesting certain things that may not have been within the powers of the arbitrator, the plaintiff waived her right to arbitration. The appellate court discussed the waiver issue.

The appellate court confirmed that there is a strong public policy favoring arbitration absent a waiver. In deciding if there was a waiver of the arbitration clause, the appellate court held that in addition to any alleged waiver, there must also be a showing that there is some prejudice to the other side. The fact of the waiver must be viewed in light of the strong public policy favoring arbitration and a party claiming the waiver has a heavy burden.

Some of the things that would be looked at are how far the litigation had gone, if the litigation machinery has been substantially invoked, whether anyone asked for arbitration and when, and whether there was a counter-claim filed.

Probably, and most importantly, the courts will examine whether there is a delay and whether the delay "affected, misled, or prejudiced" the opposing party.

In this case, the appellate court held that there was no prejudice to the other party and therefore no waiver of the right to arbitrate.

Abdulaziz is an attorney with North Hollywood-based Abdulaziz & Grossbart. The firm's Web site is www.aglaw.net, its e-mail is ino@aglaw.net.