Look Before You Leap – Don’t Give Away that Arbitration Agreement

Photo via Pexels
Photo via Pexels

It can happen in any business – a customer or client relationship goes awry and you get sued. This could mean years tied up in an uncertain and expensive court fight.

Fortunately, maybe years ago, your lawyer included an arbitration provision in your business standard terms and conditions. But that agreement is buried in your file under a mountain of purchase orders, shipping confirmations and invoices. Now, you’ve been sued and are facing key court deadlines. What do you do to protect the right to arbitrate?

Good news first – public policy is on your side because arbitration clauses are strongly favored in Ohio. For that reason, it is difficult for your opponent to take away your right to arbitrate. But it can happen, so you need to be vigilant.

When the issue arises, courts consider: (1) any delay in demanding arbitration; (2) the level of participation in the ongoing litigation before demanding arbitration; (3) any response to the complaint without asserting an arbitration demand; and finally, (4) whether the opposing party has been prejudiced by acts inconsistent with arbitration demand. In short, a court is trying to determine whether you have committed to proceeding before the court instead of in arbitration. 

One recent case example is instructive. In that case, a pre-suit letter was sent by counsel for an aggrieved employee (let’s call her “Employee”) to her employer (“Employer”) where Employee’s counsel laid out the facts of potential claims and asked to discuss a resolution via phone. In that letter, it was stated that:

“If [Employee] has executed any documents that attempt to limit her right to pursue a jury trial, and/or reduce the statute of limitations to anything less than prescribed by statute, and/or agreeing to arbitration we demand that you immediately forward any and all agreements to our attention”

Finally, the letter stated:

“Failure to produce any such agreement within thirty days will constitute your implied agreement to waive the option of arbitration and waive any contractual limitations short[en]ing the time to file a complaint”

A legal representative for the Employer answered the letter, providing a preliminary response that briefly disputed the factual claims but did not raise the issue of the Employee’s arbitration agreement with the Employer. 

Employee then filed suit in court. In responding to the complaint, Employer quickly invoked the arbitration agreement and moved to stay the court proceeding. Employee countered asserting that the arbitration agreement was waived through the Employer’s pre-litigation silence on the arbitration agreement in a response to the lengthy pre-litigation letter. 

In weighing the factors, the court found that Employee (rather than Employer) filed the complaint to start a proceeding in the court, Employer did not file a counterclaim; the arbitration agreement was invoked before the time for filing an answer expired; the motion invoking arbitration was the Employer’s only participation in the litigation; and the only alleged prejudice was the cost to file the complaint.

The court agreed with the Employer, finding that Employee’s unilateral deadline and attempt to create a waiver trip-wire was unavailing. The pre-suit letter and response served as a simple informal settlement attempt to resolve the matter prior to filing in court. This was entirely consistent with the arbitration provision which required attempts to informally resolve the matter before the initiation of arbitration. In summary, the preliminary response to the pre-suit letter, standing alone, was not sufficient to show agreed participation in court or meet the high bar of waiver of arbitration.

So what can be gleaned from this real-life case? The key takeaways are straightforward: 

  • Whether you seek outside counsel at the first signs of a dispute or not, it is important to be able to quickly and easily locate the pertinent documents and to keep a possible arbitration provision top of mind.
  • If you do employ outside counsel, ensure that you have provided them with all relevant agreements as soon as possible, or at the very least, provide a heads-up concerning an arbitration provision in play.  
  • While courts and public policy are on your side in upholding an agreement to arbitrate, it is essential to speak up and leave no doubt that you intend to enforce your right to do so. 

This article should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.

Barnes & Thornburg LLP is a national, Midwestern-based business law firm that strives for a more entrepreneurial and cost-effective approach both to client service and its own business. Read more Metropreneurial Legal Insights.