Contract disputes are often governed by arbitration clauses. The purpose of arbitration is to have a simple, quick, and efficient method to resolve controversies. (Molecular Analytical Systems v. Ciphergen BioSystems (2010) 186 Cal.App.4th 696.) Failing to act promptly, however, may lead to waiver of the parties’ right to arbitration.
A Party May Waive Its Right to Arbitrate
The right to compel arbitration arises from the parties’ contract and, as with other contractual rights, is subject to waiver. Such waiver may be express or implied from the parties’ conduct. (See C.C.P. § 1281.2, and Davis v. Blue Cross (1979) 25 Cal.3d 418, 425.) Waiver of the right to arbitrate “does not require a voluntary relinquishment of a known right . . .” (Burton v. Cruise (2010) 190 Cal.App.4th 939, 944.)
Generally, when a party seeks to establish a claimant has waived its right to arbitrate, it must demonstrate: 1) knowledge of an existing right to compel arbitration, 2) acts inconsistent with that existing right, and 3) prejudice to the party opposing arbitration. (U.S. v. Park Place Assocs. (9th Cir. 2009) 863 F.3d 907, 921.) The party seeking to establish waiver bears the burden as the law favors arbitration and will err accordingly. (Saint Agnes v. PacifiCare (2003) 31 Cal.4th 1187, 1195.)
A Responding Party May Waive Its Right to Compel Arbitration
If a claimant files suit in California state court to enforce a contract term, the respondent must file a timely motion to compel arbitration if it wishes to take advantage of the ADR (Alternative Dispute Resolution) process prescribed in the contract. The motion to compel arbitration is usually filed concurrently with a motion to stay litigation pending arbitration. (See Twentieth Century Fox v. Sup. Ct. (2000) 79 Cal.App.4th 188, 195.)
A motion to compel arbitration, however, may be denied where the moving party delays its motion until after taking advantage of discovery that would not have been available in arbitration, thereby prejudicing the claimant. (Zamora v. Lehman (2010) 186 Cal.App.4th 1, 17.) In this scenario, the responding party will be forced to litigate the contract dispute in state court.
Waiver by Unreasonable Delay
A party may waive its right to arbitrate by making an untimely demand, even when there is no intent to forgo arbitration. In this circumstance, waiver is similar to “a forfeiture arising from the nonperformance of a required act.” (See Platt Pacific v. Andelson (1993) 6 Cal.4th 307, 310-311 [holding that waiver of arbitration for failure to make a timely demand cannot be excused by the absence of an intent to waive].) When the contract is silent as to the time period to demand arbitration, the parties are required to make the demand within a “reasonable time.” (Allstate v. Gonzalez (1995) 38 Cal.App.4th 783, 790 citing Spear v. California State Auto. Assn. (1992) 2 Cal.4th 1035, 1043.) An unreasonable delay thereafter in demanding arbitration waives the right to arbitrate. (Allstate, supra at 790-793.)
In Allstate v. Gonzalez, the petitioner, Mr. Gonzalez, was injured in a July 1986 automobile accident. One year later, Mr. Gonzalez filed a personal injury action against the putative defendants – whom he subsequently learned were uninsured. Mr. Gonzalez informed his insurance carrier (and respondent), Allstate, of his resultant uninsured motorist claim in March of 1989. In October of 1989, Allstate advised Mr. Gonzalez to file a demand for arbitration. Over the next three years, Allstate and Mr. Gonzalez (through his various counsel) exchanged at least seven letters specifically discussing the pending arbitration. Mr. Gonzalez finally filed his demand for arbitration nearly three years later, in February of 1992. (Id. at 790-791.)
Thereafter, Allstate filed a declaratory relief action arguing, inter alia, Mr. Gonzalez waived the right to arbitrate his uninsured motorist claim via unreasonable delay in filing his arbitration demand. (Id. at 787.) After hearing the declaratory relief action, the trial court issued a statement of decision declining to address Allstate’s waiver defense. (Id. at 787-788.) Allstate appealed to the California Court of Appeal, Second District. (Id. at 789.)
The appellate court began by observing that, because the essential facts were undisputed, the issue of unreasonable delay by Mr. Gonzalez in demanding arbitration was a question of law for the court to decide. (Id. at 790 citing Fullerton Union High School v. Riles (1983) 139 Cal.App.3d 369, 383.) The appellate court went on to hold that Mr. Gonzalez’s decision to wait nearly three years after learning he needed to arbitrate the matter to file his demand for arbitration constituted unreasonable delay and, therefore, waived his right to arbitrate. (Id. at 792.) While there is no bright line test for the time period constituting unreasonable delay, Allstate provides a strong foundation for respondents to establish waiver after three years of unjustified delay.
Respondent’s Failure to Demand Arbitration Is Not a Defense
Generally, a claimant seeking arbitration after an unreasonable delay may not rely on the respondent’s failure to demand arbitration to avoid waiver. Although both parties have the right to demand arbitration, the burden of prosecution always rests with the claimant. (Allstate, supra at 792 citing Shumpert v. Tishman Co. (1988) 198 Cal.App.3d 598, 603.) Thus, the court reasoned, Mr. Gonzalez could not avoid the consequences of his own lack of diligence by attempting to shift to Allstate the responsibility for pursuing arbitration of Mr. Gonzalez’s claim. (Allstate, supra at 793.)
Unreasonable Delay, In Itself, Constitutes Prejudice to Respondent
A claimant defending against a waiver argument is likely to rely on authority like U.S. v. Park Place Assocs. (9th Cir. 2009) 863 F.3d 907 to contend a party seeking waiver of a right to arbitration must demonstrate: 1) knowledge of an existing right to compel arbitration, 2) acts inconsistent with that existing right, and 3) prejudice to the party opposing arbitration. (Id. at 921 and see e.g. Spear v. California State Auto Assn. (1995) 38 Cal.App.4th 783, 1043-1044.) Claimant will, thereby, argue the respondent cannot establish waiver unless the respondent also establishes prejudice independent of the unreasonable delay.
The appellate court in Allstate directly addressed and rejected this argument. Mr. Gonzalez argued Allstate was not prejudiced by his delay in demanding arbitration. The court, however, relied on Spear, supra holding prejudice is a factor to weigh only when the claimant has been diligent. Because Mr. Gonzalez’s delay was so protracted, it was unnecessary to address whether Allstate established prejudice. (Allstate, supra at 793.) In other words, unreasonable delay alone establishes the prejudice otherwise required for waiver. (Id., and see also e.g. Burton v. Cruise (2010) 190 Cal.App.4th 939, 619-620 and 621 [confirming delay alone constitutes prejudice as delay circumvents the expected benefits to be achieved from a speedy arbitral forum].)
Under certain circumstances, a claimant’s unreasonable delay can, in itself, lead to waiver of the right to arbitrate. While California courts have yet to provide a concrete deadline, an unreasonable delay of three years provides a sound basis to pursue waiver.
ABOUT THE AUTHOR: Mr. Felderman is a graduate of University of Iowa School of Law. He specializes in general liability, professional liability, and business litigation. Contact him at firstname.lastname@example.org.
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