Thursday, August 12, 2010

Scope of Arbitration Clauses and Waiver of Rights to Arbitration

In some cases, plaintiffs may be able to force a dispute into a court proceeding even though an arbitration agreement between the parties controls and even though the defendants may argue that an arbitration clause divests the court system of its jurisdiction over the dispute seeking to have the matter resolved through arbitration instead of a trial by jury. The pros and cons for having disputes heard in mediation, arbitration, or judicial proceeding will be the topic of a future Colorado Construction Litigation blog entry. The following discusses the court’s method for determining the scope of an arbitration agreement and whether or not a party has waived its rights to enforce the arbitration clause. These were the issues in the recent U.S. District Court decision, Stone v. Vail Resorts Development Co., 2010 WL 2653314, 5 (D.Colo.).

In that case, the plaintiffs purchased a condominium from defendants and alleged that they were promised assigned parking spaces, but that defendants secretly substituted a document that only provided for valet parking. Plaintiffs’ allegations included breach of contract and violation of the Colorado Consumer Protection Act (“CCPA”) claims, among others. After plaintiffs instituted the lawsuit, defendants filed a motion, arguing that an arbitration clause in the Condominium Declarations governed “all claims arising out of the interpretation, applications or enforcement” of the Declaration. In response, plaintiffs argued that their claims did not arise out of the arbitration agreement, that defendants waived their right to arbitration, and that plaintiffs’ CCPA claims were not subject to arbitration.

In its order, the court discussed the broad support for arbitration agreements, citing prior cases referring to a “strong federal policy encouraging the expeditious and inexpensive resolution of disputes through arbitration.” The order further stated that “Courts must interpret arbitration clauses liberally, and all doubts must be resolved in favor of arbitration.”

In deciding whether [laintiffs’ claims were subject to the arbitration agreement, the court began its analysis as to whether the particular clause was narrow or broad. If the clause is narrow, then only the limited subject is subject to arbitration and other disputed matters would be determined to be outside the arbitration agreement’s purview. If the clause is broad, then a presumption arises of arbitrability, including even collateral issues. The Declaration called for “all Claims arising out of or relating to the interpretation, application, or enforcement of this Declaration. . . .” Plaintiffs argued that their claims did not arise out of the Declaration, but out of promises by defendants related to parking rights. The court disagreed, focusing on the phrase "arising out of or relating to," as evidence of the parties intent to apply the clause broadly, and that plaintiffs’ claims fell within the scope of the arbitration provision.

Plaintiffs argued that defendants waived their rights to compel arbitration because defendants did not assert their right to arbitration as an affirmative defense in their answer to plaintiffs’ complaint. The court cited six factors to consider when determining whether a party has waived such rights:

(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.

The court remarked that defendants filed their motion to compel arbitration approximately 75 days after being served with plaintiffs’ complaint, and that defendants raised the issue of arbitration in initial disclosures and a scheduling conference. Therefore, the court found that defendants acted consistently with their rights to arbitration, that the defendants did not request arbitration as a delay tactic or to mislead or prejudice the plaintiffs.

Although plaintiffs argued without citing any persuasive authority or support that their CCPA claim was not subject to arbitration, the court disagreed. The court stated that plaintiff’s claims were based on promises regarding parking rights set out in the purchase of their condominium and the Declaration, and found that these claims were also subject to arbitration.

Stone v. Vail Resorts Development Co. is a recent example of numerous decisions where arbitration clauses are a favored method of dispute resolution. This is a trial court order only in and is not binding authority, but it is instructional, nonetheless. An earlier Colorado Supreme Court case, City and County of Denver v. District Court In and For City and County of Denver, 939 P.2d 1353 (Colo. 1997), utilized the same six factors in its determination that an alternate dispute resolution provision in a contract had not been waived.

Courts generally will resolve doubts in favor of arbitration. However, when preparing a contract with an arbitration clause, one should take care that the clause is as broad as needed. Further, if named as a defendant in a dispute where an arbitration agreement may govern, the defending party should assert early and often its right to arbitration, in order to enforce and preserve that right.

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The information contained in this blog is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter.