The Critical Path: Tools for Resolving Construction Disputes : California Construction Lawyer & Attorney for Dispute Resolution in Los Angeles, San Diego & the S.F. Bay Area

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The right to arbitrate a dispute can be waived. One way to waive arbitration rights is to sit on them, figuratively speaking, of course. By sit on them, I mean delay enforcement of the right or take steps that leads the other side to believe you do not intend to arbitrate the dispute. In a recent unpublished opinion (meaning, the case can't be cited in legal pleadings or used in oral argument as persuasive authority), the California Court of Appeal addressed the waiver issue. The case is important to the The Critical Path because the facts present a common set of circumstances that can result in a waiver. Therefore, even though the opinion is unpublished, it is instructive, and it is helpful in that it refers to most of the published California opinions on the subject. Click here to read the opinion.

Here's What Happened

Thompson Building Materials was a defendant in a construction defect case. The homeowners alleged the stone pavers provided by Thompson cracked and deteriorated due to latent defects, and that debris from the defective material damaged the pool filter and pump system. Thompson filed an answer to the complaint and participated in court-ordered proceedings, discovery, and a mediation. A week before the discovery cut-off and a month before trial, Thompson filed a motion to compel arbitration, claiming that it had recently discovered an arbitration provision on the back of the invoices for the sale of the building materials.Apparently, when the invoices were copied, only the front side was copied, leaving the backside boilerplate, including the arbitration provision, uncopied.

In support of the motion to compel arbitration, Thompson's counsel informed the trial court that

although he had-known of these invoices and had been-litigating these invoices for probably 20 years, his associate (to whom he had delegated the responsibility of responding to plaintiffs discovery) had not, and-she simply didn't know any better in terms of knowing there should have been a back side on [the invoice]. 

 Plaintiff homeowners opposed the motion to compel, arguing Thompson waived the arbitration provision by participating in the litigation for over a year and that plaintiffs were prejudiced by the fact that Thompson was attempting to compel arbitration of a case that was only a month away from trial. Plaintiffs also argued that they were prejudiced because Thompson obtained information in discovery that it would not have been able to obtain in arbitration.

 The trial court granted the motion to compel arbitration, and the homeowners filed a petition for writ of mandate. The Court of Appeal held the trial court's order was not supported by substantial evidence and granted the homeowners' petition. The court concluded Thompson had waived its arbitration rights:

Although there is no uniform test for determining whether a party‘s conduct amounts to a waiver of the right to arbitrate, the courts have formulated a list of factors that are relevant in making that determination. These include ‗―(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.(St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1196, quoting Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, 992.)

Thompson‘s conduct in this case satisfies virtually all of these factors and compels a finding of waiver. Thompson did not raise arbitration as an affirmative defense in its answer. (SeeGuess?, Inc. v. Superior Court, supra, 79 Cal.App.4th at pp. 557-558.) Thompson participated in the litigation for nearly a year. In opposition to Thompson‘s motion, plaintiffs‘ counsel submitted a declaration in which he listed 54 items plaintiffs considered to be ―significant litigation activities by the parties. Nearly half of these items are discovery propounded by Thompson. The parties designated expert witnesses; Thompson‘s expert inspected plaintiffs‘ property in June 2009 and March 2010. The parties also participated in a case management conference in September 2009 and court ordered mediation in February 2010. Suffice it to say, ―the litigation machinery has been substantially invoked and the parties ―were well into preparation of a lawsuit before Thompson notified plaintiffs that it would seek to compel arbitration.  

Lessons to be Learned

Usually, the decision to include an arbitration provision in a contract is the result of a deliberative decision making process. Therefore, when a claim arises, it would be wise to take steps to preserve that right, or at least, consider your options. You may want to create a checklist that could include one or more of the following points:                                                                                                                                                

• make sure there is  a written contract
• assume the contract has a dispute or claims clause and check to see if there is an arbitration provision
• decide if the arbitration provision should be enforced or waived, if it is believed that litigation would be more advantageous under the circumstances of the claim
• decide if there are mechanics lien rights, statute of limitations issues, or other equitable remedies that must be preserved by filing a lawsuit, then seek a stay of the action, and proceed with the parts of the claim that are subject to arbitration.                                                                                                                                                      

You might also want to be sure that both sides of documents are copied before providing them to your attorney or to the other side. You would be surprised how many times issues seem to disappear simply because both sides of documents are inadvertently not copied.