Don't Bet the Business

I write about contracts quite a bit. I’m a lawyer, and I like contracts. I like them not because they are often so long and confusing that my clients need to me just to understand what their rights and obligations actually are; just the opposite. 

I like contracts because, when they are properly prepared, they leave little doubt as to what each side needs to do, expects to receive and, in many cases, what happens when there is a breach.

The courts in Michigan recognize an extremely broad right to contract. As long as the contract is not illegal, or against public policy, the courts likely will honor and enforce the parties’ intended agreement. One of the contractual rights the courts welcome with open arms, and routinely enforce without much of a second thought, is the parties’ right to resolve their legal disputes somewhere other than in a courtroom. 

This type of agreement often takes the form of an arbitration clause or agreement. An arbitration clause is a contract to resolve a dispute through an arbitration proceeding as opposed to a traditional lawsuit and possible public trial. 

The courts often do not concern themselves with when, where or how the arbitration takes place. Trial judges simply know that by enforcing a valid arbitration clause it means they are enforcing the parties’ intention when the contract was made and, as an ancillary benefit, there will be one less case assigned to their docket.

The existence and enforceability of an arbitration clause are questions of law for the trial judge to decide. Once a trial judge concludes that a valid arbitration agreement exists, questions of enforceability must be dealt with.   

One of the most common challenges to the enforceability of an arbitration agreement is that the party seeking to compel arbitration has waived that contractual right. To be sure, because arbitration is highly favored by the courts, the waiver of a contractual right to arbitration is disfavored. "The party arguing there has been a waiver of this right bears a heavy burden of proof and must demonstrate knowledge of an existing right to compel arbitration, acts inconsistent with the right to arbitrate, and prejudice resulting from the inconsistent acts." Madison Dist Pub Schools v Myers, 247 Mich App 583, 588; 637 NW2d 526 (2001). An arbitration waiver can be express or implied.

In Michigan, a waiver may be found purely by a party’s conduct. For example, the courts have ruled that defending a lawsuit, or actually proceeding to a trial, will result in the waiver of a right to arbitrate. However, a waiver can result from actions falling short of proceeding to trial. 

A waiver can be found merely by filing an answer without properly demanding or asserting the right to arbitration.  Similarly, a waiver can occur by filing an answer containing a counterclaim without demanding arbitration. A waiver also can result by filing a counterclaim that is deemed inconsistent with a previous arbitration demand, by filing a third-party complaint or cross-claim, or by taking other litigation steps such as filing a summary disposition motion, when these actions are viewed as being inconsistent with arbitration.  

On the other hand, a party will not be deemed to have waived the right to arbitrate by litigating an issue that is not arbitrable. More significantly, a waiver typically will not be found where the party seeking to show a waiver cannot demonstrate prejudice by the actions constituting the waiver. Unfortunately, “prejudice” is rarely a purely objective finding. 

Actual prejudice is a matter of a trial judge’s discretionary interpretation. For example, prejudice has been found where a plaintiff files a lawsuit that the defendant actively litigates for an extended period before seeking to compel arbitration; actively litigating for over a year seems to be a benchmark of sorts.

On the other hand, the courts have determined that prejudice is lacking when the arbitration is demanded a few months after the lawsuit is filed. And even when the passage of time spells prejudice because of the costs incurred, that perceived prejudice sometimes can be rectified by an order requiring the payment of costs, clearing the way to move the case to arbitration. Each case will be different. 

The point being, if you take the time to include an arbitration clause or agreement as part of your contract, the decision to litigate or proceed with arbitration is one that should be made as early as possible. It is a decision that often has business considerations as well as significant litigation strategy implications as you and your attorney work together to get out of whatever you have gotten into. The right to arbitrate does not always mean arbitration is in your best interest. 

Preserving the option to choose, however, is always preferred and should be protected. Make sure that you and your attorney know how and act accordingly.