Waiver of Defendant's Right to Arbitrate by Affirmative Acceptance of Litigation

Plaintiffs sometimes choose to litigate even when the contract between the parties contains a valid arbitration agreement. In such cases, defendants occasionally proceed with litigation instead of compelling plaintiffs to arbitrate, either under a mistaken assumption that they can quickly prevail in litigation or due to their ignorance of the arbitration clause in the contract. Nevertheless, after prolonged litigation, defendants then choose to enforce their right and serve plaintiffs with a notice of intent to arbitrate under N.Y. C.P.L.R. § 7503 and proceed with submitting their claim to the arbitral institution.

However, defendants’ right to compel arbitration and to request a stay of action is not absolute and can be waived.

The law in New York is clear and well defined with regards to this issue: A party engaged in litigation that inherently manifests a preference to judicial proceedings waives its right to arbitrate.[1] Defendants waive their right to arbitrate by affirmatively participating in the judicial proceedings. Contesting the merits through the judicial process is regarded as an affirmative acceptance of the judicial forum and a waiver of any right to arbitrate.[2]

If defendants engage in court litigation, for instance, by filing pleadings in a case, such as a complaint or a counterclaim; by bringing motions on the merits, such as a motion to dismiss or motion for summary judgment; or conducting extensive discovery defendants usually waive their right to arbitrate. Therefore, at that stage of judicial proceedings, the defendants do not have a legal ground to request the stay of the proceedings in favor of arbitration.

New York courts have decided in a number of cases holding that availability of pretrial disclosure devices is a significant distinguishing characteristic between judicial and arbitral proceedings.[3] Parties cannot take advantage of the judicial process by exerting pretrial disclosures generally not available in arbitration and then also seek the benefits of arbitration. “The courtroom may not be used as a convenient vestibule to the arbitration hall so as to allow a party to create his own unique structure combining litigation and arbitration.”[4]

Second Department explained in Willer v Kleinman that “[t]here is no inflexible or mechanical rule as to what constitutes a waiver of the right to arbitrate.”[5] Determination of the issue depends on the facts and circumstances of each particular case. Among the factors to be considered are the extent of the party’s participation in litigation and conduct inconsistent with the assertion of a right to arbitrate, the delay in seeking arbitration, and whether the other party has been prejudiced.

The Court further explained, that while a party who commences an action waives its right to arbitrate, the same cannot be said for a defendant. A defendant who submits an answer, or submits a pre-answer motion to dismiss the action, does not waive arbitration, especially if the arbitrability of the controversy is asserted as a ground to dismiss the action.[6] However, in Willer, the court ruled that defendants, by their conduct, waived arbitration because defendants asserted counterclaims related to issues in the main action, and defendants sought and obtained discovery.

Therefore, defendants, who want to enforce their right to arbitrate to enjoy smooth and efficient resolution of their dispute, should assert their right earlier in the litigation. Otherwise, if defendants have already served answers on the merits and exhausted the tools for discovery, they waive the right to arbitrate and will be forced to litigate the matter.

[1] De Sapio v Kohlmeyer, 35 NY2d 402, 405 [1974].

[2] Id.

[3] De Sapio, at 406.

[4] Id.

[5] Willer v Kleinman, NYS2d 567, 570 [2014].

[6] Id.