New York Law Review

Tag: Arbitration Waiver

  • Stark v. Molod Spitz DeSantis & Stark, P.C., 9 N.Y.3d 59 (2007): Determining Waiver of Right to Arbitrate

    9 N.Y.3d 59 (2007)

    A party waives its right to arbitrate when it actively participates in litigation in a manner inconsistent with an intent to arbitrate, but actions to preserve the status quo or address urgent needs do not necessarily constitute waiver.

    Summary

    Linda Stark, a former partner at Molod Spitz DeSantis & Stark, sued the firm for breach of contract, gender discrimination, and other claims after her termination. The firm initially participated in a special proceeding and related court actions regarding client files and fees, before moving to compel arbitration based on an employment agreement. The New York Court of Appeals held that the firm’s prior actions in court did not constitute a waiver of its right to arbitrate, as those actions were primarily aimed at resolving immediate issues related to client representation and fees, and the firm had reserved its rights. The case was remitted to the Appellate Division to determine if the gender discrimination claim was arbitrable.

    Facts

    Linda Stark was a contract partner at Molod Spitz DeSantis & Stark. Her employment agreement contained an arbitration clause for all disputes. After the firm terminated Stark, she removed files and solicited clients. Stark initiated a special proceeding seeking client file access, fee arrangements, and unpaid wages. The firm opposed the application and cross-moved for retaining and charging liens and other reimbursements, but did not initially seek to compel arbitration. A stipulation was reached regarding client files and disbursements, with a mutual reservation of rights. Stark then filed a plenary action alleging breach of contract, gender discrimination, and defamation.

    Procedural History

    Stark initiated a special proceeding, followed by a plenary action. The firm moved to dismiss or compel arbitration in the plenary action. Supreme Court dismissed some claims, compelled arbitration on the gender discrimination claim, and denied Stark’s cross-motion to stay arbitration. The Appellate Division reinstated dismissed claims, denied the motion to compel arbitration, and granted Stark’s cross-motion to stay arbitration, finding the firm had waived its right to arbitrate. The Court of Appeals granted leave to appeal on the arbitration issue.

    Issue(s)

    Whether the law firm waived its right to compel arbitration by participating in a special proceeding and related court actions before moving to compel arbitration in a subsequent plenary action.

    Holding

    No, because the firm’s actions in the initial special proceeding and related court actions were primarily focused on resolving urgent, practical issues related to client representation and fees, and the firm had included a mutual reservation-of-rights clause in the stipulation.

    Court’s Reasoning

    The Court of Appeals recognized New York’s strong public policy favoring arbitration. However, the right to arbitration can be waived if a party’s actions are inconsistent with an intent to arbitrate. Citing De Sapio v. Kohlmeyer, 35 N.Y.2d 402, 405 (1974), the Court emphasized that waiver occurs when a party’s participation in litigation “manifests an affirmative acceptance of the judicial forum.” The Court distinguished the firm’s actions from a waiver, noting that the initial court actions were prompted by Stark’s application for emergency relief regarding client files and fees. The stipulation minimized interruption of Stark’s client representation. The Court stated, “Notably, the motions in the trial courts seeking attorneys’ fees and disbursements were contemplated by the stipulation, and the firm’s only other affirmative motion subsequent to the stipulation sought to enforce it.” The mutual reservation-of-rights clause in the stipulation also preserved the firm’s right to demand arbitration for other claims. The Court remitted the case to the Appellate Division to determine whether Stark’s gender discrimination claim was arbitrable. The Court reasoned that the firm’s actions were consistent with an attempt to preserve the status quo and address immediate needs, rather than an affirmative acceptance of the judicial forum for resolving all disputes.

  • Sherrill v. Grayco Builders, Inc., 64 N.Y.2d 261 (1985): Loss of Right to Arbitration by Litigating the Dispute

    Sherrill v. Grayco Builders, Inc., 64 N.Y.2d 261 (1985)

    A party waives its right to arbitration when it actively participates in litigation involving the same claims, manifesting a preference for a judicial forum over arbitration.

    Summary

    This case addresses whether a party’s right to arbitrate a dispute can be lost through extensive participation in litigation. The Court of Appeals held that Gray, by actively litigating claims that were subject to arbitration, demonstrated a clear preference for litigation, thus waiving the right to compel arbitration. The court emphasized that a party cannot use the court system as a “vestibule to the arbitration hall” by pursuing litigation and then later attempting to switch to arbitration.

    Facts

    The dispute arose from a 1972 limited partnership agreement (RPC Agreement) for a housing project. The agreement included an arbitration clause for disputes between partners. A second agreement in 1975 had a similar clause. In 1976, a series of informal documents were created, allegedly modifying the partnership, which led to disputes regarding Sherrill’s withdrawal from the partnership. Sherrill initiated a lawsuit in 1978, and for nearly three years, the litigation proceeded without any mention of arbitration. Gray actively participated in the lawsuit, including discovery and depositions, before demanding arbitration in 1981. He simultaneously pursued the litigation and sought arbitration.

    Procedural History

    Sherrill initially sued to rescind an agreement. Gray answered and actively litigated the case for three years. Gray then served arbitration demands while continuing the litigation. Sherrill commenced a second action. The lower court consolidated the suits and stayed arbitration, concluding the parties had chosen the courtroom for resolution. The Appellate Division affirmed. This appeal followed, addressing the stay of arbitration.

    Issue(s)

    Whether Gray, by actively participating in litigation involving the same claims that were subject to arbitration, waived his right to compel arbitration.

    Holding

    Yes, because Gray’s litigation activity manifested a preference clearly inconsistent with a later claim that the parties were obligated to settle their differences by arbitration. His actions constituted an election to litigate rather than arbitrate.

    Court’s Reasoning

    The Court of Appeals reasoned that the right to arbitration, like other contract rights, can be modified, waived, or abandoned. Gray’s extensive participation in litigation, including discovery and motion practice, demonstrated a clear intent to resolve the dispute in court, thus waiving his right to arbitration. The court emphasized that the pivotal issue in both the litigation and the proposed arbitration was the modification of the underlying agreements by Sherrill’s attempted withdrawal from the partnership, an issue arising directly from the agreements subject to arbitration.

    The court distinguished cases where litigation was necessary to preserve the status quo or involved entirely separate claims. Here, the core issue was the same in both the litigation and the arbitration demands. The court quoted De Sapio v. Kohlmeyer, stating, “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.” The court stated that measures taken to assert a right to arbitrate must occur before the right is forfeited, stating, “Once the right to arbitrate a particular dispute has been lost by an election to litigate it cannot be recaptured.”

  • Allied Bldg. Inspectors v. Office of Labor Relations, 45 N.Y.2d 735 (1978): Waiver of Arbitration Rights by Litigating Subject Matter Jurisdiction

    Allied Bldg. Inspectors Local 211 v. Office of Labor Relations, 45 N.Y.2d 735 (1978)

    A party does not waive its right to arbitration by initially contesting subject matter jurisdiction in court, provided such action is consistent with an intention to arbitrate and the arbitration remedy is asserted without unreasonable delay after the jurisdictional issue is resolved.

    Summary

    This case addresses whether the City of New York waived its right to compel arbitration by first removing a case to federal court and moving for dismissal based on a lack of subject matter jurisdiction. The New York Court of Appeals held that the City did not waive its right to arbitration because its actions were aimed at determining the proper forum, not at litigating the merits of the dispute, and it asserted its right to arbitration within a reasonable time after the jurisdictional issue was resolved. The court modified the lower court’s order to stay the proceeding pending arbitration, rather than dismissing it.

    Facts

    The Allied Building Inspectors union and the City of New York had a collective bargaining agreement that included salary increases. The City refused to implement the full increase, citing the Economic Stabilization Act of 1970. The union filed a grievance, but instead of proceeding to arbitration as required by the agreement, it filed an Article 78 proceeding in state court to compel the City to implement the increases. The City then removed the case to federal court, arguing that federal law gave the federal court exclusive jurisdiction. After the federal court remanded the case back to state court, the City then moved to dismiss the Article 78 proceeding based on the union’s failure to arbitrate.

    Procedural History

    The union initiated an Article 78 proceeding in New York State court. The City removed the case to the U.S. District Court, which remanded it back to the State court. In State court, the City then moved to dismiss, asserting the union’s failure to exhaust the arbitration clause. Special Term denied the City’s motion. The Appellate Division reversed and dismissed the petition, directing the parties to arbitration. The Union appealed to the New York Court of Appeals.

    Issue(s)

    Whether the City waived its right to assert arbitration as the exclusive remedy by (1) petitioning to remove the proceeding to federal court and (2) moving in federal court for dismissal of the proceeding.

    Holding

    No, because the City’s actions were directed at challenging the subject matter jurisdiction of the courts, not at resolving the merits of the dispute, and the City asserted its right to arbitration without unreasonable delay after the jurisdictional issue was resolved.

    Court’s Reasoning

    The court reasoned that a party can waive its right to arbitration if its actions are inconsistent with an intention to arbitrate. The court stated, “In the absence of unreasonable delay, so long as the defendant’s actions are consistent with an assertion of the right to arbitrate, there is no waiver.” Here, the City’s actions in seeking removal to federal court and moving to dismiss were based on its belief that the state court lacked subject matter jurisdiction due to federal preemption. The court emphasized that “[a]t no point was the city looking to the courts to justify withholding of the full wage and salary increases.” The court found that the City’s use of the judicial process was limited to testing the subject matter jurisdiction of the state and federal courts. Once that issue was resolved, the City asserted its right to arbitration without unreasonable delay. The court distinguished this situation from cases where a party actively litigates the merits of a dispute before asserting a right to arbitration. The court cited City Trade & Ind. v New Cent. Jute Mills Co., 25 NY2d 49, 55. Finally, the Court clarified that an agreement to arbitrate is not a defense to an action and cannot be the basis for dismissal; the proper remedy is a stay of the judicial proceeding pending arbitration.

  • De Sapio v. Kohlmeyer, 35 N.Y.2d 402 (1974): Waiver of Arbitration Rights Through Affirmative Use of Judicial Process

    De Sapio v. Kohlmeyer, 35 N.Y.2d 402 (1974)

    A party waives its right to arbitration when it affirmatively uses the judicial process in a manner inconsistent with an intent to arbitrate, such as by asserting a cross-claim or engaging in discovery.

    Summary

    De Sapio, a former employee of Kohlmeyer, sued Kohlmeyer for defamation based on statements made to an investigator hired by De Sapio’s prospective new employer. Kohlmeyer, despite having an arbitration agreement with De Sapio, initially participated in the lawsuit by interposing a cross claim and taking De Sapio’s deposition before moving to stay the proceedings and compel arbitration. The New York Court of Appeals held that Kohlmeyer waived its right to arbitration by actively participating in the litigation, thus demonstrating an acceptance of the judicial forum. This decision clarifies that a party cannot use the judicial system for its advantages and then later insist on arbitration.

    Facts

    James De Sapio, a former block trader for Kohlmeyer, was discharged in April 1971. In January 1972, he sought new employment and authorized an investigation into his employment history. A representative of Fidelifacts, an investigative firm, interviewed a Kohlmeyer partner, who allegedly made defamatory remarks about the reasons for De Sapio’s termination. De Sapio then sued Kohlmeyer for defamation, claiming Fidelifacts republished the defamatory statements to his prospective employer.

    Procedural History

    De Sapio filed suit against Kohlmeyer in Supreme Court. Kohlmeyer answered, asserting an affirmative defense based on its arbitration agreement with De Sapio. Kohlmeyer then deposed De Sapio and moved to stay the court proceedings pending arbitration. Special Term denied the stay. The Appellate Division affirmed. The Court of Appeals granted leave to appeal and certified the question of whether the order affirming the denial of the stay was properly made.

    Issue(s)

    Whether Kohlmeyer waived its right to compel arbitration by actively participating in the lawsuit through actions such as asserting a cross-claim and taking the plaintiff’s deposition.

    Holding

    Yes, because Kohlmeyer’s actions demonstrated an affirmative acceptance of the judicial forum, which is inconsistent with a later claim that only the arbitral forum is satisfactory. These actions constituted a waiver of Kohlmeyer’s right to stay the action and compel arbitration.

    Court’s Reasoning

    The court reasoned that while a defendant does not automatically waive its right to arbitration by merely interposing an answer, affirmative use of the judicial process is inconsistent with a later attempt to invoke arbitration. The court emphasized that the key is the degree of participation in the lawsuit. Actions consistent with asserting the right to arbitrate do not constitute a waiver. However, when a defendant’s participation shows an affirmative acceptance of the judicial forum, with its attendant advantages, it waives the right to stay the action and compel arbitration.

    The Court found that Kohlmeyer’s interposition of a cross-claim seeking apportionment of liability and its procurement of a deposition of De Sapio constituted an affirmative use of the judicial process. The court noted that apportionment of liability could not be obtained in arbitration because Fidelifacts was not a party to the arbitration agreement. Furthermore, the court highlighted the importance of discovery procedures in distinguishing judicial and arbitral proceedings, stating that “It is contemplated that disclosure devices will be sparingly used in arbitration proceedings. If the parties wish the procedures available for their protection in a court of law, they ought not to provide for the arbitration of the dispute.” The court concluded that Kohlmeyer could not use the courtroom as a “convenient vestibule to the arbitration hall” to combine litigation and arbitration strategically. The court also stated, “where the defendant’s participation in the lawsuit manifests an affirmative acceptance of the judicial forum, with whatever advantages it may offer in the particular case, his actions are then inconsistent with a later claim that only the arbitral forum is satisfactory.”