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.”