Waiver of Right to Arbitration
OHIO. Do you have the right to enforce an arbitration clause in your contract? Yes, unless you “act inconsistently with the right to arbitrate,” or in English, if you have an arbitration clause in your contract, but file a lawsuit instead, you may not be able to enforce your right to arbitrate.
In the case, 84 Lumber Co v. O.C.H. Construction LLC v. Martin, 84 sold materials to O.C.H. for the construction of a home for Martin. While the contract between O.C.H. and Martin contained an arbitration clause, the purchase agreement between 84 and O.C.H. did not. 84 sued O.C.H. due to non-payment of the money owed for the materials used in the construction of the Martin house. O.C.H. had no defense to the 84 claims, but tried to dissuade/delay 84’s collection efforts by naming Martin as a third-party defendant. O.C.H.’s claim was essentially, yes, I may owe 84 the money for the materials, but Martin owes me for the same materials, so get the money from them (such a claim may work to permit the O.C.H.s of the world to collect the money to pay the 84s of the world, but does not transfer the liability for the payment to 84 from O.C.H. to the Martins.
After O.C.H. filed its third-party claim, the Martins filed an answer and counterclaim against O.C.H. After the counterclaim was filed O.C.H. filed a motion to enforce the arbitration clause.
The Trial Court denied O.C.H.’s motion and the case was appealed. The Court of Appeals found that the question of waiver is “fact-driven” and uses an “abuse of discretion” standard to determine whether the Trial Court’s decision should be reversed. O.C.H. argued that it filed its motion only 73 days after it filed the third-party complaint and 43 days after the Martins filed their counterclaim and that no discovery had been exchanged, so there was no prejudice to the Martins. It also argued that in a similar case Stoner v. Salon Lofts, the Trial Court ruled in favor of enforcing arbitration even though the motion was filed within 5 months of the responsive pleading and before the discovery cut-off, so the same should apply here.
The Court of Appeals disagreed on both counts holding that O.C.H. had waived its right to arbitrate. First, because it is an “abuse of discretion standard” so the trial court has wide latitude; Second, because in Stoner it was the defendant, not the (third-party) plaintiff, that filed to enforce arbitration; and Third, because the Martins were forced to file a response to the complaint and “forcing such a response defeats one of the primary objectives of arbitration.”
If you want to enforce your right to arbitrate, be careful not to act inconsistently with your right to arbitration or you leave it in the Court’s discretion as to whether you can change your mind.
Russell O’Rourke is a partner and Chair of the Construction Law Practice Group of the Cleveland, Ohio law firm Meyers, Roman, Friedberg & Lewis. He may be reached at email or 216/831-0042.