Thursday, 23 January 2014 10:34
By Doug Hanson
Arbitration over litigation—contractor’s preference
The contractor hired the subcontractor to perform landscaping work related to the construction of a medical center. The contract contained an arbitration clause that provided if a dispute, then the contractor, at his sole discretion, could enforce the subcontractor to arbitrate the dispute. A dispute later arose between the parties regarding the sufficiency of the work performed by the subcontractor. The subcontractor filed a complaint against the contractor in state court and sought a judgment for damages in the amount of $144,916.98.
The complaint was amended prior to the contractor filing his answer. The amended complaint added a defendant and replaced one of the claims. The contractor filed a motion to dismiss alleging that the owner of the subcontractor (the owner had failed to properly form his business under Tennessee law) was not a party to the contract and lacked standing to assert the claims in the complaint.
After considerable delay, a second amended complaint was filed by the subcontractor to resolve the proper party issue. The contractor filed an answer to the second amended complaint asserting that the dispute may be submitted to arbitration at the sole option of the contractor and that the contractor expressly reserved the right to require arbitration of the dispute pursuant to the terms of the subcontract.
Approximately three years after the original complaint was filed, the contractor filed a motion to compel arbitration, citing the arbitration clause in the contract. The subcontractor sought to avoid arbitration by arguing: (1) that the arbitration right had been waived by the contractor’s participation in litigation; and (2) the arbitration clause was unconscionable because it was contained within an adhesion contract. The subcontractor also asserted that enforcement of the arbitration provision would be unconscionable due to the delay in seeking arbitration and by forcing him to incur both litigation and arbitration expenses. The subcontractor contended that a decline in the economy and litigation expenses resulted in his inability to pay fees or costs associated with arbitration.
The trial court denied the motion to compel arbitration. The trial court held that the clause was not unconscionable, but the contractor had waived the right to enforce the arbitration provision based on his participation in the litigation process. The trial court reasoned that filing an answer and responding to discovery constituted participation in the litigation process. The contractor appealed.
The Tennessee Court of Appeals began by analyzing whether arbitration agreements may be waived by actions of the party seeking to rely upon an arbitration agreement. The court noted waiver may be established by express declarations, acts and declarations manifesting an intent and purpose not to claim the supposed advantage or by a course of conduct. The court further noted that waiver will not be presumed, and the party claiming waiver bears the burden of proving it.
The court of appeals rejected the trial court’s finding that filing an answer and a small number of pleadings or discovery responses constituted waiver. The court found the case was pending over an extended period of time due to the subcontractor’s failure to file an amended complaint and the subcontractor’s counsel withdrawing while the litigation was pending. The court attributed the delays in the case to the subcontractor’s former counsel as well. The court further found the contractor did not conduct discovery and reserved its right to arbitrate within two months after the second amended complaint was filed which named the correct party. The court held the subcontractor failed to demonstrate that the contractor “clearly, unequivocally and decisively” waived the right to arbitrate. Therefore, the court held the right to arbitration had not been waived.
The court then focused on whether the arbitration clause was unenforceable as an unconscionable contract of adhesion. The court found that the record did not demonstrate that the parties lacked equal commercial sophistication, that the subcontractor was a weaker party, or that the contractor possessed superior knowledge of the subject matter. The record did not reflect that the subcontractor questioned the terms of the agreement or why the subcontractor could not have simply walked away from the agreement if the terms were deemed unacceptable or unfavorable. A conclusory statement that the contract was a “take it or leave it contract” would not suffice according to the court. Therefore, the court reversed the trial court. The case was remanded for an entry of an order to compel arbitration.