Arbitration: Waiver Is for the Tribunal, Not the Court, Says Split Louisiana (Web)

A divided Louisiana appeals court held that a denial of a motion requesting arbitration is appealable, and whether arbitration was waived is an issue to be decided by arbitrators, rather than a court.

In the consolidated case of Arkel Constructors Inc. v. Duplantier & Meric, Architects LLC, et al., Nos. 2006 CA 1950 & 1951 (La. App.1st Cir. July 25)(available at http://www.la-fcca.org/Opinions/Pub2007/2007-07/2006CA1950July2007.pub17.pdf), a 3-2 Louisiana Court of Appeal panel reversed a trial court ruling that a party had waived its right to arbitration, and sending the case to the arbitrators.

The split decision has been appealed to the Louisiana Supreme Court, which as of Sept. 19 hadn’t decided whether it would hear the case.

The appeals panel found that the authority to decide if arbitration has been waived by party action is with the tribunal, not the court.

General contractor Arkel filed a March 2005, suit, against the state, which owned the construction project Arkel worked on. The suit alleged that its performance had been delayed due to defective drawings and specifications, as well as improper administration, on a site installation.

A subcontractor, Professional Construction Services Inc., was responsible for the installation. PCS wasn’t a named defendant in Arkel's suit. But in September 2005, PCS filed a separate suit against Arkel. The two suits were joined by consent judgment in February 2006.

In April 2006, PCS filed “an exception of prematurity and a motion to compel arbitration and to stay proceedings pending arbitration.” This claim was based on the arbitration clause in the subcontract between Arkel and PCS.

Arkel opposed the motion, but it didn’t deny the existence or applicability of the arbitration clause. It stated that by filing its own suit on the contract without invoking the arbitration clause, PCS had waived its arbitration right.

The East Baton Rouge, La., trial court held that plaintiff PCS was “in default” for filing its suit without asserting its arbitration right. Based upon such a finding, the court held that the court, and not the arbitrator, must determine whether arbitration had been waived.

The trial court concluded that PCS had waived its right to arbitration. PCS appealed.

The issues for the appeals court were: (1) the appealability of the trial court's judgment denying the motion to compel; (2) whether the trial judge, rather than the arbitrator, has the authority to determine if the party requesting arbitration is in “default” and; finally, (3) whether the trial court erred in finding that PCS was in default and waived arbitration by filing suit without reserving its rights to arbitration.

The ruling of denying arbitration was an interlocutory ruling, which doesn’t determine the merits, but only preliminary matters, according to the majority opinion, written by Judge Robert D. Downing. The appealability of the interlocutory rulings is governed by LSA-C.C.P. art. 2083 as amended by 2005 La. Acts, No. 205, effective Jan. 1, 2006. Prior to this amendment, denying a motion to compel arbitration was immediately appealable, but the new rule provides that an immediate appeal of interlocutory ruling must be specifically provided by law.

In the absence of legislation expressly authorizing an interlocutory judgment’s appeal, a party must now seek review under the appellate court's supervisory jurisdiction. LSA-C.C.P. art.2083, Comments-2005(a)(b). Nevertheless, the appeals panel applied Johnson v. Blue Haven Pools of Louisiana Inc., 928 So 2d 594 596 n 1 (2006), in which, after the amendment, the Louisiana appeals court held that a judgment denying a request for arbitration is an appealable, interlocutory order.

In addition, the opinion says that the case “warrants the exercise of [the court's] supervisory jurisdiction.” PCS filed its appeal notice on time. Denying it review would force it to litigate an entire matter before exercising its opportunity to appeal the decision denying arbitration. If that appeal was successful, it would “render the entire litigation futile.”

The majority opinion also noted that a strong public policy favoring arbitration in the interest of judicial economy also supports the appealability of the motion denying the arbitration request.

With the appealability issue aside, the Downing majority appeals panel opinion turned to the waiver issue. LSA-R.S. 9:4202. applies to where, like in Arkel, the suit is brought before an arbitration clause is invoked.

According to this rule, once a party applies for a stay pending arbitration, and shows that (1) there is a written arbitration agreement, and (2) the issue is referable to arbitration under the agreement, as long as that party is not in default in proceeding with the arbitration, the court must stay the trial in order for arbitration to proceed.

Section 9:4203 “makes clear that the only two issues that the trial court may concern itself with are (1) whether there is a dispute as to the making of the agreement and (2) whether a party has failed to comply with the agreement.” Int’l River Center v Johns Manville Sales Corp., 861 So 2d 139, 142 (La. S.Ct. 2003).

There is no dispute that an arbitration agreement exists, nor that the issue related to the subcontractor’s performance may be referred to arbitration. Int’l River Center posed the “exact issue,” according to Judge Downing, “which entity determines whether a contractual arbitration agreement has been waived by a party's actions--the courts or an arbitrator.”

The Int’l River Center Court concluded that neither statute allows the trial court to determine waiver issues.

The Court held procedural questions that grow out of the dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator. The presumption also is that the arbitrator should decide allegations of waiver delay or a similar arbitrability defense.

The majority held that whether a contractual arbitration agreement has been waived by PCS's action should be determined by an arbitrator, not a court.

There were two dissents. First, Judge Jefferson D. Hughes III wrote that the situation was different than Int’l River Center case. While the party seeking arbitration was not in default in Int’l River Center, here, Arkel didn’t refuse to arbitrate. Rather, PCS chose and agreed to litigate, and both parties signed a consent agreement consolidating the actions.

“Thus,” wrote Hughes, “PCS agreed to have these matters heard in District Court.” He would have upheld the trial court’s factual finding that PCS was in default and effectively waived its right to arbitration.

Judge Page McClendon’s dissent noted that legislative intent in enacting LSA-R.S. 9:4202–the section staying proceedings brought in violation of the arbitration clause--is to “maintain the court's authority to determine whether a party applying for a stay of proceedings pending arbitration has defaulted, and thereby lost the right to stay the court proceeding and compel arbitration.”

The rule was made to prevent parties who bypass arbitration and “to pursue others through the judicial process, from changing their plan mid-suit and deciding arbitration would be more advantageous, to the prejudice of defendants who were willing to arbitrate.”

He also noted that Int’l River Center didn’t conflict. In Int’l River Center, the defendant who applied for the stay pending arbitration wasn’t the defaulting party. The defendant wasn’t the party who had refused or failed to perform under the written arbitration agreement.

The Arkel situation is the same. The stay applicant may have been in default. Thus, the trial court had jurisdiction under La. LSA-R.S. 9:4202 to determine whether the applicant's actions did indeed amount to default.

As a result, McClendon also would have affirmed.

--Esther SeonMin Lee, CPR Intern