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Statute of Limitations Is No Bar to Compelling Arbitration, California Supreme Court Holds
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November 2, 2009
Howrey LLP
The California Supreme Court has held that a trial court may not deny a petition to compel arbitration on grounds that the statute of limitations had run on the claims the parties agreed to arbitrate.
A contractor performing work on a pump station in Santa Monica, California, hired a subcontractor to install a temporary shoring system for concrete work on the project. The subcontract contained an arbitration clause that did not set a time limit for demanding arbitration.
The contractor and subcontractor had a payment dispute, and the subcontractor sued for breach of contract, for quantum meruit, on the contractor’s payment bond and to enforce a public works stop notice. Then, both the contractor and subcontractor were sued by a third party for personal injuries related to the construction project. The contractor tendered its defense to the subcontractor, which agreed to defend. The subcontractor then dismissed its payment lawsuit against contractor without prejudice. The subcontractor later claimed that it did so pursuant to an oral agreement with contractor tolling the statute of limitations, a claim that the contractor denied.
More than five years later, after the personal injury action was resolved, the subcontractor filed a new lawsuit in the payment dispute, asserting breach of contract, quantum meruit and prompt payment law violations and alleging the tolling agreement. Within a month of filing, the subcontractor demanded arbitration and filed a petition to compel arbitration. The contractor opposed the petition, arguing that the subcontractor had waived its right to compel arbitration pursuant to Code of Civil Procedure §1281.2(a) by failing to demand arbitration within a reasonable time. It also argued that subcontractor’s claims were barred by statutes of limitations because the subcontractor did not have a written tolling agreement.
The Superior Court denied the subcontractor’s petition to compel arbitration. It held that in the absence of a written tolling agreement, the statutes of limitations had run on all of subcontractor’s claims and the subcontractor, therefore, could not compel arbitration of those claims. The court concluded it did not need to reach the question of whether the subcontractor had brought its petition to compel within a reasonable time and thereby had waived its right to compel arbitration as provided in Code of Civil Procedure §1281.2(a).
On appeal, the subcontractor argued that the statute of limitations defense was for the arbitrators and not the court to decide. The Court of Appeal affirmed, relying on the waiver argument that the Superior Court had not reached. The Court of Appeal held that subcontractor’s failure to file a petition to compel arbitration within the limitations periods for its claims constituted a waiver of its right to compel arbitration of those claims.
The California Supreme Court granted the subcontractor’s petition for review and reversed. Wagner Construction Co. v. Pacific Mechanical Corp., 41 Cal. 4th 19, 58 Cal.Rptr.3d 434 (2007).
The Supreme Court held that the lower courts acted improperly in denying the petition to compel arbitration on ground that the statute of limitations had run. The Supreme court held that it was for the arbitrators, and not the courts, to decide whether a statute of limitation barred the claims the parties had agreed to arbitrate.
The Supreme Court wrote that asserting the statute of limitations had run on claims was an affirmative defense that fell naturally within the parties’ agreement to arbitrate any dispute arising from their contract. Even if the language were less clear, the court pointed out that California’s strong public policy in favor arbitration required that any doubts about the scope of arbitrable issues be resolved in favor of arbitration. No applicable statute or case permitted denying arbitration on basis of a statute of limitations. Rather, the court noted, California’s arbitration statute forbids denying enforcement of a written arbitration agreement on grounds that the petitioner’s claims lack substantive merit.
The court did note that delay in demanding or seeking to compel arbitration could provide a basis to deny a petition to compel arbitration – entirely independent of statutes of limitation. It wrote that a petition to compel arbitration must be brought within four years after the party to be compelled refused to arbitrate. This, it wrote, had nothing to do with the statute of limitations on the underlying claims. Rather, it derives from the court’s treatment over the years of petitions to compel arbitration as in essence a suit in equity to compel specific performance of the arbitration agreement. That cause of action accrues only upon a refusal to arbitrate.
But, the court wrote, this does not mean that a party may postpone arbitration indefinitely by delaying in demanding it. Rather, the right to demand arbitration can be waived by failing to do so within the time allowed by a governing statute or by the parties’ contract. Waiver is a statutory ground for denying arbitration. Code of Civil Procedure §1281.2 (a).
If no time limit to demand arbitration is specified by statute or contract, the court wrote, a party still must demand arbitration within a reasonable time. This is based on the general principle of contract law that when no time is specified for performance, a reasonable time is allowed. Whether a party sought arbitration within a reasonable time is a question of fact dependent on the situation of the parties, the nature of the transaction and the facts of the case, the court wrote.
The court noted it had previously held that waiver of the right to arbitrate cannot be determined on the basis of one test and listed factors that are potentially relevant: 1) whether the party’s actions were inconsistent with the right to arbitrate; 2) whether the parties were well into preparation of a lawsuit before arbitration was sought; 3) whether the trial date was near or there had been a long delay in seeking arbitration; 4) whether a defendant seeking arbitration filed a counterclaim without seeking a stay of the litigation; 5) whether the litigation had progressed through “important intervening steps” that were not available in arbitration, such as discovery; and 6) whether delay had misled, prejudiced or otherwise affected the party resisting arbitration.
Because of the strong public policy favoring arbitration, the court wrote, waiver of the right to arbitrate will not be lightly inferred, placing a heavy burden of proof on the party seeking to establish waiver.
Because the trial court in this case had declined to determine whether arbitration had been sought within a reasonable time and had not made the necessary factual inquiry to determine whether the subcontractor had waived its right to compel arbitration, the Supreme Court remanded the case to the trial court for further factual and legal inquiries.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
©2009 Howrey LLP
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