Arbitration has long been touted as a magic bullet that reduces the cost and time required to resolve business disputes and that alleviates the inherent unpredictability of litigation. (Whether arbitration actually delivers those benefits usually depends upon the specific facts and circumstances at hand.) In recognition of these benefits, North Carolina public policy, as a general principle, favors arbitration when there is a valid arbitration agreement in place. However, as made clear once again in a Court of Appeals’ December 1, 2015 opinion, the public policy favoring arbitration does not mean that a party to an arbitration agreement may sit on its rights and participate extensively in litigation before seeking to enforce the agreement.
In the T.M.C.S., Inc. d/b/a TM Construction, Inc. v. Marco Contractors, Inc. opinion, the Court of Appeals upheld a trial court order denying a motion to compel arbitration because the party seeking to enforce the arbitration agreement had waited too long to do so. The Court concluded that by not bringing a demand for arbitration within the time required by the arbitration agreement, the party had forfeited its right to arbitrate.
T.M.C.S. was a construction dispute. Marco Contractors (“Marco”) hired TM Construction (“TM”) to complete renovations of a Wal-Mart store in Forsyth County. TM completed the renovations, but TM and Marco disagreed about the amount Marco owed for the renovations. TM filed a claim of lien on the real property and a complaint in Forsyth County Superior Court seeking judgment on its claim of lien. In response, Marco filed an answer and participated in court-ordered mediation. After mediation failed to resolve the dispute, TM served discovery on Marco, and the parties engaged in a long discovery dispute resulting in the imposition of sanctions against Marco. Then, approximately a year after TM filed the lien, Marco filed a motion for summary judgment and, as an alternative form of relief, a motion to compel arbitration proceedings in Pennsylvania. Marco based its motion to compel arbitration on an arbitration agreement contained in the construction contract between the parties.
The arbitration agreement stated, with emphasis added:
All claims or disputes between the Subcontractor and the Contractor arising out of or related to this Subcontract or the breach thereof or either party’s performance of their obligations under this Subcontract shall be decided by arbitration, at the option of the Contractor, in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association (“AAA”) currently in effect. Notice of the demand for arbitration shall be filed in writing with the other party to this agreement and, upon acceptance by the Contractor, if required, filed with the AAA. Such notice must be made within 30 days after the claim or dispute has arisen or within 30 days after the Subcontractor’s work under this Subcontract has been completed, whichever is later.
When reviewing Marco’s appeal from the order denying the motion to compel arbitration, the Court of Appeals concluded that the language of the arbitration agreement was “clear and ambiguous” and therefore applied the plain meaning rule to interpret the terms of the agreement. The Court interpreted the clause to require either party wishing to arbitrate a dispute to file a written notice of the demand for arbitration with the other file within the later of 30 days after the claim or dispute arose or 30 days of when TM completed its work under the contract. The Court reasoned that a dispute arose under the contract when TM filed a claim of a lien on the real property and served a claim on funds nearly a year before Marco’s motion to compel arbitration and that Marco’s motion to compel arbitration was too late. The Court concluded that by failing to demand arbitration within 30 days, Marco had forfeited its right to arbitration.
The Court of Appeals did not discuss Marco’s substantial involvement in the litigation prior to bringing the motion to compel arbitration. Instead, the Court noted that there is a distinction between an implicit waiver of a right to arbitrate (which arises in cases in which there is no set deadline for making a demand for arbitration and the party seeking to compel arbitration acts in a manner inconsistent with the right to arbitrate to the prejudice of the other party) and a forfeiture of the right to arbitrate (which arises when the agreement to arbitrate sets a specific time limit for demanding arbitration and the party seeking arbitration does not submit its demand for arbitration within that deadline). Nonetheless, it is likely that Marco’s substantial participation in the ongoing litigation, including a protracted discovery dispute, did not help its case when later seeking to compel arbitration. This opinion, along with prior opinions finding that parties had waived the right to arbitrate, highlights that when there is an arbitration agreement that could apply to a dispute, a party must decide upfront whether it wants to seek arbitration and must demand or move to compel arbitration very early in the dispute. Deciding to seek arbitration is not a decision that can be put off until the parties are well into litigation.