Court Finds Arbitration Clause Waived Due To Delay In Demanding Arbitration

Arbitration

CONTRACTUAL RIGHT TO ARBITRATION WAIVED BY DELAY AND PREJUDICE TO OPPOSING PARTY

The Georgia Court of Appeals chipped away at the trend to submit cases to arbitration whenever possible in SunTrust Bank v. Lilliston, 338 Ga. App. 738, 791 S.E.2d 614 (2016),  According to the court of appeals, this was a case of first impression.

Relevant facts were not in dispute.  SunTrust Bank loaned about $500,000 to L-T Adventures, Inc. [LTA], in 2001.  That transaction did not include any provision for arbitration of disputes.

SunTrust made a second loan in 2005 for about $2,000,000 to Jedon Lilliston, one of LTA’s owners, and to her former husband.

The agreement that accompanied the second loan provided for mediation of disputes that arose under the loan agreement and, if mediation was unsuccessful, it stated “any party may demand arbitration.”

A dispute arose between the parties concerning interest charged and collected under both loan agreements.  Jedon Lilliston and LTA filed suit against SunTrust in Chatham County State Court on April 9, 2013.

Fourteen months later, on August 8, 2014, the case was transferred to the Fulton County Superior Court.  Another seven months passed and on January 15, 2015, the plaintiffs voluntarily dismissed their action.  SunTrust had not made any demand for arbitration.

After five more months, on June 19, 2015, the plaintiffs renewed their action by filing suit in Fulton County Superior Court.  SunTrust answered, and soon brought a motion to compel arbitration.

This motion was denied by the trial court.  The court agreed that there was a valid arbitration agreement, and that some of the claims raised by the plaintiffs were subject to that agreement.

But based on its actions during the original litigation, SunTrust had waived its right to compel arbitration.  The trial court noted that SunTrust had participated in the original litigation for more than a year and a half without raising the issue of arbitration.  It had participated in discovery, filed a motion for summary judgment, and the case had been placed on the trial calendar before being dismissed by the plaintiffs.

The lower court determined that SunTrust’s actions were inconsistent with the right to arbitrate, plus the delay and cost associated with discovery would operate to the prejudice of the plaintiffs.

The Georgia Court of Appeals accepted SunTrust’s request for an interlocutory appeal.

The court began its analysis by referencing the applicable standard of review.  Whether the trial court ruled correctly on a motion to compel arbitration was strictly a question of law.

The court of appeals then noted that the Federal Arbitration Act applied, and quoted a portion of the Act:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S. Code section 2.

Next the Georgia court referenced language from a decision by the Eleventh Circuit Court of Appeals:

[A] party that substantially invokes the litigation machinery prior to demanding arbitration may waive its right to arbitrate. A party has waived its right to arbitrate if, under the totality of the circumstances, the party has acted inconsistently with the arbitration right, and, in so acting, has in some way prejudiced the other party[.]

The Georgia Court of Appeals then stated the trial court ruled correctly that a party may waive any right to arbitration by action inconsistent with that right to the detriment of the other party.

SunTrust argued that when the action was renewed it was a de novo action, and SunTrust was entitled to raise any legitimate defense without regard to whether it was raised in the original action.

The court of appeals recognized that would ordinarily be true, but here the doctrine of waiver applied.  What constituted a waiver of the right to arbitration depended on the facts of each case..  In this case the trial court found waiver based on SunTrust’s participation in discovery in the original case, by filing a motion for summary judgment, and by waiting a year and a half causing the case to be placed on the trial calendar.  The trial court determined that this delay and the costs associated with discovery would operate to the prejudice of the plaintiffs if the motion to compel arbitration was granted.

The court of appeals stated that that the trial court’s findings were not clearly erroneous.  The conclusion that SunTrust had waived its contractual right to compel arbitration in this case was upheld by the Georgia Court of Appeals.