A federal court in New Jersey held that where a party fails to timely demand arbitration within the statute of limitations provided by the contract, the arbitrator does not have jurisdiction to hear the case, so any subsequent arbitration award must be vacated.

In Bapu Corp. v. Choice Hotels International, Inc., No. 07-CV-5938 (WJM), 2008 WL 2559306 (D.N.J. June 24, 2008), Bapu and Choice entered into a hotel franchise contract that required Bapu to renovate a building by November 30, 2000. The contract contained an arbitration agreement, and also provided that neither party could file a claim "after 3 years from the date that the claim arose."

Bapu did not complete the renovation by November 30, 2000, so Choice offered to extend the deadline if Bapu paid a $5,000 fee. Bapu declined the offer. In 2002 and again in 2004, Choice sent Bapu a notice of default, but took no other action. In September 2004, Choice sent Bapu notice that it was terminating the contract. Finally, on October 19, 2006, Choice served Bapu with a demand for arbitration.

Bapu objected to the arbitration on the ground that it was barred by the applicable statute of limitations. The arbitrator acknowledged this argument but refused to acknowledge it before the hearing, and then the arbitrator did not address the argument at the hearing. The arbitrator issued an award in favor of Choice for $142,560.

Bapu moved to vacate the award, arguing that the arbitrator lacked jurisdiction over the dispute because the three-year statute of limitations provided by the contract expired before Choice filed its demand for arbitration. Choice moved to confirm the award, arguing that Bapu's claims were completely resolved by the arbitration.

The Court granted Bapu's motion to vacate the award, holding that the arbitrator lacked jurisdiction over the dispute because Choice had failed to demand arbitration within the three-year period provided by the contract. The Court held that as a corollary to the contractual nature of arbitration, parties may contractually agree on the time limits in which to commence arbitration, and that such time limits act as substantive limitations on the arbitrator's jurisdiction.

The Court then held that it did not need to determine precisely when Choice's breach of contract claim arose because it was clearly more than three years before Choice filed its demand for arbitration. The Court held that Choice's claim initially arose November 30, 2000, but Bapu was not in material breach at that point. However, the Court held that even giving Bapu a reasonable amount of time to perform before its failure could be considered a material breach, Choice's claim arose significantly more than three years before it demanded arbitration in 2006.

Consequently, the Court held that Choice "appears to have sat on its rights too long . . . Accordingly, the arbitrator lacked jurisdiction over this dispute, and the Court must vacate its award."