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According to a New Jersey federal court, the right to arbitrate is not necessarily waived when a party fails to raise arbitration as a affirmative defense in its answer, particularly if it is raised before the other party would face significant prejudice.
In Cathay Bank v. Inchon, LLC, No. 06-1971 (DRD), 2006 WL 2355407 (D.N.J. Aug. 15, 2006), Cathay sued Inchon for defaulting on two loan agreements. Both contracts included arbitration agreements, but Inchon did not raise arbitration as an affirmative defense in its answer to the complaint.
Instead, Inchon first raised arbitration as a defense 45 days after filing its answer, and only in response to Cathay’s motion for summary judgment. Cathay argued that Inchon had waived arbitration as a defense, and the court agreed that, normally, a failure to plead an affirmative defense constitutes a waiver of that defense.
However, the Court examined the issue of waiver more thoroughly because “any examination of whether the right to compel arbitration has been waived must be conducted in light of the strong federal policy favoring arbitration for dispute resolution.”
After examining several cases involving arbitration waivers, the Court concluded that Cathay “failed to show that it has suffered any significant adverse effects during the brief 45 day period since [Inchon] filed [its] answer.” The Court granted Inchon’s motion to dismiss in favor of arbitration.
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