|
The California Supreme Court held that the statute of limitations is not a proper basis for denying a motion to compel arbitration because the arbitrator, not the court, must decide whether the statute of limitations bars any claims that the parties have agreed to arbitrate.
In Wagner Construction Co. v. Pacific Mechanical Corp., 157 P.3d 1029 (Cal. 2007), Pacific subcontracted work to Wagner under a contract containing an arbitration clause.
Wagner later sued Pacific for money allegedly due under the contract, but the suit was dismissed when both Wagner and Pacific were sued for personal injuries. Once the personal injury suit was resolved, Wagner filed a new suit against Pacific.
In the second suit against Pacific, Wagner filed a motion to compel arbitration. In opposing the motion, Pacific argued that Wagner waived the right to arbitrate and that the statute of limitations barred the suit. The trial court denied the motion to compel based solely on the statute of limitations.
On appeal, Wagner argued that the arbitrator, not the court, should decide whether the statute of limitations bars any claims that the parties have agreed to arbitrate. Even though neither party argued the waiver issue, the court of appeal affirmed the trial court's ruling on the ground that Wagner waived the right to arbitrate.
The California Supreme Court (the Court) granted review to address the question of whether a court may deny a motion to compel arbitration on the ground that the statute of limitations bars the suit. The Court held that the statute of limitations is not a proper basis for denying a motion to compel arbitration because application of the statute of limitations is a question for the arbitrator.
Despite its holding, the Court did not remand the case with instructions to order arbitration because there remained the issue of whether Wagner waived its right to arbitrate through unreasonable delay. Since the trial court never addressed the waiver issue, the Court remanded the case with instructions to apply a multi-factor test in determining whether Wagner waived its right to arbitrate.
In reaching its holding, the Court acknowledged "the possibility that arbitrators may base their decision upon broad principles of justice and equity" and thus award damages on a claim that would be time-barred in court. As the Court explained, parties can "avoid this risk . . . by specifically agreeing that the arbitrators must act in conformity with the rules of law."
Another way to eliminate the risk that an arbitrator will disregard the law in favor of "broad principles of justice and equity" is for parties to agree to arbitrate in accordance with the National Arbitration Forum Code of Procedure, as Rule 20(D) requires the arbitrator to follow the applicable substantive law.
Subscribe to a free weekly update on ADR case law and
legislation
|