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Finishing What You Started: When courts will refuse to compel arbitration
September 16, 2009
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It is common to have arbitration clauses in contracts, and courts will honor these clauses in all but very rare instances. In fact, Virginia courts have repeatedly stated a clear public policy in favor of arbitration and upholding arbitration agreements.  Additionally, Virginia Code Section 8.01-581.02 (A) [pdf] mandates a court to compel arbitration when a party to an arbitration agreement petitions the court and the opposing party refuses to arbitrate.

Nonetheless, a party can waive its right to invoke an arbitration clause when it initiates litigation and later uses the arbitration clause to thwart the litigation process. This is exactly what happened recently in the Circuit Court for the City of Hopewell in the consolidated cases of Shoosmith Bros., Inc. v. Hopewell Nursing Home, LLC, et al., Case No. CL06-299 and Kenbridge Constr. Co., Inc. v. Hopewell Health Investors, LLC, Case No. CL09-108 [pdf].

In Shoosmith Brothers, Judge Campbell noted that Virginia has not squarely addressed the issue of waiver of arbitration, but relied on the concept of “default” in the Federal Arbitration Act and cases from the United States Court of Appeals for the Fourth Circuit to articulate a test for waiver.  The question became whether Kenbridge Construction Company “so substantially utilize[d] the litigation machinery that to subsequently permit arbitration would prejudice” Shoosmith Brothers, Inc.  Judge Campbell had no problem finding waiver where Kenbridge had been participating for two and a half years in litigation involving two different cases with many different parties, and arbitration with only Kenbridge would have left the other parties in “judicial limbo.”

The lesson to take from this is “Finish what you started.” Arbitration can save parties a great deal of time, money and frustration.  You should be sure at the outset that arbitration is the dispute resolution forum you want before you include arbitration clauses in your agreements, and understand you may be stuck with your choices.