Be careful with how you act with arbitration clauses in your contracts. If you are not careful in how you act to enforce these clauses, you could find yourself stuck in court whether you like it or not.
As I stated in a recent update to a post last month, the Fourth Circuit Court of Appeals recently weighed in on the issue of a contractor’s waiver of its rights to arbitration under a contract. Briefly, the facts of Forrester v. Penn Lyon Homes, et. al., No. 07-2171 are as follows. The Forrester’s sued Penn Lyon and its warranty company alleging among other things a breach of express warranty based upon a warranty contract containing a mandatory arbitration clause. Instead of immediately alleging an affirmative defense based upon the arbitration clause, the defendants removed the case to federal court and litigated for 18 months before raising the arbitration defense for the first time.
The 4th Circuit (correctly in my opinion) affirmed the lower court and held that the defendants defaulted their right to arbitration because of their actions in defense of the court action and the prejudice to the plaintiffs caused by those actions.
The lesson here is two fold. First, as a contractor, be sure to raise any arbitration rights early in any litigation or you may lose those rights. The courts do not look kindly on those that sit on their rights for too long.
Second, as a plaintiff (whether homeowner, contractor or subcontractor) in a case such as Forrester, you need not point out the arbitration clause to a defendant. Depending on the situation, you may want to try the litigation route even in the face of such a clause and make the other party enforce its arbitration rights or lose them through non-enforcement.
As always, good legal counsel is key in assuring that these steps are taken in a timely manner by which your rights are protected.
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