Tennessee Court Holds Arbitration Clause Not Waived

In a breach of contract case involving a subcontractor’s claim against a general contractor, Skelton v. Freese Const. Co., Inc., the Court of Appeals of Tennessee recently ruled that the general contractor did not waive its right to require that the case be arbitrated, and reversed the trial court on that issue. The trial court had ruled that the general contractor had waived its right to require arbitration by participating in the litigation in the trial court before filing a motion to compel arbitration.

Here are the key facts:

• Subcontractor signed a Subcontract Agreement with the General Contractor
• Subcontractor signed as “Outdoors Unlimited, LLC” (the “LLC”)

• On January 12, 2009, Mr. Skelton, individually, not the LLC, filed an action against Contractor in the Chancery Court for Rutherford County
• On June 2, 2009, Contractor filed a motion to dismiss Mr. Skelton’s Complaint because Mr. Skelton was not a party to the Subcontract Agreement
• When Contractor’s motion to dismiss was heard in August of 2009, Mr. Skelton’s counsel asked to be allowed to amend his complaint and the trial court ordered that he should file an amended complaint within ten days
• The order that Mr. Skelton file an amended complaint was not entered until November 5, 2009, some three months after the hearing
• On September 10, 2010, Mr. Skelton’s attorney filed a second motion to withdraw which was granted in September of 2010
• On March 29, 2011, Contractor filed a notice of hearing setting its previously filed motion to dismiss for a hearing on April 7, 2011
• On April 6, 2011, and just one day before Contractor’s motion to dismiss was set to be heard, a new lawyer filed a notice of appearance for Mr. Skelton and also filed a Second Amended Complaint
• The Second Amended Complaint named the LLC as a plaintiff in the action for the very first time
• On April 7, 2011, the trial court denied Contractor’s motion to dismiss, but found that the Second Amended Complaint was of no effect
• On May 19, 2011, a Second Amended Complaint naming the LLC as a plaintiff was again filed
• On July 17, 2011, Contractor filed an answer to the Second Amended Complaint in which it stated that it reserved the right to require arbitration
• Following Contractor’s filing its answer to the Second Amended Complaint, the lawyers for the parties had several discussions about the possibility of the parties agreeing to arbitration without the necessity of Contractor having to file a motion to compel arbitration: They also discussed the filing and scheduling of a motion to compel arbitration after Subcontractor took the position that it would not agree to arbitration
• Around August 30, 2011, Contractor responded to interrogatories sent by Mr. Skelton
• On February 15, 2012, Contractor filed a motion to compel arbitration

The trial court held that Contractor had waived its right to arbitrate because it had participated in the litigation and responded to the interrogatories of Subcontractor.

Tennessee lawyers who handle arbitration cases know that there is Tennessee case law that establishes that a party may waive its right to arbitration by participating in a lawsuit before making a demand for arbitration. For example, take a look at Carolyn B. Beasley Cotton Co. v. Ralph (Tenn. Ct. App. 2000). In that case, the court ruled that a party had waived his right to demand arbitration because he filed an answer to the complaint; answered the other party’s requests for production; took depositions; and filed pre-trial motions.

In this case, the Contractor waited about three years from the time the complaint was filed to file a motion to compel arbitration and, in the meantime, answered interrogatories. How is it that Contractor did not waive its right to demand arbitration?

The court started out its analysis by stating that the mere passage of time between the filing of the complaint and the filing of Contractor’s motion to compel arbitration was not determinative, in and of itself, on the issue of waiver. The court based its opinion on the fact that the party to the written agreement, which had the provision requiring arbitration, was the LLC, not Mr. Skelton, and on the fact that the LLC was not added to the lawsuit until over two years after the action was initiated. It also pointed out that, unlike in the Beasley case; Contractor had expressly reserved its right to demand arbitration in its answer.

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