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Right to Arbitrate Waived by Prior Litigation Conduct

June 14, 2024

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Commercial and consumer contracts typically contain arbitration provisions which require that any disputes under the contract be resolved by arbitration and not litigation. Generally, New Jersey courts favor the enforcement of arbitration agreements, but a party may lose the right to seek or compel arbitration by its prior conduct.

For example, in Marmo and Sons General Contracting, LLC v. Biagi Farms, LLC, the Appellate Division addressed this issue in a case where the parties entered into a contract in which plaintiff agreed to build a home for the defendant. The contract contained a binding arbitration clause wherein any disputes arising from the contract were subject to a binding arbitration before the American Arbitration Association. Plaintiff claimed that defendant did not pay over $225,000 due under the contract and sought initial arbitration. The arbitrator awarded plaintiff $133,000 but plaintiff subsequently filed a lawsuit for breach of contract and unjust enrichment, among other claims. The parties certified in their pleadings that the matter was not the subject of an arbitration proceeding and that no arbitration proceeding will be contemplated.

After six months of extensive discovery, plaintiff moved to stay the proceedings and compel binding arbitration. The trial court denied the motion, holding that plaintiff waived its right to transfer the case to arbitration.

The Appellate Division analyzed the case at bar under the totality of the circumstances test established in Cole v. Jersey City Medical Center, 215 N.J. 265 (2013). The factors included whether any delays in making the arbitration request were related to litigation strategy and whether either party was prejudiced by such delay. The defendants argued that recently-decided US Supreme Court case Morgan v. Sundance, Inc., 596 U.S. 411 (2022), eradicated the prejudice prong altogether. The Appellate Division disagreed but held that this factor was not dispositive of the issue and that plaintiff’s conduct in the litigation had waived its right to seek binding arbitration.

The takeaway from the Marmo and Sons decision is that a commercial or consumer contract should be analyzed to determine whether it contains an arbitration agreement and the decision whether to pursue arbitration or litigation should be made at the outset. Actively pursuing litigation and discovery first can preclude the right to seek arbitration.

Marmo and Sons v. Biagi Farms
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