Many business contracts have an arbitration provision that states something similar to: "any dispute arising out of or related to this agreement shall be subject to binding arbitration, not to a lawsuit filed in court." Some provisions even expressly state that the parties waive their right to file a lawsuit if such a dispute arises. It is therefore reasonable for those parties to assume that they will not see the inside of a courtroom if there is a dispute.
However, the Ohio Court of Appeals for the Second Appellate District recently emphasized that "even if a contract requires arbitration, a contracting party can waive the right to arbitration." White v. Smith, 2nd Dist. Greene No. 2014-CA-48, 2015 Ohio App. Lexis 1603, 2015 Ohio 1671, ¶¶1-2 (May 1, 2015). The court made its decision while still acknowledging the presumption in favor of resolving disputes through arbitration. Id. at ¶22-23 (quoting from Ohio's arbitration statute and stating that "arbitration is encouraged as a method to settle disputes, and a presumption favoring arbitration arises when the claim in dispute falls within the scope of an arbitration provision.") (internal quotation and citation removed). The court held that, "'[l]ike any other contractual right, the right to arbitrate may be waived,'" although "'[d]ue to Ohio's strong policy favoring arbitration, the party asserting a waiver has the burden of proving it." Id. at ¶24, quoting Murtha v. Ravines of McNaughton Condominium Assn., 10th Dist. Franklin No. 09AP-709, 2010-Ohio-1325, ¶20.
The Second Appellate District in White then adopted the Tenth Appellate District's test for determining whether a party waived its right to arbitration by participating in litigation:
"A party asserting waiver must prove that the waiving party knew of the existing right to arbitrate and, based on the totality of the circumstances, acted inconsistently with that known right. In determining whether the totality of the circumstances supports a finding of waiver, a court may consider such factors as: (1) whether the party seeking arbitration invoked the court's jurisdiction by filing a complaint or claim without first requesting a stay; (2) the delay, if any, by the party seeking arbitration to request a stay; (3) the extent to which the party seeking arbitration has participated in the litigation; and (4) whether prior inconsistent acts by the party seeking arbitration would prejudice the non-moving party. Waiver attaches where there is active participation in a lawsuit evincing an acquiescence to proceeding in a judicial forum."
White, 2015 Ohio 1671, ¶25, quoting Pinnell v. Cugini & Cappoccia Builders, Inc., 10th Dist. Franklin No. 13AP-579, 2014-Ohio-669, ¶ 18 (internal citations and quotations removed). The court added that "[p]rejudice to the other party is a factor that may be considered in determining whether actions taken by the allegedly waiving party are so inconsistent with the exercise of the right of arbitration as to constitute an implicit waiver of that right; but prejudice is not something that must be proven, independently of waiver." White, 2015 Ohio 1671, ¶26 (internal citation and quotation removed).
The Second Appellate District then found that the defendants in White had waived their right to arbitration by participating in litigation. Id. at ¶27. The court made this decision despite a provision in the parties' contract that said that all disputes relating to the contract would be resolved by arbitration and that both parties waived the right to file a lawsuit. Id. at ¶¶1-5. Applying the waiver test, the court first stated that the defendants were aware of their right to arbitration. Id. at ¶27. Next, regarding the "totality of the circumstances" factors, the court stated that, although the defendants did not initially invoke the trial court's jurisdiction, "all the remaining factors weigh heavily in favor of waiver." Id. The court stated that, "[s]pecifically, [the defendants] appeared in not just one, but two litigations, ranging over a period of almost three years, before they asserted a right to arbitrate. They conducted and participated in extensive discovery, involved the court in discovery matters, agreed to various extensions so that discovery could be concluded prior to trial, and participated in several court-ordered mediation sessions, all without raising the issue of arbitration until nearly a year and a half after the second case was filed." Id. The court concluded that the defendants "chose not to invoke the arbitration clause through nearly three years of litigation," and therefore acted inconsistently with their known right to arbitrate. Id. at ¶¶30-31.
In sum, Ohio's Second Appellate District in White adopted the Tenth Appellate District's knowledge and totality of the circumstances test for determining whether a party waived its contractual right to arbitrate by participating in litigation. Id. at ¶¶24-25, 27, 30. It is likely that this test will be applied by all Ohio trial courts going forward. [1] Therefore, parties to a contract with an arbitration provision should be mindful that they can still waive their right to arbitration, even if the provision requires arbitration of all disputes. If a dispute arises, then parties should quickly determine whether an arbitration provision applies. Although a party may choose to ignore an arbitration provision and take actions inconsistent with a right to arbitration, White shows that doing so can lead to waiving that right.
[1] An Ohio trial court in the Second District is bound only by decisions of (1) the Ohio Supreme Court, and (2) the Ohio Court of Appeals for the Second Appellate District. See State v. Williams, 119 Ohio App. 3d 512, 516, 695 N.E. 2d 832 (11th Dist. 1997) ("A trial court is free to rely upon the logic of courts outside its appellate district in rendering a decision. However, other such decisions are merely persuasive and do not constitute binding authority. Although technically not judicial notice, the trial court accepted the factual findings of other courts outside its appellate district. A trial court can only take note of its own factual findings based on the evidence before the court until appropriate precedent has been established within its own district or by the Supreme Court of Ohio.").
