by Andrew Flake
Clash of the forums: Two parties to a contract, an arbitration clause, and a dispute over the breadth of the clause. When the plaintiff files its complaint in court, intending to move forward with litigation, the defendant counters with a motion to compel arbitration.
Most litigators intending to arbitrate in this scenario have an intuitive sense of timing; speed is important. Apart from the rules of procedure, they understand that by proceeding in litigation, they run a risk: Where a party participates first in the pending litigation — for example, by filing a motion to dismiss, taking discovery, or requesting some relief from the Court other than as necessary to protect its rights — it can lose, or waive, the right to arbitrate.
We call this kind of waiver “conduct-based,” and a discussion in a recent Georgia Court of Appeals case, Milliken v. C. Merrill Constr., LLC, provides practitioners useful guidance on what that means, as well as how to avoid it.
The general rule in Georgia is as follows: “…a party that substantially invokes the litigation machinery prior to demanding arbitration may waive its right to arbitrate. A party has waived its right to arbitrate if, under the totality of the circumstances, the party has acted inconsistently with the arbitration right.” Where the underlying facts are undisputed, this question is one of law.
And we know from the U.S. Supreme Court’s 2022 opinion in Morgan v. Sundance, Inc., 596 U. S. 411 that the focus is on the waiving party’s actions, not whether the other party suffered any prejudice; at least in cases involving interstate commerce and thus governed by the FAA, no showing of prejudice is required.
With that background, here’s what happened in Milliken, a case decided by the Georgia Court of Appeals. The case was a construction suit, with the contractor, Merrill Construction, suing the owner, Milliken, over an additional project payment. Their agreement had a dispute resolution provision, one providing for arbitration under AAA’s Construction Arbitration Rules.
The dates are relevant to the waiver question, so let’s review them. Milliken answered the Complaint on November 16, 2022, without including arbitration as a defense. In December, the contractor’s counsel sent Milliken’s counsel some discovery, and the lawyers corresponded about getting responses early January of 2023.
Around a month and half later, on January 5, 2023, Milliken moved to dismiss and to compel arbitration. Merrill opposed the motion, moving for a stay of any arbitration and arguing that Milliken had waived his right to arbitrate by, among other things, ignoring a pre-suit demand for arbitration.
On February 7, the Court denied Milliken’s motion to compel arbitration and granted Merrill’s motion to stay.
On appeal, Milliken challenged denial of his motion to compel arbitration, and the Court of Appeals considered whether Milliken’s conduct amounted to a waiver, considering two aspects of the question.
The first question, as with many issues that arise when both a court proceeding and an arbitration are ongoing, was: Who decides, the court or the arbitrator?
For conduct-based waiver, the presumptive answer is that the court decides, absent “clear and unmistakable” evidence that the parties want an arbitrator to decide the issue. That evidence can be in the form of a “delegation clause” in the parties’ agreement, or, in some cases, by the incorporation of arbitral rules that reserve certain questions for the arbitrator.
Both AAA’s Commercial Rules and Construction Rules, for example, provide that an arbitrator “shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement.”
But conduct-based waiver is different, not typically covered in an administering institution’s rules nor, in my experience, in most arbitration contracts. And in the Milliken-Merrill case, the Court of Appeals did not find any such clear and unmistakable evidence, including in Construction Rule 9.
In fact, the issue of first impression in the case was whether “these provisions of the AAA Construction Industry Arbitration Rules and Mediation Procedures provide evidence of a clear and unmistakable intent for the arbitrator to decide the issue of whether a party has waived the right to arbitration through its conduct.” The Court of Appeals determined that they did not; the trial court had properly decided the issue itself.
The second question then became: On the facts of this particular case, was there conduct-based waiver?
Let’s pause here and consider a few additional facts. Milliken did not sit idly by in the litigation. While his motion to compel arbitration was pending, Milliken responded to the discovery served by the contractor’s counsel and, near the end of January, served his own discovery requests.
After the trial court denied his motion to compel, Milliken also filed a confession of judgment; the parties litigated an attorney’s fees issue, and the trial court entered judgment for the confessed amount, plus interest, attorney’s fees, and expenses, all together, around $100,000.
In deciding there was no waiver — and thus vacating the judgment and remanding the case to be ordered to arbitration –the Court of Appeals made clear, in broad terms, that “not every foray into the courthouse effects a waiver of the right to arbitrate.”
For a litigator reviewing this decision, two practice points will jump out.First, the analysis of conduct-based waiver, which depends on the facts of each case, focuses on the conduct before seeking to enforce arbitration rights. In Milliken’s case, the only activity prior to filing his motion to compel was submitting a mandatory Answer and engaging in some discovery-related correspondence.
Second, in the waiver analysis, courts should consider whether a party’s actions go beyond the required or “merely defensive.” The Court offered these examples from other cases:
engaging in extensive discovery; filing a motion for summary judgment; participating in a pre-trial order; attending trial calendars; selecting a jury; seeking arbitration after discovery is complete and the discovery period is over; extending the time within which to respond and responding to discovery; opposing a motion on the merits; filing leaves of absence and motions for pro hac vice admissions; and waiting for the opposing party’s responses to written discovery requests before demanding arbitration
In such instances of affirmative or non-defensive action, which raise concerns over potential gamesmanship or a “wait and see” approach to enforcing rights to arbitrate, there is likely to be waiver.
The decision is one I’d commend to you. The Court of Appeals offers practical and useful guidance for the advocate, reasoning through it with detailed citation, and doing so in a way that leaves appropriate flexibility for the on-the-ground reality of each case.
Taking the opinion as a whole, it would seem that by including an arbitration defense in an answer, promptly moving to compel arbitration, and then keeping litigation activity to the defensive minimum, a party stays well inside a safe ambit of non-waiver.
[The case is Milliken v. C. Merrill Constr., LLC, No. A24A0348 (decided May 29, 2024).]P.S. Currently, Georgia law, as opposed to post-Morgan federal arbitration law, retains the consideration of prejudice to the other party in considering conduct-based waiver. In its footnote 4, the Court leaves open the question of whether, in a case governed solely by Georgia law and not involving interstate commerce and thus the FAA, it would retain that requirement.