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Nebraska Supreme Court: Litigating May Cause Waiver of Right to Arbitrate Even Absent Prejudice

on Friday, 30 September 2022 in Dirt Alert: David C. Levy, Editor

Kingery Constr. Co. v. 6135 O St. Car Wash, LLC, 312 Neb. 502 (2022).

Construction contracts routinely contain arbitration provisions.  Under the Federal Arbitration Act (the “Act”), those provisions can displace the parties’ rights to sue.  9 U.S.C. § 2.  Section 3 of the Act requires courts to stay any related lawsuit until the arbitration has concluded.  A litigating party who fails to promptly seek arbitration, however, waives its right to arbitrate.  § 3.

6135 O Street Car Wash, LLC (“Landowner”) contracted with Kingery Construction Company (“Contractor”) to construct a car wash.  The parties used an AIA form construction contract and elected in the contract to utilize arbitration for dispute resolution.  The contract stipulated that the American Arbitration Association would administer any dispute and that the Act would govern.

Contractor sued Landowner for breach of contract.  According to the complaint, Landowner owed $41,698.57 for Contractor’s work.  Landowner moved to dismiss, alleging Contractor waived its claim by litigating instead of promptly commencing arbitration.  Contractor countered by filing a demand for arbitration. 

Over Landowner’s objection, the trial court agreed to stay the case and compel arbitration.  Relying on a previous case, Good Samaritan Coffee Co. v. LaRue Distrib., Inc., 275 Neb. 674 (2008), the trial court held a stay was appropriate.  Although Contractor litigated in a manner inconsistent with commencing arbitration, Landowner suffered no prejudice as a result.  Landowner appealed.

The Nebraska Supreme Court reversed.  It held the trial court’s reliance on prejudice was erroneous.  Although prejudice was previously a factor for determining waiver of an arbitration provision, the U.S. Supreme Court’s recent decision in Morgan v. Sundance, Inc., 142 S. Ct. 1708 (2022) rejected that factor.  Morgan held that “prejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the [Act].”  Id. at 1714.

Thus, the Nebraska Supreme Court overruled Good Samaritan Coffee Co. and held prejudice is no longer relevant in evaluating waiver of an arbitration provision.  Rather, waiver depends on whether the person’s litigation-related conduct demonstrates a voluntary and intentional relinquishment of the right to require arbitration.  The more time and litigation-related conduct that passes before a demand for arbitration, the more likely a court will deem the right waived. 

Because the trial court considered an irrelevant factor, the Nebraska Supreme Court remanded the case for reconsideration.  The Court did not decide whether the potential waiver of arbitration would also cause a waiver of Contractor’s other remedies, including its lawsuit against Landowner.

This decision underscores the importance of careful contract drafting and contract administration.  Contract forms are common in the construction industry, and those forms often include arbitration as a standard method of dispute resolution.  While convenient, those forms do not excuse contract drafters from carefully reviewing all of the contract terms and modifying terms where appropriate.

Likewise, it is incumbent upon the party seeking to enforce a contract to understand the contract provisions, particularly any provisions dealing with dispute resolution.  An oversight may compromise the party’s claims.

Hannes D. Zetzsche

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