Participation In An Arbitration May Waive a Party’s Right to Seek Relief From the Courts

A recent case decided by the Appellate Division for the Second Department showcases the potential effect participating in an arbitration may have on a party’s ability to seek relief from or otherwise litigate the issues in the court system.

The appellant in Mechtronics Corp. v. Kirchhoff Consigli Construction Management, LLC was a subcontractor to the respondent, Kirchoff, who was the general contractor. Disputes arose during the course of the project and in accordance with the terms of the subcontract, Mechtronics filed a demand for arbitration. The respondent appeared in the arbitration and asserted counterclaims. The parties then jointly selected an arbitrator, conducted discovery and agreed upon hearing dates.

Thereafter, Mechtronics commenced a proceeding in New York Supreme Court seeking to permanently stay the arbitration, arguing that it had learned during the course of discovery in the arbitration proceeding that the general contractor had allegedly fraudulently misrepresented or concealed material facts concerning the scope of work. In response, the general contractor filed a cross motion seeking to compel arbitration. The Supreme Court denied the motion to stay the arbitration and granted the motion to compel. Mechtronics then appealed the decision to the Second Department.

Article 75 of the CPLR, which governs arbitration in New York provides that “a party who has not participated in the arbitration and who has not made or been served with an application to compel arbitration, may apply to stay arbitration on the ground that a valid agreement was not made.” However, a previous Second Department ruling in Stone v. Noble Construction Management, Inc., held that “consequently, a party seeking to avoid arbitration on the ground of no agreement to arbitrate can raise such objection only when it has not participated in the arbitration.”

Citing the Stone case, the Second Department in the Mechtronics matter determined that the appellant was precluded from seeking a stay based on the facts that the appellant had initiated the arbitration, participated in selecting an arbitrator, conducted discovery and agreed upon hearing dates. Thus, in the words of the Stone decision, the appellant had “sufficiently participated in the arbitration so as to waive its right to seek a stay.”

Such disputes over agreements for arbitration are fairly common place in the construction industry as many standard contracts contain language concerning alternative dispute resolution. In the event there is a dispute as to the enforceability of such clauses, the contractor must be careful that he does not “participate in the arbitration” to such an extent as to effectively waive his right to seek a remedy from the New York courts.

This article was authored by Nathan Shook, a member of the New York construction law firm of Giannasca & Shook, PLLC. This article is for general information only and should not be construed to contain all information necessary to address all matters related to arbitration. Please contact our office for any specific matters on which you may need professional legal advice.