An Insurer Waives Its Right To Compel Arbitration Where It Invokes The Judicial Process To The Prejudice Of Its Opponent, Despite A “No Waiver” Of Arbitration Clause
December, 2004
The Fifth Circuit recently held that where an insurer relied upon the judicial process to resolve a variety of issues and only on the eve of trial sought to invoke arbitration, it waived any right to compel the opposing party to engage in arbitration. Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341 (5th Cir. 2004). The court refused to enforce a “no waiver” of arbitration clause.
Facts
Republic was a party to a reinsurance agreement among a group of various companies. An arbitration procedure resulted in a settlement agreement which further defined the rights and duties of the group members with respect to various reinsurance agreements. The settlement agreement contained a clause allowing any party to compel arbitration and to resolve any disputes between the parties to the agreement.
One party to the settlement agreement, Pan Atlantic Insurance Company, assigned its rights to recover under the reinsurance contracts to PAICO Receivables, LLC (“PRLLC”). Thereafter, PRLLC sought unsuccessfully to enforce Pan Atlantic’s rights under the settlement agreement.
Republic filed a federal declaratory judgment action seeking an order that the assignment to PRLLC was invalid for lack of written consent from Republic. Republic did not include in its pleading any request to pursue its arbitration rights.
The parties then engaged in full fledged discovery on all issues. The scope of discovery was not limited to the issue of whether the assignment was valid. Republic successfully resisted efforts of PRLLC to limit discovery to the question of validity of the assignment.
Days before trial was scheduled to begin, Republic asserted for the first time its right to arbitrate under the settlement agreement. The district court denied this request and ruled that Republic waived its right to arbitrate. The district court found PRLLC would be prejudiced if it allowed arbitration because PRLLC incurred attorneys’ fees, engaged in full-fledged discovery, expert preparation and incurred other trial preparation expenses. The Fifth Circuit affirmed.
Analysis
In rejecting the late effort at arbitration, the court applied the rule that waiver will be found when the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party. Here, Republic answered counterclaims, conducted extensive discovery, amended its complaint, filed motions to compel, a motion for summary judgment, a motion in limine and filed the required pre-trial materials before seeking arbitration.
The court rejected Republic’s argument that it was unable to assert its arbitration rights until the court first declared that PRLLC, as assignee, was bound by the obligations of that agreement. Republic did not limit its judicial activity to that issue; instead, it engaged in discovery addressing all issues raised by the pleadings, including PRLLC’s counterclaims.
Prejudice to the party not seeking arbitration is measured against three criteria. First, prejudice may be found where discovery included both arbitrable and non-arbitrable issues. Second, time and expense incurred in defending a motion for summary judgment can cause prejudice. Lastly, a failure to timely assert the right to arbitrate is relevant to the prejudice determination.
The settlement agreement had a “no waiver” provision whereby the parties agreed that pursuit of litigation would not constitute a waiver of arbitration. However, the court ruled that such a provision would not prevent a court from finding that a waiver occurred. The court noted that a “no waiver” provision cannot impair a court’s exercise of its inherent power to control its own docket.
Learning Points:
Arbitration rights must be asserted as early as possible to give the other side notice of the intent to rely upon such a contractual provision. Where litigation is initiated with no intent to waive arbitration, the suit should seek, at least in the alternative, separate relief with respect to compelling arbitration.
To preserve arbitration rights, a litigant should seek court approval to limit discovery to the threshold issues bearing on arbitration, such as whether the arbitration agreement is valid, whether it should be reformed, or as here, whether an assignee is a proper party. Lastly, “no waiver” clauses will not prevent a court from finding a waiver occurred.
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