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Court of Appeals Clarifies Standard of Review for Waiver of Arbitration Clause

The North Carolina Court of Appeals kicked off a new year of decisions by clarifying the applicable standard of review for a trial court’s decision on whether a party has waived a contractual right to arbitration. In iPayment, Inc. v. Grainger, the plaintiff appealed from an order denying its motion to compel the arbitration of counterclaims that had been brought by one of the defendants.

The case arose out of efforts by plaintiff to prevent defendants from fraudulently avoiding an arbitration award in a separate case that was pending confirmation in the Southern District of New York. One defendant was in the case solely as an alleged recipient of the fraudulent transfers.

After the plaintiff began discovery in the fraudulent transfer litigation, the defendant alleged to have received the fraudulent transfers counterclaimed under several theories related to a contract that the plaintiff and defendant had entered into that contained an arbitration clause. That contract was not at issue in the causes of action brought by the plaintiff. After the counterclaims were filed, the plaintiff began taking depositions while reserving all rights to argue that the counterclaims were subject to the arbitration clause contained in the contract.

The plaintiff eventually filed a motion to dismiss the counterclaims or, in the alternative, to stay the litigation and compel arbitration. The trial court denied the motion to compel on the basis that the depositions taken by the plaintiff amounted to conduct that was inconsistent with the arbitration provision at issue, and that the plaintiff had therefore waived its rights under the arbitration clause.

In reversing and remanding the order, the Court of Appeals detailed the standard of review that should be applied to such decisions, clarifying what had previously been muddy waters. The source of that mud was apparently a statement in the seminal decision on arbitration waiver in North Carolina, in which the Court of Appeals stated that “[w]aiver of a contractual right to arbitration is a question of fact.” Cyclone Roofing Co. v. David M. LaFave Co.., 312 N.C. 224, 229, 321 S.E.2d 872, 876 (1984).

At first glance, that statement appears to be as clear as any you’ll ever see from a court. However, as the iPayment court noted, a closer examination of the Supreme Court’s interpretation of Cyclone Roofing and later cases discussing the issue of waiver shows that the issue was far from clear.

Prior decisions from the Court of Appeals, for example, had stated that the determination of whether a party has waived its right to arbitrate, a question of fact according to Cyclone Roofing, requires the application of “rules of law” to the facts of the case. See Servomation Corp. v. Hickory Constr. Co., 316 N.C. 543, 544-45, 342 S.E.2d 853, 854 (1986).  However, since whether an issue is one of fact or law turns on whether determination of that issue requires the application of legal principles, an issue which requires the application of “rules of law” to determine cannot, by definition, be an issue of fact.  Other cases, while stating that the issue was one of fact, applied a de novo standard of review to the issue, which is usually reserved for issues of law. See Prime Homes Inc. v. Byrd, 102 N.C. App. 255, 258-59, 401 S.E.2d. 822, 825 (1991).

In order to clarify the standard, the iPayment court interpreted Cyclone Roofing’s reference to waiver being a question of fact as a reference to the question of whether a party has in fact engaged in a particular action.  However, the actual determination of whether or not those “factual” actions constitute waiver is a question of law subject to de novo review. The court went on to apply a de novo standard and ultimately held that the plaintiff’s initial claims against the defendant had no relation to the parties’ contract, and, therefore, in light of the strong public policy favoring arbitration, the plaintiff’s conduct during the litigation was not inconsistent with its right to arbitrate the counterclaims.

Given the popularity of arbitration clauses and the “strong public policy” preference for arbitration, this case provides much needed certainty as to how a case will be reviewed on appeal. Thoughts? Comment below!

 

-Zack Dawson

 

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