The Sixth Circuit recently reversed a decision from an Ohio federal court related to whether a party waived its arbitration rights through posturing correspondence written prior to the filing of litigation or arbitration. In Borror Property Management, LLC v. Oro Karric North, LLC (No. 2:19-cv-04375), the Sixth Circuit upheld the defendant's contractual right to arbitration by concluding that no waiver of such right had occurred.
Oro Karric North, LLC and its related entities (entered into contracts with Borror Property Management, LLC, for Borror to manage Oro's residential apartments. Each management contract included an arbitration provision stating, in essence, that disputes between them would be determined by arbitration unless they first resolved the dispute among themselves.
When a dispute arose, Oro asserted in a letter that Borror was in breach of contract and stated that it planned "to proceed directly to litigation in either state or federal court" as the contracts "do not limit litigation exclusively to arbitration." Borror then filed a lawsuit in court. Oro then moved to compel arbitration, but the district court denied that request. The question on appeal was whether Oro waived its otherwise enforceable right to arbitration by its pre-litigation conduct.
Federal law looks favorably upon arbitration, and any waiver of that right "is not to be lightly inferred." A party waives its arbitration right only when (1) the party's acts are "completely inconsistent" with its arbitration right, and (2) the party's conduct is prejudicial to an opposing party (such as by significantly delaying one's asserting the right to arbitrate).
The Sixth Circuit concluded that Oro did not waive its right to arbitration. It found that Oro's "litigation-threatening" correspondence did not amount to conduct "completely inconsistent" with its arbitration right. Pre-litigation letters serve a variety of purposes - from identifying a party's concerns to foreshadowing litigation to articulating a path to settlement. These letters, as the Sixth Circuit noted, are often more rhetorical art than legal science. And because a party's true intentions in crafting such correspondence cannot be known, courts are reluctant to give those letters the same legal force as it might give a party's representations in other settings.
Even if it were to find Oro's letter entirely inconsistent with its arbitration rights, as the Sixth Circuit noted, Borror was not materially prejudiced by Oro's actions. Typically, in this context, prejudice appears when one party spends substantial time or money in litigation before an arbitration right is invoked. Such was not the case here.
Having determined that Oro's pre-lawsuit communications were neither inconsistent with its arbitration right nor prejudicial to Borror, the Sixth Circuit held that there was no waiver of Oro's arbitration rights. Concluding otherwise, as the Sixth Circuit reasoned, would make it much more difficult for parties to work out their differences short of litigation, which would, in turn, unnecessarily increase the load on the judicial system.
This opinion supports the freedom to negotiate, posture, and act in one's interest when faced with a dispute. While there is always some risk that pre-lawsuit or pre-arbitration conduct could result in a waiver, such is not the result preferred by the courts. By enabling parties to speak freely prior to filing suit, courts are facilitating out-of-court resolutions of their differences.
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